Financing sustainability reaches mainstream: panelists

Financing sustainability "has gone from niche to mainstream," said James Alexander, chief executive, UK Sustainable Investment and Finance Association, and it's now up to global investors to expand their "impact on social and environmental issues."

But Alexander and other panelists at the Economist Impact Sustainability Summit held this week said that it will take a collaborative effort by private investors and government, and from wealthy nations in support of developing economies, if the world is to avoid the worst impacts of climate change.

Green finance has been one of the few good stories in the global economy in last few years, said Daniel Hanna, global head for sustainable finance, Standard Chartered, a London-based financial services company. More than $1 trillion in sustainable bonds were issued in 2021 for the first time. That's a 20-fold rise from 2015, and now accounts for almost 10% of global debt markets, he said.

Lending for green and sustainability projects, including clean energy, also surged to a new record of $700 billion in 2021, more than triple the prior peak, he said.

More is clearly coming, such as through the Glasgow Financial Alliance for Net Zero, announced during COP26, which has 450 financial firms from 45 countries committing over $130 trillion to net-zero investments.

"I think we are seeing a fundamental rewriting of financial sector," Hanna said. "The challenge of climate change … is increasingly being embedded into how finance operates on day-to-day basis."

Innovation, democratization, standardization

Now, the challenge is ensuring there's enough investment, and getting it to areas and sectors in which it can make the biggest, quickest difference, panelists said.

"There's huge momentum, but we actually need a lot, lot more," Hanna said. He pegged net-zero carbon investment needs at as much as $8 trillion annually through 2050.

This doesn't even include another $2.5 trillion per year that the UN has identified to meet its sustainability goals, he added.

Innovation, democratization, and standardization will help encourage more lending, the panelists said.

Innovations are coming from all sectors, such as "transition bonds," which fund efforts by companies or governments to move on the path to net zero. The first transition bond in aviation was issued in 2021, for example. "Blue bonds," which commit funds to protect and clean oceans and coastlines, were pioneered by the Seychelles in 2020, and Belize offered $553 million of blue bonds in 2021.

Another idea is to incorporate key performance indicators (KPIs) in corporate bonds. "With KPIs, if someone doesn't hit their transition target, they could be required to purchase [carbon] offsets," Hanna said.

Democratization raises the matter of where an investment is made, not just what the investment is.

COP26 brought the issue of inequity to the forefront, as nations that have contributed very little to the carbon inventory are bearing the brunt of its impacts. They successfully pushed for wealthy nations to live up to their prior promises to devote $100 billion per year to climate adaptation and the energy transition in developing nations.

Panelists said the G20 can get into the act more strongly, and they said to watch what happens as Indonesia holds the G20 presidency this year and Brazil holds it in 2023.

"You need to tackle sustainability risks at the global level," said Olaf Sleijpen, executive director, monetary affairs and financial stability, De Nederlandsche Bank. "The good news is that some non-western countries also have it high on their agenda. We see countries like India say we are willing to do something about our emissions, but we need some [financial] help."

Thinking geographically about how to invest in the energy transition also brings practical benefits, Hanna pointed out. "A single dollar invested in a solar park in India has seven times the impact of reducing carbon emissions in France. How we mobilize money from Lyon to Lucknow is … going to actually make a real change to the world," Hanna said.

Democratization also means "enabling sustainable behavior" by the general public, added Katherine Brown, vice president, inclusion, impact & sustainability, Europe, Visa.

Through surveys, Visa has identified significant interest in sustainability, but lack of knowledge or opportunity to act on it, she said. In a survey of more than 30,000 people worldwide, Visa found that 63% said climate change is important, but only 34% said companies are helping them to be sustainable.

A consumer finance company like Visa can play its part by offering green banking products, such as carbon offsets for financial transactions and travel, partnership with electric vehicle providers, and contactless payments for public transportation, which became important during Covid-19. "We have to bring people along on this journey," Brown said.

These are on top of Visa's own sustainability commitments. Starting in 2020, all of Visa's global electricity needs have been supplied by renewables. Last year, it issued a $500-million green bond to support energy and water efficiency projects through 2027 for its buildings, employee commuter programs, and more.

Only doing the easy stuff

However, along with greater corporate commitment to sustainability comes the risk of "greenwashing," according to Lutfey Siddiqi, professor at the London School of Economics. He said that investors and government need to distinguish between corporate talk and action.

This is a global matter for corporations, their investors, and government, Hanna said. "We are only doing, frankly, the easy stuff now—powering with electricity whenever possible, and with renewables where we can," he said. "Now we have to tackle the hard-to-abate sectors that are completely embedded in how global economy works. We need humility … we're just getting started."

This is where standardization of reporting on GHG emissions and other metrics comes in, panelists said. They called on governments to help provide consistent rules that investors can use for weighing green and sustainable investments.

The International Financial Reporting Standards Board is taking the lead on developing voluntary standards. Having those types of standards written into law by the EU and applied globally would be welcomed by investors, said Sleijpen.

On 21 March, the same day the panelists were speaking, the US Securities and Exchange Commission released its first-ever rules to require climate risk disclosure for public companies—another mark of a governmental effort to drive greater consistency.

Panelists stressed the urgency of providing this common ground for private finance for energy transition and sustainability. "Don't let 'perfect be the enemy of the good,'" Hanna said. "It's taken decades to harmonize tax legislation [globally]—and it's still not done. We do not have decades … on climate change."

Government's role

One panel at the conference expanded upon the ways that governments can support private investment for carbon reduction concurrently with improving economic equality across the world.

Setting policies with significant carbon prices would be a direct signal to investors, said Sleijpen. "The business case to invest in energy transition must be better ... [and that] starts with pricing of carbon," he said. "It … should be more profitable to invest in green technologies," backed by government policies that investors can be confident will remain in force.

Central banks can play a role, too, said Jim O'Neill, senior advisor at London-based policy institute Chatham House. "Just as central banks in many parts of the world are given an inflation target … if governments were truly, truly committed to net-zero … then, of course, central banks could be mandated to incorporate that into everything they are doing," he said.

As one example, O'Neill said a large central bank could send a "bold" message by saying that financial ratings agencies should consider a company's contribution to fossil fuel emissions in analyzing capital risk, though he added, "that has to be well thought-out."

It should be noted that the idea of incorporating climate risk into financial measures is controversial, at least in the US. Sarah Bloom Raskin, nominee to the US central bank, the Federal Reserve, withdrew her application earlier this month when Republicans and one Democrat said they believed she wants to go too far in that arena. In her resignation letter to US President Joe Biden, Raskin said, "It was—and is—my considered view that the perils of climate change must be added to the list of serious risks that the Federal Reserve considers to ensure the stability and resiliency of our economy and financial system."

Without commenting on the US situation, O'Neill said he understands why this is a sensitive issue.

Central banks "are finding it difficult enough … to actually keep inflation in tow, so throwing in another target for them [climate change] might exacerbate the challenge of achieving anything," he said.

Inflation has even worse effects in poorer parts of the world, where food consumes larger parts of a household's budget, and thus pushes climate change further down the agenda, O'Neill said.

On the other hand, Alexander said he is "very optimistic" about the way the private sector has stepped up its environmental commitments and financing. "In some ways, corporates are now ahead of governments," he said.

Posted 24 March 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.