The colour of money

Pressure for business to ‘go green’ has been building steadily for 20 years. What started as a minority concern has steadily moved up the corporate agenda, as governments impose incentives and penalties to support green policies, while an increasingly informed consumer base votes with their wallets.


Yet one sector slow to rise to the challenge has been finance and financial services, for which the ordinary barriers to green thinking are more pronounced.

‘The financial sector, or at least part of it, has acknowledged that the long term is becoming more important,’ says Karsten Löffler, co-head of the Frankfurt School – UNEP Collaborating Centre for Climate & Sustainable Energy Finance.

‘What the industry is recognising is that this is something that has been on the agenda for a while. Every financial institution will be faced with how to embrace it, implement it, and make it a tactical component of everyday decision making.’

A word that comes up often when talking about green finance is ‘long termism’ – more specifically, the lack of it. Climate change is obviously a huge risk but one stretching far enough into the future and with so many unknowns as to be challenging to incorporate into finance’s current risk models.

‘One challenge is the longevity of what sustainability and being green means is not easily translated – at least not by many stakeholders in the financial sector – into decision making,’ says Löffler.

But while bringing financial institutions into the sustainability fold has been slow going, some institutions have been early converts.

‘At Santander, we have a very conservative, risk-based approach to how we handle projects and our longstanding participation in green finance is testament to that,’ asserts Timo Spitzer, head of legal global corporate banking at Santander.

‘The nature of projects being financed is changing. We are seeing an increasing volume of projects involved with financing the construction and operations of projects focused on sustainability – think wind farms, solar plants and thermal facilities. We are specifically targeting projects that provide positive outcomes for the greater community.’

The benefits of regulating businesses into going green have been touted by many, but there is a risk of unintended side effects.

Myopia is not endemic to the private sector. The journey towards a sustainable future has frequently seen governments dip the proverbial toe into the waters, only to pull it back at the first sign of trouble.

Connecticut has long been seen as an early adopter in the green finance field, with its creation of the Connecticut Green Bank, the first of its kind in the US. The bank was established in 2011 and quickly became a model, both in the US and globally, for green project finance. It boasts a credible track record over the course of its seven-year life. According to chief executive Bryan Garcia, the bank has stimulated over $900m in private investment in 234 megawatts of clean energy projects and has reduced carbon dioxide emissions by 3.7 million tons.

However, the state budget released in October of last year contained a provision that would strip the bank of ratepayer funding – effectively the entirety of their budget. According to an open letter published by the bank: ‘Not only would a transfer of $27.5m from the Green Bank to the General Fund cause $185m of private investment and over 800 direct jobs (and 1,600 indirect and induced jobs) to be lost in Connecticut, but it would effectively end the Connecticut Green Bank.’

Similarly, the UK’s Green Investment Group (formerly Green Investment Bank (GIB)) was sold off by the Department for Business, Energy & Industrial Strategy to Australian bank Macquarie earlier this year for £2.3bn. The sale was criticised by some as short-sighted, with the UK’s Public Accounts Committee remarking that: ‘In making decisions about GIB’s future, the department prioritised reducing public debt and how much money could be gained from the sale over the continued delivery of GIB’s green objective.’

In addition to considering the sale price below expectations, the committee blasted the department for repealing legislation protecting the group’s ‘green purposes’ and for not demanding sufficient guarantees over the future of the organisation.

Since its inception in 2012, the Green Investment Group has backed over 100 green infrastructure projects, committing £3.4bn to the UK’s economy. Now, its future is uncertain.

Public-private tension

While a number of businesses have taken up the gauntlet, many continue to resist. A report delivered to the UK prime minister by Sir Nicholas Stern back in 2014 called climate change the ‘greatest market failure the world has ever seen’. The question then becomes one of approach by policymakers.

‘There is a debate about whether the public sector should frame regulation in terms of supporting green or penalising brown – for instance, with respect to capital requirements,’ says Löffler.

‘This is an interesting discussion where there is not a single right or wrong answer, but there are certainly different voices to be heard. The benefits of regulating businesses into going green have been touted by many, but there is a risk of unintended side effects.’

Case studies for both the carrot and stick approaches can be found around the world. The use of Energy Efficiency Obligations (EEOs) in the EU have seen increased adoption over the past five years. Their implementation varies nationally, but EEOs typically set annual energy-saving targets over a long-term period.

A 2016 report published by the Nordic Council of Ministers called the Nordic region’s ability to get the right policy mix between taxes and subsidies a key contributing factor to its success in the green finance arena.

EEF, Britain’s primary manufacturers’ association, released a report in 2015 on Britain’s place on the spectrum. Paul Raynes, EEF director of policy, said that ‘the current system of energy taxation is too complex and hurts Britain’s competitiveness’, adding that ‘instead of simply hitting firms with the big stick of ever-higher carbon taxes and levies, we should be offering them the carrot of tax breaks to invest in potentially very profitable advanced low-carbon technologies’.

The need to encourage discussion feeds into another thrust of the plan: to boost transparency.

China has been active in launching new initiatives to promote green investment, with various approaches falling all along the ‘carrot-stick’ spectrum. For instance, when assessing the suitability of advancement for its public officials, China now implements a system whereby progress towards environmental objectives is rewarded over economic growth. China has also introduced mandatory environmental pollution liability insurance for ‘brown’ investment projects. Reducing environmental risk cuts financing costs.

Singapore’s approach has also been praised, particularly in the context of water efficiency. The country’s Public Utilities Board (PUB) offers the free replacement of old, 9-litre water closets with efficient, 4.5-litre models for low-income households. Larger water users in the industrial sector are also required to install private water meters and then submit the collected data to PUB for at least three consecutive years. It has also established the Water Efficient Building certification, encouraging businesses, industries, schools and buildings to adopt water-efficient measures.

‘Progressive governments are pushing forward with this, but there’s no one-size-fits-all policy,’ says Löffler.

The European approach

In March, the European Commission (EC) revealed its Action Plan on Financing Sustainable Growth. The roadmap was drafted following a report published by an EU-appointed expert group on sustainable finance in 2016. The plan asserts that the financial system has a central role to play in the push towards a sustainable future and economies.

There are three broad aims: shift capital flows toward sustainable investment; manage financial risks stemming from climate change; and foster transparency and ‘long-termism’ in financial and economic activity.

‘The roadmap has the opportunity to be a catalyst – and at the very least have a significant impact – towards promoting methodologies for the financial sector to deal with the issue of green and sustainable finance,’ says Löffler.

The plan spells out eight priority action points for the EC:

  • Introduce a common sustainable finance taxonomy.
  • Elucidate investor duties to extend the time frame of investment and prioritise environmental, social and governance issues.
  • Tighten disclosure rules to make sustainability opportunities and risks fully transparent.
  • Connect the general public with sustainable finance opportunities.
  • Develop official European sustainable finance standards with green bonds as a priority.
  • Establish a ‘Sustainable Infrastructure Europe’ agency to improve and expand the current pipeline of sustainable assets.
  • Reform governance and leadership of companies to build sustainable finance competencies.
  • Enlarge the role and capabilities of the European supervisory authorities to promote sustainable finance as part of their mandates.

That the taxonomy point is listed first is no accident: it is something that sustainability advocates have long pushed for.

Löffler comments: ‘We will first get most certainly a taxonomy on what “green” means. That might change the regulator’s perspective in supporting the financial institutions to report on what they are doing. Certainly, it adds some substance to the overall discussion.’

Few, if any, would claim that the private sector should be left to its own devices, but the balance of market intervention is yet
to be agreed.

The need to encourage discussion feeds into another thrust of the plan: to boost transparency. In the words of the plan, ‘transparency of market participants’ activities is essential to a well-functioning financial system’ and ‘a central focus of the sustainability agenda is to reduce the undue pressure for short-term performance in financial and economic decision making, notably by increased transparency, so that investors, whether corporate or retail, can take better informed and more responsible investment decisions’.

If the action plan is to be taken at its word, this move toward transparency is serious. Recent years have seen a rise in sustainability index providers but without full disclosure of their methodologies, these will be of limited use. To address this, the Commission aims to this year propose a means of harmonising benchmarks for low-carbon securities issuers, based on agreed methodology to calculate their carbon impact.

In a further development, in March, the Green Finance Taskforce, a UK government-backed group set up to encourage sustainable investment, issued its set-piece report, Accelerating Green Finance (see box, opposite). Proposals include ten core ‘themes’, including relaunching the UK’s green finance activities through a single brand; measures to boost investment in innovative clean technologies; improving and supporting benchmarks for green investing; and the creation of a long-term plan to raise capital for green projects. The report was drawn up by a 16-strong group including Linklaters projects partner Charlotte Morgan and London Stock Exchange chief executive Nikhil Rathi as well as senior investment figures from HSBC (Daniel Klier), Aviva (Steve Waygood) and Barclays (Rhian-Mari Thomas).

The (Clean) road ahead

There still remains a huge gap in sustainability policies between the public and the private sector.

Few, if any, would claim that the private sector should be left to its own devices, but the balance of market intervention is yet to be agreed. Market forces – competition and the damage that can come from bad press – will be enough to kick the private sector into action in some cases, but it cannot be relied upon in every case, or even most cases.

As such, there has been much concern in the UK that recent reductions in subsidies for clean energy have already led to a sharp drop in investment in renewable energy. In May, MPs on the Parliamentary Environmental Audit Committee warned that the Government’s Clean Growth Strategy, issued in 2017, was ‘long on aspiration, but short on detail’ and risked missing long-term targets on cutting carbon emissions.

It is widely accepted that it will to a considerable extent fall to the state to provide the long-term incentives and stability to support green industry and infrastructure for years to come.

As Löffler concludes: ‘At this stage, a number of private-sector stakeholders are not in the position to embrace the long-term objectives entirely, because those objectives and the business’ objectives don’t align. It’s often these types of technologies that can be difference-makers, but financial institutions can find it difficult to justify these investments under existing risk models.’

Governments need to be proactive about filling this gap – either through carrots, sticks, or a combination of both.
Greg Hall is a deputy editor of GC magazine.

French finance – Arnaud de Bresson, Paris Europlace

‘Because of strong government support in France on the issue of green finance, but also from our business community, corporates and banks alike are focused on green financing. It’s a high-priority issue for the future and for the present.

We have to work together with international financial centres to effect real change. First, that means working with other European financial centres on this issue, which can be an opportunity to develop new initiatives within the financial industry.

To that end, at Paris Europlace, we have developed a specific new initiative within our organisation, which we call “Paris Finance for Tomorrow”. It involves 50 market participants, working together to accelerate the development of green finance in all areas, from green investment to global decarbonation. These include Crédit Agricole, EDF, ENGIE, PwC, Société Générale, WWF, BNP Paribas and Banque de France.

It’s a first move, but one that I’m confident will be the first phase of a long-term story. The business world is becoming increasingly aware of the necessity to participate not only in climate issues but also chances to develop new business opportunities.

Whatever your role – investor, bank, corporate or otherwise – it’s becoming near universally accepted that this will be an important part of business for the coming years and beyond.’

The three aims of the European Commission action plan on financing sustainable growth

1. Reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth.
The action plan states that ‘current levels of investment are not sufficient to support an environmentally and socially-sustainable economic system’. The gap between current levels and the levels required to meet the EU’s climate and energy targets by 2030 amounts to nearly €180bn. The first – and most urgent – step is to establish a unified EU classification system, or taxonomy, to clearly define which activities can be called ‘sustainable’.

To that end, the Commission is ‘significantly boosting’ its financial and technical support for sustainable infrastructure investment via the European Fund for Strategic Investments (EFSI) and the European Investment Advisory Hub. At least 40% of EFSI financing for infrastructure and innovation will be used to support climate action projects.

2. Manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues.
The second aim of the plan is to include environmental and social goals into financial decisions to limit the impact of these risks.

For instance, weather-related natural disasters will mean that insurance companies need to prepare for higher costs, banks will have to weather greater losses due to companies becoming less profitable because of climate change or deteriorating natural resources.

3. Foster transparency and ‘long-termism’.
The plan asserts that ‘corporate transparency on sustainability issues is a prerequisite to enable financial market actors to properly assess the long-term value creation of companies and their management of sustainability risks’.

As such, policies should encourage less focus on short-term performance so investors can make better-informed and more responsible investment decisions.

Boosting the City’s role in clean energy

Morgan,-Charlotte_NEWLinklaters partner Charlotte Morgan was one of 16 industry senior figures on the government-backed Green Finance Taskforce, which was created to help support the sector. The body on 28 March issued a wide-ranging report, Accelerating Green Finance, which made a series of proposals. We caught up with Morgan about her work with the taskforce and the outlook for clean energy in the UK.

‘The Minister [of state for energy and clean growth] Claire Perry is keen for Britain to remain the pre-eminent place for green finance; she’s a great chair. We’ve seen a number of pension fund investors coming into the space, which has been very successful at driving down the cost of renewable energy.

There are huge opportunities for the City to export its expertise on green finance.

There are other centres of global finance in Asia where green bonds have been issued and [French President Emmanuel] Macron has also indicated a desire to see greater urgency in green finance on the back of the [2015] Paris climate change agreement [the inter-governmental accord to reduce global CO2 emissions].

What we found was even though there were individual work steams, the issues were similar, and there were real synergies.

‘It was a really positive experience, it’s also a great opportunity for industry and business to say what would drive the economy better in their respective areas. There were obviously a lot of recommendations, but in respect of what went into the final report there was a good level of engagement and agreement.’