Top Voice: Lucia Fuselli, MBA



In this edition of Top Voices, IB will be introducing our readers to the work of Lucia Fuselli, an energy and sustainability expert and Fellow of the World Energy Council, who is based in Luxembourg, having served at various levels within a number of highly prominent mission-led organisations throughout her career, Lucia speaks to IB's editorial team about the impact of the newly drafted Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy, summarising the detail of their respective applications and reflecting on the extended significance to asset managers, funds and other financial institutions respectively.

The Interview

Q: As a thought leader and influential personality in the energy space, could you please tell us a bit about your career and how you managed to reach your current position?

I started working in clean energy after I graduated, initially in the development and project management of large sized plants and energy efficiency retrofits within EMEA. Then moved across the value chain, working in multinational companies in the UK. In the meantime, being increasingly interested in the policy and finance aspects connected to clean energy, I studied for a Master's in Finance and, having moved to Brussels, got the chance to collaborate as an external consultant to a European MEP (tracking and advising on policy). In the meantime, I applied and got selected by the EIB to work as an energy specialist: spent around 4 years there, performing due diligence on climate mitigation investments (from project finance to intermediated lending) with a global remit, supporting origination and getting involved in transversal activities such as technical assistance programs and ad-hoc analysis on specific subjects. All these have been incredible opportunities. In particular, working for the Bank made me appreciate the everyday value-add of working for a purpose (as opposed to working for a mere profit) and further increased knowledge of the efforts of global international organisations on climate resilience, climate finance and development.

Coming from a working class background, without a network of advisors/mentors or - at least initially - a career orientation, this process hasn't been linear or easy and carried its share of setbacks alongside successes. Nonetheless, I tried to keep positive and, most of the time, managed to bounce back and/or to improve. Also, I always worked and studied, taking on ad-hoc consultancy work (e.g. on sustainable urban development and resource efficiency) along the way as I wouldn't have been able to afford postgraduate education otherwise.

At the moment I am working for an international private consultancy. It is also a time of reflection where I can brainstorm on how to best put into service my expertise and align it with my personal interests (for example, emerging and middle-income countries), whilst setting off time to acquire new skills.

Q: Can you explain succinctly how the SFDR operates and it's application to fund managers generally?

The Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory disclosure obligations at the level of the entity (e.g. the bank or fund) and at the level of the financial product.

At the level of the entity, all entities providing - for example - advice, portfolio management services, investment or pension products, alternative funds or UCITS products will have to report a sustainability risk policy on their websites (i.e. how are they integrating sustainability risk considerations into the investment decision-making process), the principal adverse impacts on sustainability (PAIS) of their investment decisions and the alignment of their remuneration policies with the sustainability objectives.

At the level of the product, what is normally required in this case is a description of product characteristics and objectives and of the methodologies for assessment, measurement and monitoring. In addition to that, SFDR requires that firms state how sustainability risks are integrated into investment decisions, what the impact of products on returns is and whether and how the product considers principal adverse impacts on sustainability (PAIS). These disclosures will have to appear on the website as well as on the pre-contractual documentation.

The regulation also requires that firms classify the products into one of the three following categories: mainstream products (i.e. regular or article 6), products promoting environmental or social characteristics (i.e. light green or article 8) or products with sustainable investment objectives (i.e. dark green or article 9). For light and dark green products, additional information will be required such as - for example - how the products are expected to fulfil the E&S characteristics/the sustainable objectives and how they are comparing to benchmarks.

Given the above, fund managers will first and foremost have to invest in knowledge building and capacity (i.e. learning to quantify and manage sustainability risk and introducing dedicated ESG expertise within their investment teams) as well as in tools to source, assess and monitor metrics such as ozone depletion, high water stress and land degradation. It will prove particularly challenging for smaller firms and developing countries, first because of a lack of a consolidated data offering in the industry, secondly because given that risk assessment is product and entity-specific, a one-stop-shop solution is unlikely (at least in the short term).

Q: What does the future look like for the SFDR and its application to renewables?

SFDR brings to the market increased transparency on green labelling of financial products and as such will further mainstream the shift to renewable energies alongside their evolution towards decarbonisation enablers (e.g. renewables serving green hydrogen production, powering EVs or being coupled with storage to provide ancillary services to electricity networks). Whether SFDR will enable reaching the scale of renewable energy investments required to reach net zero will depend on the regulation balance between effectiveness and implementability (i.e. ease to which it's applied, enforced and confidently adopted by financial actors and corporates). 

Q: What are your thoughts in regards to the provisions of the EU's Taxonomy and its application to new LNG projects?

The EU Taxonomy inserts an additional layer of assessment, monitoring and reporting at the product level. In simple terms, it is a framework used to define "what is green", and it explains to what extent the underlying investments of the product are in activities that qualify as environmentally sustainable.

In preparing the Taxonomy, there has been considerable debate as to whether to include gas as a sustainable activity. The key point was whether "bridge fuels" such as gas (and nuclear) should be part of the transition, to increase sustainability in energy-intensive, heat-requiring industries (e.g. cement and steelmaking) for which renewable-based electricity is still overpriced.

For each activity, the Taxonomy specifies three main concepts and related assessment criteria: substantial contribution to climate mitigation, substantial contribution to climate adaptation and do-no-significant harm (DNSH).

For the Production of Electricity from Gas, the EU Taxonomy states that an activity is qualified as exerting a substantial contribution (for its own performance and as contributing to the transition):

  • To climate mitigation - if, according to a Product Carbon Footprint (PCF) assessment, the life cycle impacts for producing 1 kWh of electricity is below a declining threshold of 100gCO2e/kWh, declining to 0gCO2e/kWh by 2050;
  • To climate adaptation - if the activity reduces all material physical climate risks in a measurable way, without adversely affecting climate adaptation elsewhere then it can be classified as an adapted activity; if the activity also promotes a technology/product/process/use or removes barriers towards adaptation, or supports adaptation of other subjects, then it can be classified as an activity enabling adaptation (these are qualitative assessment).

Additionally, the DNSH criteria for mitigation requires that emissions are limited through Best Available Techniques (BREFs for large combustion plants) and that all relevant environmental directives are respected, whereas DNSH criteria for adaptation look at aspects such as impacts on local water (consumption and sewage), waste and recycling criteria, and direct impacts on sensitive ecosystems, species or habitats. All of this aside of the usual compliance to existing E&S directives.

Based on the above, new LNG projects will have to be 'designed for sustainability'.

For a start, this will entail early on investment in additional studies and monitoring tools (e.g. a PCF assessment based on the plant lifecycle, benchmarking of emission reductions to BREF criteria, introducing water use/conservation management plans, monitoring of gas leakages across the value chain, producing scenario-based climate risk assessments) as well as a programmatic view on how to progressively improve identified metrics. In the long term, the biggest challenge will be to produce and enact a credible plan to technically reach net zero emissions by 2050, as this will require committing to future investments in currently non-mature technologies (e.g. CCU) and - at the same time - in a portfolio of nature-based carbon offsetting solutions (the benefits of which will, again, have to be quantified and monitored over time).

Q: Does the EU's Green Taxonomy exist as a template for other international guidelines?

The EU Taxonomy Regulation applies to all financial products being offered in the EU (i.e. funds offering EU-denominated products and funds selling products in the EU) and has implications for companies, as all firms/subsidiaries covered by the EU Non-Financial Reporting Directive will also have to disclose the alignment of all their business activities. As a consequence, overseas financial actors working with EU investors may be required to be Taxonomy-compliant.

At the same time, in absence of other national/regional regulatory regimes for sustainable finance, non-EU-related financial actors may choose to adopt the Taxonomy as a disclosure framework: it could be to avoid greenwashing risk, attract investments from EU or to show adherence to a structured benchmarking system. Whilst this doesn't mean that the Taxonomy will automatically become a template for other international guidelines, it also implies that the Taxonomy has indeed the potential to influence/contribute to such guidelines and reporting frameworks at the regional and international level (and viceversa, as the Taxonomy itself may be subject to refinements).

Examples, such as the creation of a "transition taxonomy" proposed by Japan's Transition Finance Study group (2020) and the classification systems developing in Canada and Malaysia show that an international influence of the Taxonomy is not only likely, but potentially already underway.

About the Top Voices in Sustainability Series

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How does the interview series operate? Essentially, each and every quarter, we will publish an interview with one of the world's most influential professionals and place the interview on our website and weekly newsletter. The theme of the interview series is "sustainability in the energy sector".

"In the long term, the biggest challenge will be to produce and enact a credible plan to technically reach net zero emissions by 2050, as this will require committing to future investments in currently non-mature technologies" - Lucia Fuselli

Q: The IEA's report suggests that renewables will overtake electricity generated through fossil fuels within 5 years and ultimately that coal will be phased out by the end of 2040. Which countries are pioneering with respect to this objective?

When we look at the share of electricity produced from renewables (Res), Europe is definitely pioneering: according to the IEA , its electricity mix in Q1 2020 featured a 20-40% share of renewables. Within Europe, Germany leads in terms of capacity (i.e. KW of REs per person), followed by Nordic countries. When it comes to decarbonisation efforts (i.e. change in carbon content of electricity, in g/Kwh) however the podium goes to the UK and Denmark. All these markets have ample capacity but also well established electricity pricing mechanisms and a track record (i.e. an established ecosystem) of financing, developing and implementing renewable energy generation. In these markets, incentives have been substituted firstly by competitive auctions and Contracts for Difference (CfDs) and now - increasingly - by merchant contracts (corporate power purchase agreements or PPAs) as low-carbon regulatory requirements affect subjects as diverse as energy-intensive corporates, data centres and pharmaceutical multinationals.

On a more general level, it has to be acknowledged that, especially during the COVID period, a considerable shift (from coal-based) towards renewable electricity generation has occurred in emerging and developing economies too, notably in China and India. Together with USA and Australia, China is also within the top 5 when it comes to reduction of the share of electricity produced from coal.

Finally, there are also countries where electricity is almost exclusively renewable-based by virtue of their endowment in natural resources, two notable examples being Iceland and Costa Rica. Even some developing countries within Africa, Central Asia and Latin America have more than 75% of their electricity production based on renewable energy, however electrification in these countries is still under development and a (often considerable) portion of the population still uses fossil-fuels for everyday life activities (e.g. cooking, running appliances...).

Q: Would you consider the promise that major international oil firms have established as being of significant value to the Paris objective?

If you are referring to the promise of the Oil and Gas Climate Initiative (OGCI) to reduce carbon emissions rate of members' combined upstream oil and gas operations to 52 million tonnes per year by 2025, this is definitely of value to the Paris objective and sums up to other individual initiatives by oil majors (e.g. BP's plan of 50 gigawatts of renewable generating capacity by 2030, Shell setting forth action items to achieve net-zero emissions in the shipping sector) and to a wider set of action points from OGCI including a $1B fund over a ten-year period dedicated to climate investments and a platform to kickstart and monitor CCUS projects globally.

Critics point out that emissions reductions are limited to member companies' operations, excluding joint venture projects involving non-member companies (the majority in O&G value chain) and that in-fact most majors only committed to reduce carbon intensity, a relative target the benefits of which could be cancelled out by an increase in demand.

To assess whether pledged actions and measures are sufficient or not, their scale and timelines should be comparable with the scale of investments and implementation/project-cycle timelines typical of the Oil & Gas industry: whilst it is not reasonable to ask for a full reconversion within the span of a few years, credible commitments should mobilise a substantial share of capital for the short term offset of emissions whilst presenting a program of both investments and operational milestones towards a full long term (i.e. by 2050) phase-out/decarbonisation. More importantly, the scope of 'commitments' must go beyond company level (upstream and downstream) to impact/incorporate the entire value chain.

Q: What do you believe are the headwinds, tailwinds or otherwise, if any, to the adequate financing of clean and affordable energy?

The main headwinds are:

Tailwinds could be found:

Finally there are transversal aspects, such as technology innovation and political/geopolitical shifts that can either disrupt or influence (i.e. accelerate/halt) the flow of financing to clean energy in specific countries or regions.

Q: Are climate bonds an adequate financing mechanism for achieving net zero emissions?

Climate bonds (or green bonds) are widely known for having financed renewables globally. What is probably less known is that other climate mitigation and adaptation technologies and sectors are also certifiable according to the climate bond initiative, for example energy efficiency of buildings, shipping and agriculture.

In the past decade, green bonds have passed from being a few billions to a 2T USD market and are consistently demonstrating to outperform traditional investments, becoming preferential products. As the global discourse shifts from renewables towards decarbonisation, increasing at the same time the sectoral scope and the overall size of investments needed, climate bonds will be - again - key to bridge the gap between providers of capital and clean assets. For example, in a not-so-distant future, clean energy bonds might include investments in hydrogen infrastructure, when the technology will be fully scaled-up. Corporate sustainability-linked bonds (SLBs), issued by corporates and triggering penalties if sustainability criteria are not met, have recently started to be issued by energy intensive industries.

In this perspective, one significant challenge will be to develop adequate platforms and robust monitoring instruments to face the new granularity, that is to streamline the assessment and promote the pooling of investments which might be far more diversified in terms of sectors but smaller in terms of individual (i.e. project) size. Another challenge is that monitoring and assessment, particularly for SLBs, will not have to be limited to the investments but also to the overall decarbonisation programs of the issuing entities verifying -for example - alignment (at project and corporate levels) to national/regional decarbonisation targets and/or significance and materiality of chosen sustainability KPIs.

Thank you to NSFM and everyone who made this interview possible. For more interviews in this series, follow us on Twitter @ibrgroupintl or connect with us on LinkedIn.