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GREEN FINANCE

“Public and blended finance, including the important commitment made by developed countries to mobilise

US$100 billion annually by 2020 for climate finance, have a vital part to play in the shift to a greener more resilient economy and a fair transition for society.” That is what Mark Carney, United Nations special envoy for climate action and finance and the prime ministerial finance adviser for COP26, set out in the COP26 Private Finance Hub Strategy.

But what is green finance, and how do we harness it to deliver the transition we need?

Green finance covers a range of

financial products such as loans, bonds or investments used to finance in part or in full green projects, assets or activities that focus on environmental outcomes.

According to the Green Bond Principles (GBP), a voluntary guideline for issuing new bonds that promote integrity in the green bond market through transparency and disclosure, a bond can obtain green credentials if the proceeds are applied to one or more of the eligible categories you see on the right. You may also come across the term climate finance, a subset of green finance that focuses on climate-change mitigation and adaptation, and sustainable finance, which integrates environmental, social and governance (ESG) considerations, and increasingly

mind the gapsAre we investing enough in lower-carbon sectors and in the natural

world? And how do we know whether ‘green’ really does mean green? Mark Browning and Ariane Brotto report

the UN Sustainable Development Goals (SDGs), into financial services. We highlight a few examples of recently issued bonds in table one.

Two interlinked challenges can seem overwhelming in their magnitude and in the level of investment it will take to address them:

POPULATION GROWTHThe world’s population is expected to increase by 25 per cent, from 7.7 billion to 9.7 billion in 2050, when two-thirds of the population will probably live in cities. It will take immense investment in infrastructure to meet this demand, not least because existing infrastructure has suffered from years of underinvestment and requires trillions of pounds worth of investment to upgrade. This will increase demand for resources, adding to the pressures on ecosystems’ health.

DEMAND FOR ENERGY AND THE DRIVE TO DECARBONISEGlobal energy demand is expected to grow by 46 per cent by 2050. The International Panel on Climate Change (IPCC) estimates that it will take a six-fold increase in investment in low-carbon energy technologies and energy efficiency to limit that global temperature increase

Green finance covers a range of financial products such as loans, bonds or investments used to finance in part or in full green projects, assets or activities that focus on environmental outcomes

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to 1.5oC by 2050 compared to 2015. The public and private sectors have a role to play deploying capital flows to finance staggering sums of investment, and at pace, to avert the climate and ecosystems crisis. Public-sector funding is crucial to accelerate climate-change action, but will not generate enough investment in infrastructure to support the transition to a low-carbon economy.

This is especially relevant as the Covid-19 pandemic has put huge pressure on public finance – although it also provides a unique opportunity for a green recovery.

Several things are increasing interest from financial institutions and governments in green finance. These include recognition of the opportunities and risks – the fact that climate change presents commercial and reputational risks – that may lower returns on investment and could lead financial assets to become impaired or stranded, and so have less value.

Other regulatory and non-regulatory drivers require greater accountability from the financial community regarding how they account for environmental, social and governance (ESG) issues in business, such as the Statement of Investment Principles for Pension Funds, and the United Nations (UN) Environmental Program Finance initiative and Principles for Responsible Investment and Insurance initiatives.

Other drivers include sustainability indices such as Dow Jones’ and corporate reporting standards that require disclosure of risks such as climate change.

BARRIERS We certainly need this growing interest in green finance and initiatives to ensure that ESG is considered in investment. But is it enough and is it happening at the pace we need? What do we need

to consider, especially when investing in infrastructure and how do we know whether green really means green?

MAKING 'GREEN' GREENOne of the main barriers to green finance mechanisms is the lack of standardisation, setting out what green means. This may hinder investment from private and public sectors and trust in these financial products from a range of stakeholders.

Recognising this, the European Union’s European Green Deal recently introduced a classification system, helping to set out what constitutes green. Last year the UK government also proposed a UK Green Taxonomy, based on the scientific metric developed for the EU Taxonomy, to be updated to meet UK needs.

Any organisation can use this classification system, which obliges companies that offer financial products to meet certain environmental objectives, similar to the Green Bond Principles introduced above, and to comply with social and governance standards.

To aid disclosure on how these financial products meet environmental outcomes, ESG management must become integral to an organisation’s management system. This will take time to become embedded and established and must also address uncertainties associated with capturing reliable and representative information.

With this in mind, strategic policy and planning in monitoring green finance are likely to need greater consideration and resources, and monitoring at transaction level over the life of a financial product – perhaps beyond it.

MEASURING AND VALUING GREEN OUTCOMESCarbon and climate change-associated standards that exist now or developed in future will be increasingly important to

value physical and financial assets. That raises other questions: is valuation based only on financial value appropriate and representative, how do we value areas such as biodiversity and how to weight the way we value these areas to obtain the societal outcomes we desire.

Unless we agree holistic measures of the outcomes we want, we risk unwanted consequences. We have seen this before in the UK, where a drive to lower carbon emissions from vehicles and financial incentives promoted diesel cars over other fuels, with negative impacts on air quality. A matter of more recent concern is how tree planting to offset carbon could have detrimental biodiversity impacts on some environments.

RECOGNISING AND MANAGING ISSUES UNIQUE TO INFRASTRUCTURE TO ENSURE GREEN OUTCOMES Investment in net-zero carbon (NZC) infrastructure requires long-term thinking; planning and delivery could take years, if not decades. Operation and management could even span centuries for some assets. Infrastructure does not sit in isolation; it usually has to interface with other infrastructure assets, and with other investment terms that may operate within cycles of five to ten years or longer, as figure two illustrates.

Some issues unique to infrastructure, including NZC infrastructure, may influence appetite to invest and/or influence appropriate environmental low-carbon performance outcomes being achieved, for instance:ALIGNING FINANCE: infrastructure finance and cyclical investment related to asset management must align and share the same low-carbon outcomes. Also, the finance and investment must not contradict or send mixed messages regarding specific aims for low carbon

FIGURE 1 ELIGIBLE GREEN PROJECTS CATEGORIES BASED ON THE GREEN BOND PRINCIPLES BY THE INTERNATIONAL CAPITAL MARKET ASSOCIATION (ICMA)

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FIGURE 2 PATHWAY TO NET-ZERO CARBON AND ALIGNING INFRASTRUCTURE DEVELOPMENT AND CAPITAL CYCLES TO ENSURE THAT MAINTENANCE AND RENEWAL ARE ALSO GREEN

FIGURE 3 EXAMPLES OF RECENT BOND TYPES

CONTRACTS: different types of contracts are likely to cover the different stages. Green finance must include the same low-carbon performance outcomes in all contracts over the life of the asset or the term of the investment MULTIDISCIPLINARY ALIGNMENT: the delivery of infrastructure across all stages requires input from many disciplines and functions. It is crucial to align the legal, financial and management systems and inputs, and to systematically consider carbon at all stages RIGHT TIME, RIGHT PLACE: it is critical to set and design the correct environmental criteria at the outset of investment and planning to avoid locking in carbon and other environmental standards that could take some time to rectify. This should help projects not to undershoot their carbon-reduction targets and to avoid stranded assets

RESPONDING TO NEW SCIENCE AND KNOWLEDGE: knowledge about the environmental performance of assets may change over the period of investment, as science discovers new things about an asset and its impact. For example, activated sludge treatment technology protects public health and the environment but also has a negative

greenhouse gas (GHG) impact. The process emits nitrous oxide, a GHG 300 times more potent than carbon dioxide (CO2). These GHG impacts were identified only relatively recently. Green financial products and their monitoring and disclosure must be able to recognise and respond to new science and knowledge.

GREEN FINANCE FUTUREIf we are to improve the quality of people’s lives and transition to a low-carbon economy, we clearly need investment at scale – and a significant proportion of it from the private sector. We must welcome the exceptional growth and interest in green finance and encourage more of this, and quickly.

To frame the criteria for green finance with genuine green objectives, such as low or net zero carbon, creates a significant opportunity to ensure we transition to a net-zero economy and make our society and economy more resilient.

Yes, there are gaps to note when

considering green finance. Some are being addressed but will take time to establish; other gaps unique to infrastructure need greater attention to address. It is especially important to align the cycles for financial investment and infrastructure development, to achieve the same green performance outcomes over the life of the asset.

Multidisciplinary teams and standards must also work seamlessly, giving more thought and resources to strategic and transactional monitoring of green finance, including transparency and disclosure, value and performance. And that requires a wide range of actors to play their part – regulators, market participants, trade associations and non-governmental organisations – to achieve the green outcomes we need. o

Mark Browning is a director at Jacobs’ Environment and Sustainability team. Ariane Brotto is a senior carbon and energy consultant at Jacobs

SECTOR

ENERGY

FASHION

FINANCIAL

FOOD

TECHNOLOGY

TRANSPORT

WATER

COMPANY

CADENT

CHANEL

GOLDMAN SACHS

TESCO

APPLE

TRANSPORT FOR LONDON

ANGLIAN

BOND TYPE

TRANSITION(B)

SUSTAINABILITY-LINKED(C)

SUSTAINABILITY-LINKED

GREEN

GREEN

GREEN

VALUE(A)

EUR500M

EUR600M

USD800M

EUR750M

EUR2BN

GBP400M

BGP250M

USE OF PROCEEDS

RETROFIT GAS DISTRIBUTION NETWORKS FOR HYDROGEN USE[I]

ALIGH WITH THE 1.5 0C TRAJECTORY OF THE SCIENCE BASED TARGET[II]

ADVANCEMENT OF CLIMATE TRANSITION AND INCLUSIVE GROWTH[III]

REDUCTION OF SCOPE 1 AND 2 GREENHOUSE GAS (GHG) EMISSIONS[IV]

ENERGY EFFICIENT AND RECYCLABLE PRODUCTS TO CUT CARBON EMISSIONS[V]

LOW CARBON TRANSPORT PROJECTS[VI],[VII]

GHG REDU TION, INCLUDING ENERGY EFFICIENCY AND CONSERVATION OF WATER RESOURCES[VIII]

If we are to improve the quality of people’s lives and transition to a low-carbon economy, we clearly need investment at scale – and a significant proportion of it from the private sector