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GreenFin funds the sustainability transition

Finding the trillions needed to address climate and the SDGs will take more than a just few progressive banks.

The following is adapted from State of Green Business 2018, published by GreenBiz in partnership with Trucost.

Global agreement to mitigate climate change? Check. A set of global goals to transition human civilization toward sustainability? Check.

Trillions of dollars to pay for it all? Not so much. At least, not yet.

Finding the capital needed to achieve the goal of 2 degrees Celsius global temperature rise, or to fund the SDGs’ 17 audacious outcomes, is a task unprecedented in scale. For nations, cities, companies and others to do their part, they'll need to come up with vast sums of money to enable the transition to sustainability.

How vast? According to the International Finance Corporation (IFC), part of the World Bank Group, the Paris Agreement could spur nearly $23 trillion in "climate-smart" investments between now and 2030. The funding needed to achieve the SDGs globally was estimated by the United Nations at $6 trillion a year for 15 years.

Of course, there's overlap between the SDGs and the Paris Agreement — Goal 13, for example, aims to "take urgent action to combat climate change and its impacts" — so the exact price tag isn't really known. Suffice it to say, it's a king's ransom.

Giants such as Barclays, Citi, Goldman Sachs, HSBC and JPMorgan Chase see nearly unlimited opportunity to fund the transition.
Amassing and deploying such sums will tax the global economy, which in 2016 was about $78 trillion, according to the International Monetary Fund. But various players are undaunted. Among those is the global banking industry — giants such as Barclays, Citi, Goldman Sachs, HSBC and JPMorgan Chase — that see nearly unlimited opportunity to fund the transition. They join the world's governments, multilateral development banks, pension funds and others in a growing pool of needed capital.

Some of this green finance — GreenFin, for short — is merely a natural extension of business as usual. Banks long have financed building construction, so backing green buildings isn't much of a stretch. Funding power plants is standard operating procedure for large financial institutions, so a solar or wind farm is a natural follow-on. Same with lending for municipal infrastructure, transit systems and affordable housing. Environmentally improved versions of these are largely variations on a theme.

Increasingly, a new breed of financial products and services is being deployed specifically to fund such projects. "More measures related to green finance were introduced between June 2016 and June 2017 than in any one-year period since 2000," Jaclyn Yeo, senior research analyst at Asia Pacific Risk Center, told BrinkNews.

Green bonds are the best-known GreenFin instrument, and probably the fastest growing. The money raised by green bonds finances projects such as renewable energy, pollution prevention and resource conservation. Introduced a decade ago by the European Investment Bank, the wider bond market started to react after a $1 billion green bond sold within an hour of issue by IFC in 2013. The market for green bonds that year was $11 billion. Just four years later, in 2017, it hit $200 billion.

It's just getting started. A 2017 report by the Organization for Economic Co-operation and Development estimated that the green bond market could grow to $4.7 trillion to $5.6 trillion in outstanding bonds by 2035, with annual issuances of $620 billion to $720 billion.

Green bonds aren't the only GreenFin innovation. There are social impact bonds, sustainable development bonds and green municipal bonds.
Green bonds aren't the only GreenFin innovation. There are social impact bonds, which aim to improve positive social outcomes that also result in public-sector savings; sustainable development bonds issued by multilateral institutions, which link returns to the performance of companies advancing global development priorities set out in the SDGs; and green municipal bonds that fund infrastructure such as energy, water and transportation systems. Late last year, HSBC issued the world's first SDG-based bond; the $1 billion offering was three times oversubscribed.

GreenFin is finding its way into government programs. Last year, the world's largest carbon emitter, China, launched five pilot zones to promote "green finance" and help pay for a war on pollution expected to cost about $450 billion a year.

The world's biggest banks, for their part, seem to be engaging in a financial arms race to claim GreenFin bragging rights. In 2015, Bank of America pledged $125 billion in low-carbon business by 2025 through lending, investing, capital raising, advisory services and developing financing solutions. Last year, JPMorgan Chase said it would facilitate $200 billion in "clean financing" through 2025. In November, HSBC pledged to provide $100 billion in financing and investment by 2025 to help combat climate change. And Citi, which in 2007 committed $50 billion over 10 years, reached that goal three years early, upping the ante to $100 billion in 2014 for "environmental solutions that will reduce climate change impacts and benefit society."

Big as these numbers are, they're still just a fraction of what's needed to take on the immense social and environmental challenges ahead.

Globally, IFC views sustainability as a massive financing opportunity, according to a recent report. Renewable energy investments could climb to $11 trillion cumulatively by 2040, it said. By 2025, investments in off-grid solar and energy storage could reach $23 billion a year and investments in green buildings could reach $3.4 trillion cumulatively in key emerging markets. Investments in water supply and sanitation could exceed $13 trillion cumulatively by 2030, with $2 trillion more needed for climate-smart urban waste management.

Of course, it's not that simple. There is the complexity of stranded assets, notably about 80 percent of global oil and gas reserves, according to the International Energy Agency. These would need to be written off — or, at least, put toward nonburnable uses such as polymers for packaging and building materials — to stay within the Paris Agreement limits. You simply can't do that without crashing the markets or causing a global recession, or worse.

But the upside is significant, too: Meeting the goals of the Paris Agreement could fuel a $19 trillion surge in additional economic growth over the next 30 years, according to a 2016 report by two global energy agencies. That's equivalent to the value of all companies traded on the New York Stock Exchange.

We're at the beginning of what promises to be a global redeployment of capital over the next quarter century.
A few nonfinancial companies are stepping up with their own GreenFin initiatives. In 2016, Apple issued a $1.5 billion green bond — the largest by any U.S. tech company — to pay for a range of environmental initiatives, including helping fund its own new headquarters. That same year, Starbucks brewed a $500 million "sustainability bond" to be used for several purposes, including underwriting programs for farmers that adhere to the Coffee and Farmer Equity practices.

Such initiatives can provide companies with multiple benefits. They include providing funds for sustainability initiatives, improving internal integration between a firm's finance and sustainability teams, and enhancing company reputation by highlighting its sustainability commitments. Moreover, such bonds can be seen as less risky to investors and, therefore, in higher demand.

There's a key role for the public sector in paving the way for GreenFin to flourish. One critical need is policy cohesiveness across ministries, central banks, regulators and financial sector participants, according to the Roadmap for a Sustainable Financial System published at a meeting of the G20's Green Finance Study Group in November.

It's clear that we're at the beginning of what promises to be a global redeployment of capital over the next quarter century. In December, French President Emmanuel Macron convened a climate summit to mark the two-year anniversary of the Paris Agreement. It showcased forward-looking initiatives from the financial sector, with speakers from the People's Bank of China, the African Investors Network for Climate, the Swedish Minister for Financial Markets and the French Minister for the Ecological and Inclusive Transition.

A truly global show of force.

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