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Five trends in green finance

To adequately respond to an issue such as climate change it is crucial to monitor the authenticity of green claims made by organisations

To encourage the reallocation of capital towards a low carbon economy the EU has designed two climate investment benchmarks which pursue similar objectives but vary in their level of ambition

To encourage the reallocation of capital towards a low carbon economy the EU has designed two climate investment benchmarks which pursue similar objectives but vary in their level of ambition

 

Mitigating greenwashing

Greenwashing is a broad umbrella term for different forms and practices of misleading communications of different organisations in relation to their performance on environmental as well as broader sustainable development-related indicators.

To be able to adequately respond to societal issues such as climate change it is crucial to monitor the authenticity of green claims made by organisations – in other words, who talks the talk and walks the walk on climate change. Sadly greenwashing has become common practice. The European Commission published a statement this year estimating that 42 per cent of corporate websites contain “exaggerated, false or deceptive and could potentially qualify as unfair commercial practices under EU rules”.


Sustainable finance takes centre-stage as investors reassess the risks attached to many sectors. Check out the Green Finance special report in full in Friday's print edition of The Irish Times, via The Irish Times ePaper, or via The Irish Times special reports digital hub.


Moreover, the lack of clear rules on what can be labelled sustainable opens the door to Wall Street simply relabelling existing funds without a change to underlying strategies.

This trend is countered by for example the Security Exchange Commission launching a Climate and ESG Task Force to “proactively identify ESG-related misconduct”, and initiatives such as GreenWatch detecting greenwashing in real time.

Paris Aligned Benchmarks

To encourage the reallocation of capital towards a low carbon and climate-resilient economy the EU designed two climate investment benchmarks which pursue similar objectives but vary in their level of ambition.

The more ambitious of the two, the EU Paris Aligned Benchmark (PAB) recommends that greenhouse gas intensity of the investment portfolio needs to decrease by 50 per cent in the first year followed by a 7 per cent annual decrease to 2050. The first in-house asset-owner implementation of the indices has been carried out by Swedish AP2 (assets of just over SEK360bn/€34.6bn), meaning that the fund is not investing in companies that generate more than 1 per cent of their turnover from coal, more than 10 per cent of their turnover from oil, and more than 50 per cent of their turnover from gas.

Scope 3 GHG emissions

In order to meaningfully measure and manage their greenhouse (GHG) emissions companies need to be able to understand their scope 1 emissions (i.e. those emissions they emit directly), scope 2 emissions (the emissions they cause through their energy consumption) as well as scope 3 emissions. While there is progress on scope 1 and scope 2 emission reporting, scope 3 reporting remains sparse at best– this is all other indirect emissions that occur in an organisation’s value chain, upstream and downstream.

While for many firms this is mainly purchase goods, transportation and distribution or travel, for fossil fuel companies emissions from consumers’ use of their products (so called “use of product emissions”) are substantial.

Carbontracker estimates that as much as 90 per cent of oil and gas companies’ emissions are scope 3. To put that into perspective, according to a Bloomberg Opinion estimate, Saudi Aramco’s Scope 3 emissions amount to 1.6 billion tons, representing over 4 per cent of all global emissions. No surprise Saudi Aramco is slow to disclose a figure itself.

Debt denial

While both equity engagement and divestment are well established strategies for responsible investors – often called “voice” and “exit” strategies –, little attention has been paid to debt denial. A special lever occurs due to the way debt market works. Most debt is never paid off once maturing but rather refinanced with fresh debt. As the maturity is fixed, the company comes under substantial time pressure to refinance and avoid insolvency. This poses a key moment to influence for any impact-oriented investor – the investor can deny the fresh capital unless Paris alignment is assured. Corporations are routinely agreeing to financial covenants.

This strategy achieves both a strong political symbol as well as effectively reducing non-Paris-aligned corporate cash flow.

Lobbying and the EU sustainable finance strategy

Climate policy will be pivotal to live up to the Paris Agreement ambitions and ensuring we transition to a net zero economy by 2050. This includes a sustainable transformation of the current financial system.

While most financial institutions are not strategically engaged, finance industry associations lobby to weaken regulation despite voicing support for sustainable finance policies. Even stronger opposition is faced from industry associations lobbying on policies directly impacting their activities – recent examples include the efforts of the gas lobby to include fossil gas in the EU taxonomy for sustainable activities. The lobbying overall is so far-reaching that the current draft delegate act substantially deviates from previous expert recommendations.

This article is based on information supplied by Theodor Cojoianu, assistant professor at Queen’s University Belfast; Andreas Hoepner, full professor at Michael Smurfit Business Graduate School; Yanan Lin, post-doctoral researcher at Michael Smurfit Business Graduate School; and Fabiola Schneider, doctoral researcher at Michael Smurfit Business Graduate School