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ESG: The metrics jigsaw


Leading viewpoint: 2019's green investment picture

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Lack of standards is not hindering green bond issuance. Pressure on corporates to finance the energy transition will intensify

Two fundamentals in the climate battle are on stark display in 2019. The October 2018 release of the SR15 report by the Intergovernmental Panel in Climate Change (IPCC) has exploded any illusions that the world still has decades to take decisive action on climate change. 

There is also a series of reports estimating the levels of climate finance in green infrastructure required in the 2020s to influence outcomes by 2050-60. The 2018 green bond issuance figure of $160bn (€140bn) reflects that the climate-finance gap is not being bridged. 

Time is running out and investment is still lagging. 

In 2017, Christiana Figueres, former executive secretary of the UN Framework Convention on Climate Change, CPD (Carbon Disclosure Project) founder Hans Joachim Schellnhuber and other climate leaders called for $1trn to be raised in green finance by 2020 as part of Mission2020’s six climate milestones. 

Two years later, taking into account private climate-based investment, it seems the main actors in the global financial system have yet to demonstrate the level of capital ‘adaptation’ defined as a ‘performance measure.’ 

Yet 2019 does offer brighter prospects. The EU Technical Expert Group (TEG) on Sustainable Finance has maintained its pace. China continued its steps towards greening its system. Mexico, Morocco, Nigeria and ASEAN have introduced green bond guidelines. The UK is acting on its Green Finance Taskforce recommendations to enhance London’s role as a green finance hub. 

The Expert Panel on Green Finance in Canada is working on its final report and, in Australia, investor and ESG groups have sidestepped political inertia and are forming a Sustainable Finance taskforce. The central bank-led Network for Greening the Financial System is to issue its first report early in 2019. 

This regulatory momentum will have an effect, with the EU TEG offering the best prospect of immediate change. Medium term, the TEG’s work may provide guidance for green frameworks in Africa and, along with the European Investment Bank’s work, enable further harmonisation with China. 

Despite the regulatory movement, a lack of green standards and an integrated global structure has been cited by both NGOs and the investment sector as a rationale for tardy issuance and slow progress in private sector green investment. 

I reject that. These calls overlook the 2018 update of the Green Bond Principles by the International Capital Market Association (ICMA), incorporation of sustainable development goals, and the welcome development of the Green Loan Principles. 

They overlook that we have undertaken a year-long development process to expand science-based standard and sector criteria. We have updated our taxonomy (which has formed part of the TEG deliberations) and in March we will release ‘version 3.0’ of our standard, a complete overhaul of our guidance for certification.  

Commonality and harmonisation are coming, but they are not here yet. But use-of-proceeds disclosure and transparency are expected by investors. Both ICMA and climate bonds schemes are embedded in market practice. The ‘lack of standards’ rationale for slow growth and non-issuance will soon no longer apply.  

Against the ticking clock that IPCC’s SR15 report amplified, pressure comes from all quarters that climate and green investment must increase. The predictions of annual issuance for 2019 ranging from $140bn to $300bn will be measured against the high bar of the first $1trn in annual investment. That continues to be the benchmark that banks, insurers and corporates must deliver. By the end of 2020, the scrutiny on those who are not investing will be sharper. 

In the interim, investors are pushing the world’s largest emitters. The Climate Action 100+ initiative – one of the projects that form part of the Investor Agenda network – has established corporate governance engagement between a $32tn coalition of institutional investors and the 160 largest emitters. 

Speeding up the ‘brown-to-green’ transition is an end point of the engagement. This must involve shifting from risk assessments and statements of intent to the actual capex plans of big emitters, their borrowing programmes and balance sheets. The joint statement from Climate Action 100+ and the Institutional Investors Group on Climate Change to power industry generators, grid operators and distributors reflects this focus. It called for capital expenditure plans compatible with the Paris Agreement and a zero-carbon economy. Metals, mining, chemical and cement industries will soon face similar calls. 

Brown-to-green transition means companies straddling both types of assets, and the sooner investor pressure results in greener capex, the better. Inevitably the first green issuances from high-carbon emitters will be greeted with accusations of greenwashing. Society is right to be sceptical, but such a development could trigger a positive debate. 

Should the world’s 200 largest banks await the perfect regulatory framework before issuing green product? Surely not given the world’s biggest bank, China’s ICBC has issued benchmark-size Climate Bonds Certified green bonds. Other banks in Australia, Canada and Europe have also done so.

More banks will lead on green bonds, green loans, mortgages and deposit products and those that do not will in time face pressure on their licence to operate.  

Nation states as sovereign issuers of green bonds also have a role. Kenya, the Netherlands and Egypt have signalled 2019 green issuance. Yet gaps remain among G20, OECD and EMEA nations. Politicians are right to encourage the private sector, but they also need to get their state institutions on board. 

This year will see a strengthening of grassroots calls for action. We are not on track to limit temperature growth to less than 2°C and are set to reach 3°C or more. The impacts are already worse than we thought. The trillions needed to support low carbon growth paths in China, India, Africa and Latin America are not in sight. What is really at stake is not so much a calendar issue, it is whether we cruise or accelerate into the 2020s. 

Sean Kidney is CEO of the Climate Bonds Initiative and sits on the EU Technical Expert Group on Sustainable Finance

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