Green finance has become one of the most important themes driving global finance. It has captured the attention of banks, companies, investors, governments and the general populace. And it continues to gather pace as the notion of a climate emergency demanding urgent action increasingly takes hold.
The finance sector sits in the middle of this debate. The role of the sellside, buyside, corporate sectors and the related institutional ecosystem in supporting and furthering the green agenda is being closely scrutinised.
From a banking perspective, the discussion goes beyond client selection, who banks lend to, the issue of stranded assets and valuations. These remain important aspects, but climate change risk is far more than a notional governance or business risk; it is starting to be viewed on the same level as operational risk, market risk, liquidity risk, funding risk, credit risk, as well as regulatory and supervisory risk. It’s impossible to ignore.
From a corporate perspective, environmental sustainability needs to move on from being considered a cost of doing business, and in many respects a distraction from day-to-day business, to a fundamental driver of how the business is run. That takes the discussion beyond potential basis-point savings – to the extent that those can even be achieved – from funding in the green capital market.
Engagement by bond investors with corporates around their sustainability and environmental strategies is becoming a bigger part of the overall discussion. This is a critical component of the green story and bond investors need to continue upping their game in this area because professional institutional environmental activism has the power to create lasting change.
The Green and Sustainable bond market and the newer Green and Sustainable loan market are growing, but in truth both are insignificant relative to the total amount of capital raised each year. Some of that is down to challenges of project selection at the corporate level but if the green capital markets are to play a role in pushing the needle, corporates need to accelerate their transition strategies.
Investors are looking more forensically at corporate transition strategies. If these are deemed to be unambitious or not credible, this may in the future prevent such companies from issuing in the Green bond market – even if the assets specifically being financed or refinanced are pure green.
From a governmental perspective, there are a number of initiatives at play that rightly render climate-change a truly global topic. The outputs of the European Commission’s Technical Expert Group on Sustainable Finance – a classification system (taxonomy), a Green bond standard, methodologies for benchmarks, and guidance for disclosure – were published on June 18, some weeks after IFR’s Green Financing Roundtable. The expectations are that this or aspects of it are adopted by others as part of a much-needed global harmonisation of standards. The fact that the broad green finance market has a multiplicity of definitions and standards means it still lacks a
proper central definition that all can adhere to.
Talk of “greenwashing” continues to abound within broad conversations about the Green bond market. And not just on the issuer side; investors also have a responsibility to ensure their engagement with the green capital markets is more than a detached box-ticking exercise.
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