Green Finance
Last Wednesday I was lucky enough to be invited to attend The Future of Green Finance Event, held at the Guildhall in London City. Green finance is gaining rapid momentum within the financial community today. In 2014 to to 2015 it went from a $30 trillion to a $70 trillion industry.
So what is green finance? This was a question asked and answered throughout the day. And as a non-finance whiz-kid I'll attempt to sum up. At the moment green finance is any form of 'ordinary finance' that is tethered to an element of environmental benefit, whether that be climate change, resiliency, sustainability Breeam, and so forth. At the moment the focus has been primarily on green bonds: loans with standard interest returns,- but this is set to expand.
There is some heated debate over 'what actually is green'; how it is defined and how it will be standardised, in part to avoid 'green washing' scandals: the practice of claiming something is green when it is in fact not. And though green bonds are the main focus at the moment, other forms of finance will undoubtedly take a greater market share with time.
Green finance has come about as investors demand more out of where their money is going and for good reason, given the global risks of climate change, rising inequality, generational shifts, rapid decreasing costs in renewables and real and increasing divestment from fossil-fuel based funds.
At the same time outside of the finance industry, sustainability, climate change and resilience are now taken very seriously. Corporations have sustainability directors, cities and governments worldwide are having to contend with rising costs, rising sea levels; the effects of climate change. And across multiple sectors, including civil society, universities, innovators and companies have been creating products, solutions and ideas that positively alter the way we consume, build our environment and create global sustainable change across all sorts of industries.
In the UK, according to the UNEP inquiry 'Design of a Sustainable Financial System: United Kingdom, Global Hub, Local Dynamics', there have been four waves of sustainable finance innovations over the past decade and a half, from 'ethical investment, moving to mainstreaming environmental factors into institutional investment, the surge of post-crisis reform and the current focus on climate and carbon risk.' Movements have usually started 'with social entrepreneurs and civil society organizations raising expectations for financial institutions, practitioners competing to capitalize on new market expectations and finally regulation being introduced to universalize good practice.' (UNEP). Without a doubt thought leadership and civil society, alongside investor and public demand have entailed the viability of green finance. In essence the market and society demands it.
Last year two major global initiatives were launched: The G-20 Green Finance Study Group under the Chinese G-20 presidency and an industry-led Task Force on Climate-related Financial Disclosures established by the Financial Stability Board to 'support the main-streaming of private sector capital to address the environmental challenges of the future' (CityandFinancial).
As the industry is growing and developing, debate is open and includes questions on standardisation and defining 'green', risk, market appetite, how to grow the market and so forth.
This debate was, in part, encapsulated in the discussions held at the Future of Green Finance Summit, for which I've included my own very sketchy notes and some analysis below. In essence there were some very bright and powerful individuals at the conference well versed in the capital markets, but there was a sense - especially from policy makers and researchers that the finance industry needs to have a far better and deeper understanding of the fundamentals of 'green'; of what resilience 'green infrastructure' and sustainability actually are. And further, what it entails for governments, society and the financial system. No doubt this is an opportunity for far greater debate and deeper relationships between policy, research and finance,- but also a requirement. There was also a huge sense of optimism and that this was a real moment for change.. and a palpable sense of opportunity.
Note: Below are my own notes on the Green Finance Summit, legible but only just..
Future of Green Finance Summit
The conference brought together some of the top directors, heads and officials from the City, the finance and banking industry, politicians, the United Nations Environment Programme, economists from the Bank of China and even a surprise visit from Mark Carney, the Governor of the Bank of England (and as it turns out, a true celebrity of the finance world- his visit generated much restrained excitement and less than subtle phone snaps by the industry audience).
Welcome and Opening Remarks
2016 holds out the promise of being the ‘year of green finance’, with multiple new measures that are driving forward progress at national and global scale. The opening session will cover the City of London Corporation’s Green Finance Initiative, with insights into the emerging B20 and G20 green finance agendas, as well as an overview of broader international developments.
Moderator: Sir Roger Gifford, Chairman, City of London 2016 Green Finance Initiative; UK Country Head of SEB
Harriet Baldwin, MP, Economic Secretary to the Treasury
Achim Steiner, Executive Director, UNEP
Keynote: Mr Zhang Hongli, co-Chair B20 Finance Track; Senior Executive Vice President, ICBC
- Source: City and Financial
Welcome and Remarks Summary
Beginning the welcome and opening remarks segment ; Sir Roger Gifford began by explaining that Green Finance 'connects political conviction with financial investment' and includes 'mainstream asset management' as the world transitions from carbon intensive to carbon neutral.
This was followed by Harriet Baldwin MP who explained that we were witnessing 'tradition hand-in-hand with innovation.. making the most of emerging opportunities. In order to stick to the agreed 2 degree increase at COP 21, $52 trillion of 'public, private capital will need to be mobilised'. She also briefly explained 'the huge investor appetite for sustainable innovation' and the 'need to scale up green financial funds'. She pointed to green bonds that have been recently released which have included large multinational companies such as Apple, Hyundai and Unilever. The next step she explained was 'greater country collaboration' and the inevitable call to action 'its up to all of us'.
Achim Steiner: 'We're not talking about the future of Green Finance. The future has arrived.' and that we are witnessing and part of transformational change. He issued several warnings. In the next 15 years to meet infrastructure targets cities and governments globally will need around $90 trillion in investment. And that 85% of this will be required from private investment. 2009 (with its very public bailouts) will not be repeatable. He explained that the current financial system 'by any outlook is not healthy' with inherent stresses and volatility, and that there is a big change as the centre of investment moves to the global South. He hinted at the challenges associated with the funding of infrastructure.
Zhang Hongli, Vice President ICBC and co-Chail B20 Finance Track finished by explaining the significance of having the G20 for the fist time all focussed on Green finance and the critical China is playing in promotion of this. With not only the event of the day, but also Business and Climate Summits leading up to the event and the funding of inquiries and study groups investigating finance solutions. He explained that 'green' is additive to finance and enables further important risk analysis via integrating environmental factors.
09.45 Session 1: An Introduction to the Financial System
This first panel will set the scene for the day’s discussions covering key financial actors, their primary functions, and will provide an overview of the emerging challenges and opportunities associated with green finance.
Moderator: Michael Sheren, Senior Advisor, Bank of England
Nikhil Rathi, CEO London Stock Exchange
Marilyn Ceci, Head of Green Bonds, J.P. Morgan
Frederic Samama, Deputy Global Head of Institutional & Sovereign Clients, Amundi Asset Management
Bodo Winkler, Head of Investor Relations & Credit Treasury, Berlin Hyp AG
- Source: City and Financial
An Introduction to the Financial System
In session 1 Bodo Winkler of Berlin Hyp described how his company became aware that a number of mortgage assets that they held could in fact be understood as 'green mortgages'. These could be refurbished buildings with additional energy efficiency or buildings that were about to acquire energy efficiency across 5 different countries. 500 million went into this new green bond. The intention from this is that not only are the assets 'green' but the use of proceeds will further fund additional green assets. Winkler defined some of the categorisations by which they validated their assets, such as certifications in BREEAM and LEED (building sustainability certs) as well as sustainable water management and waste. Although they were not able to directly calculate the carbon offsets they're beginning to understand more.
Ceci expounded on the need to further leverage green assets, that mainstream investors are part of this conversation, providing the appetite, but that if credit is not there, no one will buy and the need for credit ratings.
Nikhil explained that from the perspective of the Stock Exchange the more familiar products are; the better. For example bonds have a standard regulatory process and profile and can be evaluated against their peers. That currently, the London Stock Exchange has 25 green bonds, including the retail and mass market, TFL infrastructure projects, Unilever and similar. He ventured that there now needs to be international standards around green bonds and that at some point an arbitration process for when things go wrong, indexes to get in and out of quickly.
Frederic Samana talked about managing risk through tethering a low carbon portfolio to an ordinary portfolio. He then talked about the need for finance to properly understand carbon footprints, 'all must do risk analysis on climate change' across all the asset classes, which will entail the reallocation of capital from high to low carbon and the way in which this will accelerate the system towards low carbon.
The panel talked about Infrastructure, - its long gestation periods, high need for finance and on the other side negative returns, which don't match capital requirements and further the fact that infrastructure projects are often complicated by many obstacles. Who is behind the project, how much more will it really cost? - Construction still considered an operational risk. Nikol talked about the Indian railways and the potential for utilising rooftops for solar energy- with 300 days of sunshine India is well-placed for this adaptation.
Further discussion centred on the need for aggregation of renewable products. Bodo brought up the question of whether green buildings are really more attractive to buyers than regular buildings (which I believe data exists for however perhaps in Australasia).
11.00 Session 2: Greening Banking and Institutional Investment
Banks and institutional investors are guardians of hundreds of trillions of dollars. However, as of now, only a very small fraction of global bank lending and assets of institutional investors have flowed into “green” initiatives. There is tremendous scope for further study and promotion of “green financing” practices to more countries, financial institutions and markets. This session will focus on some of the key opportunities and challenges for banks and investors in scaling up green finance.
Moderator: Robert Ward, Deputy Director, Global Financial Markets, HM Treasury
Namita Vikas, Group President and Country Head, Responsible Banking and Chief Sustainability Officer, Yes Bank Ltd
Siobhan Cleary, Head of Research and Public Policy, World Federation of Exchanges
Karsten Loeffler, MD, Allianz Climate Solutions
Nick Dent, MD and Head of EMEA Debt Syndicate, Nomura
Key points:
Nick Dent had a focus on social housing, the need for environmental housing projects and the debate over what is green - is it sustainability, is it projects that respond to climate change and are we at risk of green washing?
Namita Vikas added to the debate explaining the support and demand from investors for green finance projects and the great profit that can be derived from this.
Karsten Loeffler spoke about understanding the horizons; renewables are well understood but other kinds of 'green' are not; such as sustainable land use. He posited that tax incentives will go a long way to achieve real change in this industry.
And Siobhan Cleary spoke of piloting initiatives green finance hasn't arrived but its 'rapidly accelerating process' getting into detail is essential.
13.30 Session 3: Greening the Bond Markets
The bond markets are the largest single pool of private sector capital globally. Despite impressive recent growth, green bonds remain a tiny percentage of total bonds in issuance, while most existing green investment is still financed through bank credit. This session will explore the steps required at the nexus of issuers, banks, markets and investors to green the bond markets and unlock the enormous potential that largely remains untapped.
Moderator: Dr Ma Jun, Chief Economist, People's Bank of China,
Paul Tregidgo, Vice Chairman, Credit Suisse
Mil WIlkis, MD, Standard & Poors
Chris Botsford, CEO, ADM Capital
Spencer Lake, Vice Chairman, HSBC and Chairman. ICMA
In Session 3, the audience was graced with Mark Carney's somewhat presidential presence, he made a general but inspiring pitch explaining the background of the event and where it could all be leading.
Ma Jun spoke about China and the benefits to green finance, with better yields in green bonds and 42 billion already released. He compared this type of finance to a kind of national maturity as Chinese banks currently have a short liability and thus short maturity. This kind of finance will assist towards a more stable system. He also spoke about investor appetite in diversification.
Spencer Lake spoke on the challenges of moving green from niche to mainstream. That Green and Infrastructure need to be together, but that we have to solve the infrastructure 'problem' (my notes - costs a fuck-ton, who pays? who benefits? how financed? wicked problem) Needs to be an asset class nascent relative to size
These asset types need to be an industrialised homogenised asset class. Governments control the framework. Regionalised approach to global problem. Bring ESG into the credit world. Not so much standardisation - this is a problem. Connect the risk profile with climate profile
2012 - 2016 49% - 59 % 20 - 30 11 - 18 6 - 8
Paul Tregidgo: there are going to be challenges in the coming wealth transfer. Millenials will go for green finance assets - in the early days, keep it simple, don't overreach. Bonds important but no the only type of finance. Industry will expand.
Chris Botsford. To paraphrase. Poor people have a lot wealth in land (he actually said this). Lets realise all the 'poor people's' wealth by encouraging them to map out their land based on GPS and satellite in Indonesia, then we can grow palm oil thereby making a ton of money............ Sustains-What?! Another model: Lets also do mini-hydro, cashflow scheme, financed by BNP IFO parcelled up by bond group then sold to markets.
Competing ... theories here, is it better to destroy an environment but realise profits quickly and give those benefits to small land owners or is there a more sustainable way of doing this without cutting down rainforests? Its still in the 'poor peoples' hands so to speak and poverty decreases but at what cost? Palm oil is an unmitigated disaster in ecological terms
Mike Wilkis: Where will green bonds evolve to .. pricing is not correlated to credentials of bond, currently related to credit. IS there actually any real benefit? (monetary)
Maj Jun - yes limited environmental risk is linked to credit risk = reduced credit risk of green companies.
ADM Chris, back to Indonesia - 4million Indonesians.. phone banking.
Paul Haven't bought down the cost of issuing green bonds, applying tech to the norms of development. there is/will be a big jump in mis matched assets
Spencer Lake: Massive potential in green bonds and finance, bonds are corporatised, green finance non-corporatised..
Governments... risk mitigation.. some tax incentives? Regulation.. assist class quality. will be an issue, disclosure, climate related financial task force
Housing and water - multilateral have t step in. Offshore wind farms etc
15.00 Session 4: The Future of Finance – Will it All Be Green?
Green finance conversations are often set against the backdrop of today’s financial system, yet powerful forces look set to disrupt the financial system of tomorrow. What are the technologies and practices – such as blockchain technology or new frontiers in risk analysis- that will redefine financial markets? How are these relevant to broader social objectives, such as the Sustainable Development Goals, and how will we measure progress?
Moderator: Nick Robins, Co-Director UNEP Inquiry
Juan Carlos Castilla-Rubio, Space Time Ventures
Peter Wheeler, Director, Silk Road Finance Corporation
Colin Le Duc, Partner, Generation Investment Management
Steve Waygood, Chief Responsible Investment Officer, Aviva Investments
Eileen Burbidge, Partner, Passion Capital; HM Treasury Special Envoy for Fintech
Eileen Burbidge ... fintech great? Blockchain great... got it.
Juan Carlos Castilla: More fintech: How will fintech help or hinder, can it mobilise large scale finance?
Steve Waygood 'If we are going to decarbonise it won't be linear - there will be many layers of innovation'
Peter Wheeler: Green is not just finance; it is now a fundamental part of the energy system. Infrastructure in renewable energy no longer requires 'miracles' because 'they're already here'. In other words we've now advanced to the point that renewables are cheap, easy and a growing part of the sector. What is more important he pointed out was the challenges of food soil and biochemical movement as we tip over our planetary boundaries. It was at this point that the entirety of the research audience began to perk up as he described biogeochemical flows and the danger of not addressing this unspoken of danger as important and dangerous as climate change which I must admit I hadn't been aware of at all.
This was the session that really became interesting. In the words of Colin Le Duc ... financial assets are just businesses, in other words all of this is just 'business'. But he made a further point, that there were some very smart people in the room in terms of capital and finance, but that they (the investment managers, financiers etc) were not paid to understand 'green' and that in order for there to be a global green finance model that is truly successful that there needs to be real incentive systems for sustainable long term investment. Although he did contrast this with the pressure on pension funds and energy managers to divest, something of a stick rather than carrot situation.
16.00 Summary of Proceedings
Ø Simon Zadek, Co-Director, UNEP Inquiry 16.15 Concluding Remarks
Ø Andrew Bailey, Deputy Governor, Bank of England 16.30 Close
Ending the event Simon Radek pointed out that though London may be saying 'we can be the centre' of Green Finance, it has competition. The same is being said by Singapore, New York, Switzerland and China. He made the point that we are at an 'inflection point of irrelevance and scale'. That this is the point at which finance and capital are finally heading to real social business disruption.
Andrew Bailey finished with a round up and the note that it was China, and Ma Jun who had offered from their side to 'work together' on an issue that is obviously so important. Fitting end.