There has been much concern about whether the coronavirus will put climate change on the back burner for investors, businesses and consumers. But the good news is that the green finance revolution seems stronger than ever.
The financial markets don’t seem to be wavering; the trend towards green investment and a greater focus on ESG issues – that stands for Environmental, Social and Governance – is continuing at pace.
According to global law firm Linklaters in a report in January, 2019 saw a record 479 green bond issuances worldwide, compared to 382 the year before. Although this wasn’t anywhere near to satisfying investor demand according to another report by the Climate Bonds Initiative, which found almost two-thirds of respondents (64%) said they prefer green bonds where they are available and competitively priced.
A bumper year for green bonds
2020 was predicted to be a ‘bumper’ year for green bonds, exceeding the previous record once again. That seems to be the case, despite the current market conditions, which are described as “crazy and quite volatile” by Anjuli Pandit, Head of Corporate Sustainability at BNP Paribas in the UK.
She describes how the market has gone from virtually nothing in just a few years since she joined the bank: “I was brought in almost four years ago now and at that time sustainable finance was this very, very, very, very tiny niche thing. Green bonds had just started to have a sprinkling in the market - nobody really knew what they were to be quite honest. I think a lot of people in the industry weren't convinced about what this was and the role that it would play.”
But fast-forward to today and the financial institutions themselves are actually starting to stimulate sustainability even more. Some previously unthinkable loan terms such as KPI linked loans that reward good sustainability behaviour in businesses that borrow money from them. Anjuli explains: “We actually reduce the interest rate, for example, if they over perform their sustainability targets."
Marianne Haarh, Executive Director at Green Digital Finance Alliance, a public-private partnership between the UN Environment Program (UNEP) and Ant Financial to leverage digital technology to scale green digital finance, also believes this is a key way to further stimulate the market around sustainability. She says: “Financial instruments that are focused on rewarding shifts in behaviours, so sustainability-linked bonds, transition bonds, those types of instruments, could probably move the market a bit faster because it puts it into a language that everybody understands. You have a lower interest rate if you behave in this way. So definitely I think that's probably going to be what's going to drive it faster than shareholder activism.”
Where there’s money to be made, there will always be those trying to ride a wave, stretching the truth or acting dishonestly. Alive to this, the EU is bringing in new regulations next year. While it doesn’t exactly roll off the tongue, the new EU Taxonomy Regulation will take the bloc nearer to a common classification system of environmentally-sustainable activities. In doing this they are hoping to reduce “greenwashing”, defined by Linklaters as ‘making misleading claims about environmental benefits to lure ethically-minded investors.’
And the EU isn’t stopping there, it’s also putting in place more stringent regulations around supply chains for companies, including the financial sector. As Marianne Haarth explains: “There's another piece of legislation that's coming in 2021 which is making it by regulation mandatory to do human rights and environmental due diligence on global value chains and that's both for corporates and financial service institutions. We've seen it introduced in France a few years ago, now the EU is introducing it as well and that's going to be across asset classes so that's going to have a huge effect.”
So, ‘big finance’ seems to be taking steps to focus on climate investment with enlightened self-interest. And governments and regulators are swinging into action to ensure fair play.
But what can we, as consumers and retail investors, do if we want to take part more actively in the green finance revolution?
Well, we actually hold a lot of power. After all, we’re the ones ultimately investing in the markets through our pension pots and savings.
Consumers probably have one of the largest roles
Anjuli Pandit explains three things we can do: “I think consumers probably have one of the largest roles. Let's take one, they vote. Obviously, who you vote for is going to set policy trends or expectations. Two, they have pensions and I think one of the main reasons that we're getting asset owners pushing the asset managers who are then coming to us with demand [for financial instruments] is because pensioners would like to have green in their portfolio. Three, they have social media and the more that they are tweeting and embarrassing a brand name or on the street with Extinction Rebellion, these things are the reason why companies want to go above and beyond regulation.”
She continues, to explain the relationship between consumers, businesses and regulators: “Human sentiment and public opinion is always ahead of policy. I do believe that policies are going to actually make the systemic changes, but it's first the consumer who has to push it and then the company will start to follow what the consumer trend is and then policy is able to follow that.”
There is a huge wave of technology also driving change and opportunity in the financial sector, much of which is available to consumers. The ‘fintech’, or financial technology sector is booming, driving innovation both with behind-the-scenes technologies like blockchain, that enable transparent tracking and reporting, and also with consumer-facing businesses.
If you want to see where things are heading, look to China, advises Marianne Haarh. As an example, Ant Forest, a backer of her own organisation the Green Digital Finance Alliance, has gained enormous traction. Users of Alipay, a huge online payment company, can be rewarded with green energy points whenever they do something to reduce their emissions, from using a bike rather than a car to buying sustainable products. The Ant Forest scheme is driving huge impact, with the scheme claiming to have enabled the planting of 100 million trees in Northwest China, covering a total area of 112,000 hectares and protecting a total area of 12,000 hectares of conservation land.
It now has more than 500 million users. “Ant forest has been going on for four years now, it's actually quite old news you know. Outside of China it's not, but in China it is”, comments Marianne.
While they may not have secured the same number of users - yet - a great example of a climate-focused European start-up is Swedish fintech, Doconomy, that was founded in 2018. Its first consumer application is DO, that, in its own words, provides “a banking service with a conscience, where your spending and your savings are measured by its impact on the planet, both negative and positive.” It can provide you with carbon data relating to your actual spending, kind of like a carbon smart meter for your money. By seeing the impact of your spending, you are then equipped to modify your behaviour.
Another new breed, tech-enabled financial services firm, this time from Germany, is Tomorrow, that provides consumer mobile banking services while promising to invest your money only in sustainable or positive social projects.
Money may be essential, but most people don’t look after it properly and don’t take proactive steps to use it for good. A recent poll on the Change Incorporated website found that 88% of people have no idea where their pension pot is invested. But as we’ve seen, there are more options than ever before to take control of your money to be more sustainable – whether it’s being more demanding around investments, or simply voting with your wallet and moving to a new bank.
Anjuli Pandit and Marianne Haarh are speaking at the Virtual Conscious Festival that starts on 12 June 2020 and aims to empower people with knowledge and inspire them to take positive action to help save our planet.