Green Finance refers to new financial instruments whose proceeds are used for sustainable development projects, initiatives, environmental products and policies under the single goal of promoting a green economic transformation toward low-carbon, sustainable and inclusive pathways. It is constituted of new financial instruments such as green banks, green funds, green bonds and carbon market instruments, and involves engaging traditional capital markets in creating and distributing a range of financial products and services that deliver both investable returns and environmentally positive outcomes.
At the core of today’s globalised economy are financial markets through which banks and investors allocate capital to different sectors. The most important thing to note is that capital allocated today will shape ecosystems, and the production and consumption patterns of the future. Having said this, the public sector funds and development assistance can supply only a small portion of green investments. Therefore, the private sector needs to fill financing gaps for green investments over the long term.
How can this be mobilised at scale?
According to the ADB report Catalyzing Green Finance , the whole financial system needs to be reoriented to support a green economy. To scale up, governments need to team up with a range of actors to increase capital flows and develop innovative financial approaches across different asset classes. In doing so, this can help catalyse the much larger flows of private finance that is necessary to unlock green business innovation on a wider scale.
To facilitate this transition, an enabling framework that promotes green finance will be required to help educate and change people’s mindsets and behaviours. In due course, this could lead to subsidies for fossil fuels being phased out, while subsidies for green products (such as electric vehicles) could be phased in. Disclosure should also be made mandatory, ensuring that companies and banks are made accountable for the environmental damage of the companies that they lend to.
If countries are to achieve sustainable development in line with the United Nation’s Sustainable Development Goals, then investments must be made in green areas. That’s why there is a specific need to promote green finance on a large and economically viable scale, as it helps ensure that green investments are prioritised over business-as-usual investments that perpetuate unsustainable growth patterns. This focus should be on the greening of an existing infrastructure, or the spending on and mobilisation of additional investments in key sectors, such as clean energy, sustainable transport, natural resources management, ecosystem services, biodiversity, sustainable tourism, and pollution prevention and control.
During this Covid-19 pandemic, many people are experiencing uncertainties that the most vulnerable communities in our society live with on a day-to-day basis. For example, worries about job security, missing mortgage or rent payments, accessing food, child care, healthcare, education, and even a general sense of feeling trapped in a situation that is well beyond their control.
However, this pandemic has certainly shown people how broken and inequitable our current systems really are, as well as the world’s approach (or lack of) towards tackling the climate crisis. This is not to say that the pandemic created these inequities that we are currently facing. Rather, it has revealed the crises that were already there, and how they are now fairing much worse. If we don’t address these issues as an integral part to our response to the outbreak, we will not only be less resilient to future pandemics and emergencies, but we will prevent ourselves from achieving any kind of ‘new normal’.
Despite the clear warnings from scientists, and the evidence pouring in every day that climate impacts are already being felt on a worldwide scale — fossil fuel companies are still spending billions to lock in more climate pollution. In 2018, roughly $1.2 trillion in investment went to fossil fuels. What’s more shocking is the fossil fuel industry has actually known about the climate crisis for decades. Investigations uncovered that the industry was funding research into carbon pollution and was aware of the dangers of rising global temperatures all the way back in the 1960s. But instead of acting responsibly, they decided to polarise the issue, confuse the public, and essentially delay action.
The IPCC has warned that global temperature rises should be limited to 1.5 degrees above pre-industrial levels in order to keep the worst, most devastating effects of climate change from battering human societies. Yet in May 2020, the concentration of carbon dioxide in the atmosphere crept up to about 418 parts per million (ppm). This was the highest ever recorded in human history. Recently, UNEP have revealed that to hit that goal, overall human-cause GHG emissions need to start dropping by 7.6% each year from now until 2030 .
The UK has an advanced climate change legislation, whose proposed budgets require the country to reduce its greenhouse gas emissions from 695MtCO2e in 2006 to 159MtCO2e by 2050. This is equivalent to an annual average reduction of 3.3%. All of this is achievable, but only if the necessary steps are taken to facilitate a smooth transition to a green economy.
Many people are fearful of life returning ‘back to normal’. That’s because as lockdowns were enforced across the world, people were temporarily locked up and excluded from these natural spaces. During this time, nature has become more visible and our collective impact on the natural world has become more noticeable through its absence. People are once again looking to nature, thinking how might they best preserve this precious planet that we live on.
Despite this eco-anxiety, COVID-19 has given us a glimpse into that future, as we have witnessed a massive decrease in energy demand during global lockdown and a significant increase in the up-take of renewable energy. We have seen renewables delivering almost half (47%) of our electricity generation across Europe - an increase of 9% compared to 2019, and even a drop in coal generation by 32% from 15th March to 17th April 2020. Change is on the horizon.
Climate change is a systemic issue and will demand that businesses take a long-term view and form strategic collaborations on a global scale, rather than focusing solely on the short-term and profitability. This is a significant worry as we build back from the coronavirus crisis, as people feel like they have to choose one or the other; profit or planet. But this is not the case. Instead of being viewed as a cost, the shift to sustainability and circularity should be seen as an opportunity to make a positive impact.
Change is possible. This is evidenced through Orsted, who was once Denmark’s largest coal, oil and gas giant. In 2017 the company decided to phase-out the use of coal for power generation and underwent a significant business model shift to focus entirely on renewable energy. Since then, investors’ share prices have tripled. A decade ago they were one of the most fossil fuel intensive energy companies in Europe. Today they’re ranked as the most sustainable company in the world (based on the Corporate Knights 2020 Global 100 index of most sustainable corporations). They truly epitomise how systemic change can occur through collective action.
From this point in time, we must work with decision makers to move from a short-term and quick-fix mentality to longer-term thinking. This is something we should have and could have done years ago, as the need for these structural changes has been growing for decades. With increased public awareness and the need to build back better, the support for this change is something very new and very exciting.
There has been lots of talk recently on whether the coronavirus crisis will spur a green recovery. Governments around the world are questioning the ability to ‘build back better’, but will they succeed in this? In fact, the determination to use this lockdown period as an opportunity for environmental change stretches far beyond this choice that governments are facing.
Since the Rockefeller Foundation first coined the term in 2008, Impact investing has gained significant traction. One of the reasons for this, is because it is a win-win form of investment. One does not have to give up returns to make an incredible impact.
Impact investing really started taking off after the financial crisis in 2008 and 2009. In many ways it takes a crisis for people to change their way of thinking and begin analysing experiences in greater detail. Many people use crises as a period of deep reflection; to reflect not only on their individual experiences, but also others and the world around them. For many, the longer this goes on, the more people’s attitudes and outlooks will change.
Impact investments have for a long time been thought of as producing both financial returns whilst making a positive impact. In many cases, people tend to think that there is some charitable and philanthropic element to impact investing. However, over more recent years there is a growing acceptance that making money and doing good can sit side-by-side. In fact, it’s been doubling in popularity every year. This is evidenced by a recent study with KPMG that showed how impact investments globally assembled $268 billion in 2017 and are poised to cross $468 billion by 2020.
Similarly, a recent report by Imperial College London and the International Energy Agency (IEW) has found that over five years in the UK alone, investments in green energy generated returns of 75.4% compared to just 8.8% for fossil fuels. It also highlighted how green stocks have performed much better during the global pandemic compared to fossil fuels, thereby accentuating the volatility of the oil, coal and gas markets. Black Rock reported that 94% of a widely-analysed global sustainable indices outperformed their parent benchmarks in the first quarter of 2020.
Impact investments are proving to be more resilient in the downturn and yet you still retain all the impact it is having. These are after all the companies of the future; companies’ that are specifically solving environmental problems, using technology to scale while ensuring that we have a planet that sustains us and future generations.
As we have become more in touch with nature during the lockdown period, it is without doubt that more and more people have become aware of the types of change required, and the extent to which we must address them if we are to live on this planet. This begs us to question whether the coronavirus will be the catalyst towards more socially responsible investing? Will we see a shift for the entire industry?
Well we have already begun to see systemic shifts. According to The Global Family Office Report 2019, the vast majority of family office’s around the world have diversified impact portfolios by investing most often in education (45%), agriculture and food (45%) and energy and resource efficiency (43%). Over the coming decades more than $30 trillion in assets will be transferred to millennials and generation X - the largest and wealthiest generation the world has ever seen.
With this unprecedented amount of wealth transferring from one generation to the next, families of wealth can have a tremendous impact in shaping the recovery by investing in a way that creates more economic opportunity for vulnerable people, but also ensures that sustainability and inclusion are at the forefront for a green recovery.
The world cannot keep on growing as it has been. While global imbalances like uneven growth, wealth inequality, and environmental degradation have generally raised living standards, unsustainable growth now puts future living standards at risk, and endangers the lives of generations to come.
According to the United Nations, achieving the SDGs will take between $5 to $7 trillion, with developing countries facing an investment gap of about $2.5 trillion. Bridging this gap is impossible for developing countries to tackle alone, and so the need for capital is huge.
So how can we make the world a better place by 2030?
Traditionally government and institutional investors help to fund this gap. However, with recent economic growth there is also huge potential from private capital. In the next 20 years, 460 billionaires will hand down USD 2.1trn to their heirs - that’s the size of India’s entire GDP. This begs us to question why private investors haven’t become more involved? Largely this is due to a lack of transparency, data availability and incentivisation.
What is impact investing?
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals. It is without doubt that this approach is considerably better than unreliable aid packages that have become the norm in the developed-developing world relationship.
Small enterprises are often too big for micro-finance and informal sources of finance, but too small or risky for commercial banks and private equity investors. However, impact investors can address this challenge as they have a critical role to play in the expansion stage before the enterprise can take on commercial finance. Impact investing certainly challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, micro-finance, and affordable and accessible basic services including housing, healthcare, and education. Interestingly, in 2014 Africa received 15% of impact investment Assets Under Management (AUM), with sub-Saharan Africa constituting the second highest regional allocation globally. This prominent position in impact investment is anticipated to strengthen, with Sub-Saharan Africa identified as the geographic area that most investors intend to increase their allocations in.
The Sustainable Development Goals (SDGs) and increasing global emissions present a critical opportunity to promote sustainable growth for all. Now more than ever, private capital can and must be invested to achieve them, as sustainable investments represent an effective tool which can contribute to closing this investment gap and facilitate the transition to a more sustainable and just society.