Going green
23 Jun 2021
In a world threatened by global warming, green finance is now more important than ever with the opportunity to attract a new set of ecologically and socially responsible investors and asset managers
Image: siberian_art/stock.adobe.com
In a world impacted by pollution, global warming, and rising sea levels, it’s now more important than ever to be aware of the decisions we make. This includes making sustainable decisions about the food we eat, the clothes we wear and the energy we consume. In the world of finance, sustainability is being widely recognised as a crucial factor when it comes to investment. Over the past few years, the term environmental, social and governance (ESG), has gone from niche to mainstream. ESG is an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business.
Likewise, the term ‘green finance’ is neither uniformly defined nor uniformly used, it is sometimes also considered as the subset of ‘sustainable finance’. Green finance encompasses a range of approaches and instruments. This includes conventional financial instruments and mechanisms that are used with a focus on environmental or climate concerns as well as newly developed instruments and mechanisms. Experts say that companies that are willing to comply with the EU Taxonomy and are contributing to a positive impact on climate change, can be eligible for green financing.
The UK’s publication of its ‘Green Finance Strategy’ describes this process as three key items:
Greening finance: ensuring current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature
Financing green: accelerating finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives
Capturing the opportunity: ensuring UK financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’, such as climate-related data and analytics, and from ‘financing green’, such as new green financial products and services
“In Raiffeisen Bank International (RBI), we support our clients in all aspects of sustainable activities with the corresponding financing. We align our business strategy with climate change and society’s goals,” comments Markus Ecker, head of cover pool and public finance at RBI.
He explains: “By offering sustainable lending products we create value for our customers’ businesses. Our sustainable finance framework is set up in an agile way to leverage from different business lines and industry professionals.”
Green finance is extremely important and also is embedded jurisdictionally in legally binding legislation such as the Paris Agreement. This highlights that signatory countries should encourage climate finance for climate mitigation and adaptation endeavours.
With this in mind, what are countries around the world doing to incorporate green finance into their industry?
Leading the way
The US, China and France are the three biggest issuers of green bonds but experts say there are a number of things other countries can do in order to follow suit.
Ecker identifies several thing that other countries can do. Firstly, local regulators can encourage green bond issuance with a meaningful incentive program as well as promote long-term funding for green financing with the use of green bonds.
Further to this, countries could adapt legislation to support green investment with more favourable financing conditions than other investments and to possibly punish environmentally harmful investments, and define standards for green products to prevent greenwashing on the market.
Moreover, by facilitating research and education, green experts would be able to build sound knowledge and awareness. Lastly, countries could implement sectoral regulatory changes to make the operating businesses greener.
From the perspective of ACA Group, a governance, risk, and compliance advisor in financial services, there has been progress on this front recently with ambitious target announcements out of the UK, EU and US.
For example, the UK announced the largest sovereign green bond offering this year, set for summer 2021.
According to Dani Williams, senior principal consultant at ACA Group and governance lead for ACA’s ESG advisory practice, it is anticipated that this will lay the foundation for further green bond expansion in the UK. But despite the size of the offering, it is still only a fraction of the UK’ gilt offering.
Green gilts
The green gilt framework, to be published in June in the UK, will detail the types of expenditures that will be financed to help meet the government’s green objectives. The government also commits to reporting the contributions of green gilt spending towards social benefits such as job creation and levelling-up. The government will offer a green retail savings product through NS&I in the summer of 2021. But some say the new green gilts carry the risk of greenwashing.
Ecker agrees this could be the case if the issuer is not transparent on the use of proceeds, or the issuer is financing sectors that can never be green (e.g. coal) or if the issuer does not fulfil the promised allocation to green projects (e.g. green bond for Mexican Airport).
“To prevent greenwashing, the issuer has to be transparent in regard to proceeds, obtain the second party opinion for the framework, establish proper internal processes for green project selection and decision making, gather the relevant data to make a quantifiable assessment, and establish transparent reporting and disclosure,” says Ecker.
Weighing in on this, Williams comments: “In terms of the new green gilts, although I would not call it ‘greenwashing’ per se, if the objectives/targets are not made in accordance with the science-backed strategy, then criticisms have been made that it will not go far enough in promoting a green strategy.”
A growing space
Amid work from governments and regulators to develop this space, investors are also pushing to go further when it comes to green finance.
Some firms are even actively choosing to adopt more green strategies for more altruistic or risk-based reasons.
ACA Compliance’s Williams observes firms almost exclusively cite investor and market pressure as the primary driver behind adopting more green strategies and investing in more green products.
“In terms of investor pressure, we have definitely seen a significant and steady increase in the past 18 to 24 months of investors asking more of their managers in the pre-investment process as well as requesting more in terms of monitoring and/or reporting on green investments,” says Williams.
Ecker adds: “Investors’ community is continuing to grow on the demand for green and sustainable investments.”
“Investors are more awake and more demanding and becoming more sophisticated of what they expect to see in terms of green and sustainable investments, which puts pressure on the issuer to really start pushing further and comply with the best market standards.”
For example, some investors interested in the fact that green bond proceeds are used to finance projects that are aligned with the very ambitious EU Taxonomy criteria.
Challenges and opportunities
Although there has been plenty of progression in the area of green finance, and opportunities still yet to come, experts say there will be some challenges along the way.
Partly this is due to the fact that although climate change environmental risk are nothing new, the focus and attention on green finance as a means to assist in meeting climate change goals is arguably still ‘new’.
Williams believes that in considering how to integrate climate and environmental risk, it might prove more challenging for managers to identify and integrate these risks effectively into their portfolio.
Ecker also identifies the following challenges:
Awareness of what constitutes green is not homogeneous across different geographical locations e.g. Western Europe versus Central and Eastern Europe
Though EU Taxonomy brings clarity of what is a green activity, it covers at the moment only seven sectors. Not covered sectors is a grey area
For the banks it is a challenge when not every company sees green finance as an opportunity to change their business model to more long-term, stakeholder-oriented commitment, e.g. real estate developers. On the other for energy sector providers partial transition to cleaner technologies is not enough the be eligible for green financing
Environmental data that is needed for decision and impact assessment is not available for most companies
Non-financial reporting is not harmonised. Different industries have different sustainability domains and relevant data
Language barrier: often the environmental data is in a local language
Ecker highlights: “We are missing better holistic and accurate environmental data and industry benchmarks.”
Looking forward, in terms of opportunities, the primary driver for the issuers is the diversification of the investor base that comes along with the green finance transactions. Green financing instruments offer an opportunity to attract a new set of ecologically and socially responsible investors and asset managers. Furthermore, Ecker suggests that reputational benefits are one of the gains issuers look for in green transactions. According to Ecker, a green bond is almost a free advertisement for the issuers which enables them to demonstrate their commitment to becoming more sustainable as a company over time.
Williams concludes: “Besides the positive global aspects of directing increasing financial flows towards opportunities that create a positive climate and environmental benefits for the longer term and accelerate change – it could prove useful in preventing some of the financial risks posed by climate change and benefit alpha generation in the medium to long term.”
Likewise, the term ‘green finance’ is neither uniformly defined nor uniformly used, it is sometimes also considered as the subset of ‘sustainable finance’. Green finance encompasses a range of approaches and instruments. This includes conventional financial instruments and mechanisms that are used with a focus on environmental or climate concerns as well as newly developed instruments and mechanisms. Experts say that companies that are willing to comply with the EU Taxonomy and are contributing to a positive impact on climate change, can be eligible for green financing.
The UK’s publication of its ‘Green Finance Strategy’ describes this process as three key items:
Greening finance: ensuring current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature
Financing green: accelerating finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives
Capturing the opportunity: ensuring UK financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’, such as climate-related data and analytics, and from ‘financing green’, such as new green financial products and services
“In Raiffeisen Bank International (RBI), we support our clients in all aspects of sustainable activities with the corresponding financing. We align our business strategy with climate change and society’s goals,” comments Markus Ecker, head of cover pool and public finance at RBI.
He explains: “By offering sustainable lending products we create value for our customers’ businesses. Our sustainable finance framework is set up in an agile way to leverage from different business lines and industry professionals.”
Green finance is extremely important and also is embedded jurisdictionally in legally binding legislation such as the Paris Agreement. This highlights that signatory countries should encourage climate finance for climate mitigation and adaptation endeavours.
With this in mind, what are countries around the world doing to incorporate green finance into their industry?
Leading the way
The US, China and France are the three biggest issuers of green bonds but experts say there are a number of things other countries can do in order to follow suit.
Ecker identifies several thing that other countries can do. Firstly, local regulators can encourage green bond issuance with a meaningful incentive program as well as promote long-term funding for green financing with the use of green bonds.
Further to this, countries could adapt legislation to support green investment with more favourable financing conditions than other investments and to possibly punish environmentally harmful investments, and define standards for green products to prevent greenwashing on the market.
Moreover, by facilitating research and education, green experts would be able to build sound knowledge and awareness. Lastly, countries could implement sectoral regulatory changes to make the operating businesses greener.
From the perspective of ACA Group, a governance, risk, and compliance advisor in financial services, there has been progress on this front recently with ambitious target announcements out of the UK, EU and US.
For example, the UK announced the largest sovereign green bond offering this year, set for summer 2021.
According to Dani Williams, senior principal consultant at ACA Group and governance lead for ACA’s ESG advisory practice, it is anticipated that this will lay the foundation for further green bond expansion in the UK. But despite the size of the offering, it is still only a fraction of the UK’ gilt offering.
Green gilts
The green gilt framework, to be published in June in the UK, will detail the types of expenditures that will be financed to help meet the government’s green objectives. The government also commits to reporting the contributions of green gilt spending towards social benefits such as job creation and levelling-up. The government will offer a green retail savings product through NS&I in the summer of 2021. But some say the new green gilts carry the risk of greenwashing.
Ecker agrees this could be the case if the issuer is not transparent on the use of proceeds, or the issuer is financing sectors that can never be green (e.g. coal) or if the issuer does not fulfil the promised allocation to green projects (e.g. green bond for Mexican Airport).
“To prevent greenwashing, the issuer has to be transparent in regard to proceeds, obtain the second party opinion for the framework, establish proper internal processes for green project selection and decision making, gather the relevant data to make a quantifiable assessment, and establish transparent reporting and disclosure,” says Ecker.
Weighing in on this, Williams comments: “In terms of the new green gilts, although I would not call it ‘greenwashing’ per se, if the objectives/targets are not made in accordance with the science-backed strategy, then criticisms have been made that it will not go far enough in promoting a green strategy.”
A growing space
Amid work from governments and regulators to develop this space, investors are also pushing to go further when it comes to green finance.
Some firms are even actively choosing to adopt more green strategies for more altruistic or risk-based reasons.
ACA Compliance’s Williams observes firms almost exclusively cite investor and market pressure as the primary driver behind adopting more green strategies and investing in more green products.
“In terms of investor pressure, we have definitely seen a significant and steady increase in the past 18 to 24 months of investors asking more of their managers in the pre-investment process as well as requesting more in terms of monitoring and/or reporting on green investments,” says Williams.
Ecker adds: “Investors’ community is continuing to grow on the demand for green and sustainable investments.”
“Investors are more awake and more demanding and becoming more sophisticated of what they expect to see in terms of green and sustainable investments, which puts pressure on the issuer to really start pushing further and comply with the best market standards.”
For example, some investors interested in the fact that green bond proceeds are used to finance projects that are aligned with the very ambitious EU Taxonomy criteria.
Challenges and opportunities
Although there has been plenty of progression in the area of green finance, and opportunities still yet to come, experts say there will be some challenges along the way.
Partly this is due to the fact that although climate change environmental risk are nothing new, the focus and attention on green finance as a means to assist in meeting climate change goals is arguably still ‘new’.
Williams believes that in considering how to integrate climate and environmental risk, it might prove more challenging for managers to identify and integrate these risks effectively into their portfolio.
Ecker also identifies the following challenges:
Awareness of what constitutes green is not homogeneous across different geographical locations e.g. Western Europe versus Central and Eastern Europe
Though EU Taxonomy brings clarity of what is a green activity, it covers at the moment only seven sectors. Not covered sectors is a grey area
For the banks it is a challenge when not every company sees green finance as an opportunity to change their business model to more long-term, stakeholder-oriented commitment, e.g. real estate developers. On the other for energy sector providers partial transition to cleaner technologies is not enough the be eligible for green financing
Environmental data that is needed for decision and impact assessment is not available for most companies
Non-financial reporting is not harmonised. Different industries have different sustainability domains and relevant data
Language barrier: often the environmental data is in a local language
Ecker highlights: “We are missing better holistic and accurate environmental data and industry benchmarks.”
Looking forward, in terms of opportunities, the primary driver for the issuers is the diversification of the investor base that comes along with the green finance transactions. Green financing instruments offer an opportunity to attract a new set of ecologically and socially responsible investors and asset managers. Furthermore, Ecker suggests that reputational benefits are one of the gains issuers look for in green transactions. According to Ecker, a green bond is almost a free advertisement for the issuers which enables them to demonstrate their commitment to becoming more sustainable as a company over time.
Williams concludes: “Besides the positive global aspects of directing increasing financial flows towards opportunities that create a positive climate and environmental benefits for the longer term and accelerate change – it could prove useful in preventing some of the financial risks posed by climate change and benefit alpha generation in the medium to long term.”
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