New Green Finance Tools and the Prospects they Bring
The synergies between the environment and finance are more obvious than ever[i]. The financial sector can help the transition towards the green economy in many diverse ways. With investors already frenetically looking for greener and low-carbon investments, the potential of green finance for contributing to sustainable development is huge. Indeed, the share of private sector investment in green finance rose by 26% from 2013 to 2014 while sustainability labels are increasingly being included to investments[ii]. This encounter between green opportunities and finance has activated the boom of a series of new financial tools meant to empower sustainable projects. What are these tools and what is their potential?
Green bonds become red hot!
Green bonds are booming. No wonder why: they are the vectors for a huge and available capital to flow towards green infrastructure projects which are thriving too worldwide. 99% of the EUR500 m raised by HSBC on his first green bond issuance last year has been allocated to green projects, and this is only one of the many successful echoes from the green bond planet! Meant to fund projects that have positive environmental and/or climate benefits, the green bond market took off in 2014 with US$36.6 billion issued bonds. 2016 issuance broke the record, reaching US$81 billion[iii]. Even though the total amount of green bonds outstanding is just 0.15% of the global fixed income market[iv], investors’ demand is rapidly increasing. New screening tools are being elaborated for investors and issuers to monitor the environmental integrity of their bonds. Among the noticeable novelties is the opening of the Luxembourg Green Exchange[v] (LGX), first platform exchange for issuers and investors focused on green instruments, and the first exchange to translate industry best practices for green securities into mandatory requirements. Genuine tools and initiatives are there for fuelling the boom of green bonds, and successfully mobilise the $100 trillion bond market for climate change solutions.
Carbon Pricing & Effective Carbon Rates
The OECD estimates carbon pricing is an essential part of the solution to tackle climate change[vi]. Over 100 countries are considering pricing carbon as part of their Paris Agreement commitment[vii]. Carbon emissions, in a large proportion responsible for global warming, should be priced according to the estimate of their climate cost, which is still not the case in 90% of current global carbon emissions. If the damage for climate change done by one tonne of CO2 is estimated at 30 EUR, carbon prices are often either nil or very low[viii]. In order to effectively price carbon, specific tax rates need to be spread out and emission trading systems reinforced. The tendency is already to bet on better carbon pricing: 70% of the steel industry will face a carbon price by 2017. Effective carbon rates are a major financial tool to effectively curb climate change. The only way to remain competitive in the long run is to adapt to very high carbon rates and a carbon-neutral way of operating.
Fintech[ix], an explosive device
Financial technology offers great potential to scale up funding for sustainable development. Through advances in digital technologies, tomorrow's financial system could be far more efficient in mobilizing green finance. For instance, Ant Financial Services (ANT), China’s largest fintech company, provides financial products and services, such as payments, loans, insurance and wealth management, to 450 million small businesses and individuals. Financial inclusion is the most immediate contribution ANT makes to sustainable development. As one of the most popular mobile apps in China, ANT has been utilizing its platform to enhance active involvement in environmental protection and green lifestyle. Many features of fintech are employable for sustainable development: the redefinition of accounting for value, higher competition, efficiency, speed and automation, risk-management, diversification, transparency, accountability, collaboration, accessibility and decentralisation. These features can contribute to building an intergenerational vision, social, economic and environmental resilience, circularity and natural resource productivity as well as inclusive prosperity, thereby supporting other aspects of sustainable development, such as natural resource productivity and depletion rates. Such potential should be recognized and acted on, while also acknowledging the limitations and challenges.
Green finance is getting mature. International institutions are helping and minimisation of risks and securing techniques are being put in place[x]. Latest move: the bundling of green loans into securities to unlock additional capital for financing the transition to a low carbon and climate-resilient economy. Opportunities now exist across the EU to grow a significant market around green securitisation and contribute directly to 2030 energy and carbon reduction targets. If political actions to green the financial system have doubled in the past five years, more efforts are necessary to turn this momentum into sound global transformation, as sustainable financial flows and stocks remain marginal to the deployment of global capital. It is urgent to acknowledge that corporations are the key to capitalise on green finance opportunities and secure the future of mankind.
[i] Simon Zadek, Co-Director of UNEP Environment’s Enquiry, while launching the 2nd Edition of UN Environment’s landmark report, The Financial System We Need.
[ii] BIAC Final Paper on Green Finance June 2016, p. 1, available at http://biac.org/wp-content/uploads/2016/06/16-06-Final-BIAC-Paper-on-Green-Finance3.pdf
[iii] According to the Green Bonds Initiative website.
[iv] According to the 2nd Edition of UN Environment’s landmark report, The Financial System We Need. The report is available for downloading here.
[v] To know more about LGX, watch the video here.
[vi] OECD, Effective Carbon Rates, Pricing CO2 through Taxes and Emissions Trading Systems, 26 September 2016, available here.
[vii] See the World Bank report here.
[viii] The 41 countries include all OECD countries and Argentina, Brazil, China, India, Indonesia, Russia and South Africa. They account for more than 80% of the world’s carbon emissions resulting from energy use. The analysis shows that in the 41 countries targeted by the OECD analysis, 60% of the carbon emissions from energy use are unpriced while only 10% of emissions are priced at an effective carbon rate.
[ix] Fintech « covers everything from mobile payment platforms to high-frequency trading, and from crowdfunding and virtual currencies to blockchain. At its core, fintech reduces market friction by cutting out incumbent intermediaries and often replacing them with lower cost variants, from robo-investors to high-frequency traders, and so ultimately by increasing the speed and lowering the costs of transactions. Fintech is part of a broader, technology-driven revolution in progress. The accelerating confluence of emerging technology breakthroughs covers wide-ranging fields such as artificial intelligence (AI), robotics, the internet of things (IoT), autonomous vehicles, 3D printing, nanotechnology, synthetic biology, DNA editing, advanced materials science, energy storage and distributed computing, to name but a few. This changing technological ecology is likely to rewire every aspect of our global economy and the design and functioning of many core societal functions. », UNEP’s report. Find out more on Fintech in the same report, pp. 39-46.
[x] 2016 has been the year of remarkable developments: G20 Finance Ministers and Central Bank Governors have for the first time agreed to scale up green finance. China has issued instructions to green the financial system, the European Commission has recently announced the development of a comprehensive European strategy on green finance while in India, new guidelines have been brought in to spur the expansion of the green bond market.