Green finance will soon become a thing of the past
As the great and the good gather this week in Bonn for COP23 to discuss progress on the 2015 Paris Agreement, the discussion will focus on what individual countries are doing to make good on their commitments. But increasingly and inevitably, talk is turning to how they are going to pay for it.
Given the sheer amount of capital required, according to some estimates $90 trillion, it is a burden too great for national public purses alone. Private capital is required at an unprecedented scale — but is the financial services industry going to deliver it?
The answer is yes. While Paris was all about countries doing the right thing, financial services remain, like any other industry, about growth. And in this instance, the two can coincide.
At the same time, there's a small revolution going on in corporate lending. Banks are reconnecting with their stakeholders by revitalizing the 'use of proceeds' clause — usually left as 'general corporate purposes' - by specifying what a loan is for and sticking to it. I predict this will become increasingly common as banks see the sense in making clearer what their loans are for — and demonstrating the social usefulness of what they are doing.
While green finance is about climate change, it also about the inherent business sense in mitigating risk in a world where governments are determined to see an energy transition take place. At the same time, population growth demands clean water, dependable food supplies, efficient housing and transportation and clean energy. All very investible areas of demand.
What is new is seeing borrowers allocating the proceeds of their loans more specifically, showing demonstrable commitment to communities and sustainable projects.
Eventually this can lead to better risk ratings, lower capital allocation and therefore higher inherent profitability. This needs time and data but a growing number of banks are now betting on the transition. Green loans are following the methodology of green bonds which have been around for 10 years since the first World Bank bond in 2008. Well over $100 billion of green bonds will be issued in 2017 alone — another record year — with over $300 billion of bonds now outstanding.
The U.K. government has recognized in launching the Green Finance Taskforce to accompany the Clean Growth Strategy presented last month that it is looking at practical ways of encouraging the development of the financial markets — not subsidies and tax breaks — in the belief that the commercial imperative will be strong enough in itself to carry things forward.
From housing loans to venture capital and infrastructure investment, green means profits as well as climate risk mitigation. In this sense it is no different from regular finance — in time we won't even draw the distinction.
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