Green finance is finally moving from the margins to the mainstream. It's arrived in common vernacular and it's here to stay, according to discussions at FundForum International 2019 in Copenhagen recently.
Green finance has developed on the back of increased climate awareness and has been pushed further into the consciousness of the asset management industry following the 2015 Paris Climate Agreement.
Green Bonds: the market lowdown
One of the latest instruments to gain popularity as part of the Green Finance agenda is green bonds, creating a market that barely existed a few years ago.
The climate-aligned bond universe has now reached USD 521 billion globally, as supply struggles to keep up with demand for green bonds.
At the forefront of this expansion in green bonds is China. According to Madame Yan Wang, Deputy General Manager at Bank of China, UK, China accounted for 18% of green bonds issued in 2018, cumulatively worth over USD 30 billion.
These bonds represent part of an ambitious plan on the part of the Chinese government to meet the nation’s environmental commitments, an undertaking that will require expenditures that could exceed (USD)? $600 billion a year. Most of this is expected to come from private funds raised through green finance instruments.
For Eila Kreivi, Director and Head of Capital Markets for the European Investment Bank, the importance of green bonds lies outside of financial additionality, as most of these projects could receive funding without the need for green bonds. The importance instead lies in the transparency of green bonds.
The European Union recently issued a taxonomy of exactly what they consider an environmentally sustainable investment is by providing a common understanding of what is green.
When investing in green bonds, the standards for demonstrating exactly what the proceeds will be used for - as well measuring the impact of a project - are much higher than in other forms of investment.
This commitment to transparency triggers processes among issuers themselves. As Kreivi emphasises: “[issuers] are giving a lot of know how to the rest of the world in terms of how they do it and what they measure – this is the additionality.”
Defining green finance is still a 'barrier' to progress
Moving forward, there is an increasing consensus that a crucial barrier to realising the true potential lays around the questions of definition and standards.
According to different definitions, estimates of total funds held in green investments ranges anyway from USD 1 trillion to USD 31 trillion. This raises concerns that ‘green’ investments lack meaning, as wide definitions of sustainability allow funds to sell themselves as ‘green’, ‘ethical’, or ‘sustainable’ without any standardisation or regulatory mechanism holding them to account.
Regulatory bodies are waking up to this. The European Union recently issued a taxonomy of exactly what they consider an environmentally sustainable investment is by providing a common understanding of what is green.
For Vasiliki Pachatouridi, Head of EMEA iShares Fixed Income Product Strategy, this represents the first step in moving from regional green finance governance and standards to an increasingly global understanding of what ‘sustainability’ really means. As Kreivi puts it, “It’s an EU initiative but it’s watched globally”.
The green finance outlook
Significant barriers remain before the full potential of green finance can be realised. Nonetheless, the outlook is increasingly positive.
The climate-aligned bond universe has now reached USD 521 billion globally, as supply struggles to keep up with demand for green bonds.
Definitions of green finance are becoming better understood and standardised. More countries are following China’s lead and starting to see green finance as an importance mechanism to fight pollution and climate change; conversations are being held regarding incentives for banks using green instruments. Green finance is finally coming of age.
Discover more content from FundForum International 2019 here.