Chinese leadership in the green bond market helped make 2016 a bumper year for climate-smart investment
With the launch of the sustainable development goals (SDGs) and the adoption of the Paris Agreement on climate change, which commits signatories to making financial flows “consistent with a pathway towards low greenhouse gas emissions and climate-resilient development,” 2015 paved the way for green finance this year.
In 2016, policymakers and financial practitioners have been busy launching initiatives and working out how to mobilise the capital required to implement the new agreements.
“For us, 2016 was the year of green finance,” says Nick Robins, co-director of the UNEP inquiry into the design of a sustainable financial system, tells Ethical Corporation. The inquiry is a two-year initiative to advance financial policy options that effectively mobilise capital for an inclusive, green economy. “The year was marked by three major developments. First, the reallocation of capital accelerated, notably through the green bond market. Second, policy makers recognised the need to set the right frameworks, highlighted by the G20’s Green Finance Study Group. And third, key financial centres such as London and Paris recognised the strategic importance of the issue.”
According to the Climate Bonds Initiative, the green bond market grew substantially this year, with green bond issuance for 2016 set to reach $80bn, more than double that of 2015.
“In 2016, we witnessed the issuance of green finance products that foster the evolution to a low-carbon economy,” says Michael Spanos, founder and managing director at London based consultancy Global Sustain. “Government agencies and corporations issued green bonds to fund clean energy and energy efficiency projects, such as the Dutch state-owned grid operator, TenneT, which issued a $1.1bn green bond for investment in transmission cables from German offshore wind farms; or the International Bank for Reconstruction and Development, which very recently raised $500m with World Bank green bonds, to support the financing of global climate action.”
Investment in coal is decreasing (credit: Balu)
China is extending its dominance of the global market for green bonds. “The world’s most-populous nation accounted for $21.9bn of the $61.1bn in global green bond sales this year,” Spanos said. Robins agrees: “China has been this year’s leader – not just through its work in the G20, but also its domestic policy agenda, which has seen it leapfrog to the top of the green bond issuance league.”
China is steadily moving away from coal and investing heavily in renewables. It is a world leader in wind power generation, with the largest installed capacity of any nation. The Asian giant is also on track to launch its national emissions trading scheme in 2017, which is likely to be more than twice the size of Europe’s Emissions Trading System – currently the world’s biggest carbon market – and is working with the UK government to make it compatible with the equivalent EU scheme.
A recent study by the International Finance Corporation (IFC) has shown that the global agreement on climate change, adopted in Paris a year ago, has helped open up nearly $23trn in opportunities for climate-smart investments in emerging markets between now and 2030.
IFC’s study, based on the national climate change commitments and underlying policies of 21 emerging-market economies, identifies sectors in each region where the potential for investment is greatest. This includes green buildings in east Asia and the Pacific, where China, Indonesia, the Philippines, and Vietnam show a climatesmart investment potential of $16trn. Latin America and the Caribbean offer the next largest opportunity, particularly in sustainable transportation, where the potential for investment in Argentina, Brazil, Colombia and Mexico is about $2.6trn.
“India is preparing to list about $746m of masala bonds in London as it seeks to fund expansion of its energy and transport infrastructure,” says Spanos. “And Egypt has agreed to buy about 400 megawatts of solar capacity, a sign that developers are slowly moving forward with clean-energy projects after a currency crisis in the country this year slowed the industry.”
The Paris Agreement has helped open up $23trn for climate-smart investments (credit: Frederic Legrand - COMEO)
Sustainability moves mainstream
Ten years ago, green finance was a question of investor preference. Today it is quickly moving from a niche agenda to one that shapes national ambitions for financial sector development.
Essential in helping green finance edge closer to the mainstream this year has been the development and adoption of frameworks and policies that support the transition.
The G20’s Green Finance Study Group was set up to identify institutional and market barriers to green finance. Based on country experiences and best practices, the group analyses options on how to enhance the ability of the financial system to mobilise private green investment, thereby facilitating the green transformation of the global economy.
In October, the European Commission established a High-Level Expert Group to develop a comprehensive European strategy on sustainable finance. In the UK, a Green Finance Initiative was launched by the City of London this year, supported by both the Treasury and the Department of Energy and Climate Change, with the aim of promoting London “as a leading global centre for green financial services.”
“Our work has identified over 200 different policy measures that have been taken to promote green finance, a doubling in less than five years,” says Robins.
Spanos adds that in policy making, the COP22 held in Marrakech this November saw negotiators from almost 200 countries showcase progress and start the important process of turning the UN’s Paris Agreement into a detailed blueprint for action. Examples include Canada and Finland, which have both pledged to phase out coal-fired electricity by 2030, and the EU, which will phase out coal subsidies and cut its energy use by 30% before the end of the next decade.
Green growth potential took off in 2016 (credit: ISAK55)
Asked about the companies that are currently leading in the area of green investment and financing, Robins said: “I would cite France’s Axa for its leadership before and after the Paris COP.” One of the world’s largest insurers, Axa was the first global financial institution to shun investments in coal companies, pursuing fossil fuel divestment. “China’s ICBC bank for its work on environmental stress testing; Kenya’s M-Kopa for enabling mobile payment for solar, which now provides energy to 400,000 customers in east Africa; and UK-based Abundance for pioneering peer-to-peer investing for renewables,” Robins adds.
Some companies are also actively working on sourcing their energy needs from renewables. Spanos names Apple, IKEA and General Motors as examples. “Apple already receives over 93% of its electricity from renewable sources, while Ikea has committed to producing as much renewable energy as it consumes by the year 2020. Also, General Motors has indicated it will generate or source all electrical power for its 350 operations in 59 countries with 100% renewable energy – wind, solar and natural gas from landfills – by 2050,” he says.
On 8 November, the election of Donald Trump as president of the US sent shock-waves across the green finance industry and beyond. The world now braces itself to see whether Trump will follow through on his ambition of pulling out of the climate deal. “While the president-elect is expected to undermine the Environmental Protection Agency’s Clean Power Plan, despite pre-election announcements, Trump recently stated that there might exist some connectivity between humans and climate change,” says Spanos.
Shortly after the US election, more than 365 businesses and investors sent a strong message to the Trump administration, reaffirming their support for the Paris Agreement and the need to accelerate the transition to a low-carbon economy. “Nobody, not even a US president, can stop all the movement toward the clean economy because the reason is simple: it’s now cheaper – and more business competitive – to cut carbon and use renewable energy than to keep a coal-running economy,” says Spanos.
Dutch financial firms are working with the government to promote the SDGs (credit: Protsasov An)
Looking ahead to 2017, the key theme will be how to harness today’s momentum to deliver real transformation to a low-carbon economy.
Robins identifies three pathways that will support the growth of green finance over the coming year: “Putting in place the measures that take the buzz in the green bond market upstream into core bank loan books: what we call “green tagging”; shifting from a risk agenda to one focused on resilience, particularly for developing countries – an agenda championed by the G20; and harnessing the immense potential of fintech for enabling access to green finance.”
In 2017, the focus will remain on the implementation of the Paris Agreement and SDGs, especially SDG 7 (ensure access to affordable, reliable, sustainable and modern energy for all), and SDG 13 (take urgent action to combat climate change and its impacts).
This month, 18 Dutch financial institutions, which collectively manage over €2.8trn in assets, invited the Dutch government and Central Bank to continue to make a concerted effort with them in support of the SDGs. The initiative is the first in the world to bring together national pension funds, insurance firms, and banks around a shared SDG investment agenda. The consortium believes that it is not only of societal importance, but also is in the interest of their investors and business relations, to consider the largest social and environmental challenges of our time in their work and investments. In their report, Building Highways to SDG Investing, signatories recommend priorities for maximising SDG investing at home as well as abroad.
This is issue 6 in our list of the top 10 issues that shaped sustainability is 2016. For the full list see here
green finance climate change China economy SDGs