Opinion: BSCR Standards will boost investment in Canada’s bioeconomy
February 21, 2020
By Jordan Solomon and Taylor Whitfield
The push for expanding renewable energy development in Canada is undeniable, but without effective supporting mechanisms to de-risk investment and accelerate capital flow, our renewable energy potential will never be fully actualized. In 2019, Natural Resources Canada (NRCan) funded a major step forward in the arena of biomass finance: Ecostrat’s development of the new Canadian Standards for Biomass Supply Chain Risk (BSCR Standards), which will help capital markets more effectively quantify biomass feedstock risk and drive capital into the sector. Recently, the Standards Council of Canada supported accrediting the BSCR Standards as an official National Standard of Canada – a second milestone in 2019 that supports renewable energy development in this country.
We know that standards work to create efficiencies for capital markets and drive investment; standardized credit ratings are a staple of the modern economic infrastructure that support $10 trillion annually in investments and lending to new developments. At their base, credit ratings consist of a standardized approach to analyzing risk, a scoring system to calculate risk and alphanumeric ratings (i.e. AA, A, BB) to efficiently signal credit risk to investors. This is exactly what we don’t have in the biomass sector, and it is a major reason why investment into biomass-based renewable energy is slower and more expensive than it could be.
By identifying over 200 common risk indicators across dozens of risk factors, the BSCR Standards offer something that has long been missing from the bio-industry: a reliable and accurate way for the capital markets to price feedstock risk. But this is only the first step towards achieving the more comprehensive goal of spurring capital flow to biomass projects. In order to do for the bioeconomy what credit ratings do for capital markets, the BSCR Standards need to be combined with the world’s first biomass risk ratings system. Biomass risk ratings will enable capital markets, insurance companies, and governments to take the array of information in a particular biomass project and translate it into a single alphanumeric score which accurately, reliably and efficiently signals overall biomass feedstock risk. In the same way any company’s credit worthiness can be understood simply by looking at the rating given to it by Moody’s or S&P, biomass risk ratings will allow capital markets to understand a project’s feedstock risks through a simple rating.
Capital markets may not easily understand the complexities and risks associated with a biomass supply chain, but they will certainly be able to understand that a clean fuel project with a “AAA biomass risk rating” is less risky than one with a BB rating – and because the ratings methodology is transparent, investors can trust that suitable due diligence of feedstock risk has been carried out and no major pathway of risk missed.
Support from the finance sector for a better system to quantify and signal biomass feedstock risk is strong and lends credibility to biomass risk ratings. Nearly 50 top capital market players sit on the Risk Ratings Review Committee and collectively represent organizations with over $50 billion in deployable capital to the bioeconomy. The Ratings Review Committee will help ensure that biomass risk ratings become a standard tool used by the finance sector in evaluating biomass-based investments.
This effective signalling of feedstock risk will create efficiencies in the market, allow capital to more effectively structure around feedstock risk and accelerate investment in biomass-based projects.
Creating a better risk evaluation infrastructure will increase the size and scope of investments in projects that have previously been priced out of the market or dragged down by inflated debt costs of up to 100 – 250 basis points.
For decades these inflated costs have slowed biomass growth to the tune of tens of millions of dollars, and to the detriment of the bioeconomy. As we head into a new decade, we will leave behind antiquated financing structures and move towards new mechanisms that enable more efficient funding of renewables and clean energy.
To learn more about the rollout of the Canadian Biomass Supply Chain Risk Standards, Risk Ratings and ways to contribute, visit www.ecostrat.com/standards.
Jordan Solomon is the president and CEO of Ecostrat and leads the development of the Canadian National Biomass Supply Chain Risk Standards. Taylor Whitfield is a project manager in Ecostrat’s Biomass Advisory Group, and a project lead on the Canadian National Biomass Supply Chain Risk Standards.
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