Special Report
A special report is content that is edited and produced by the special reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report but do not have editorial control.

Green finance comes of age

Growth in sustainably managed assets shows green investing is going mainstream

After a number of false dawns, green finance is finally shaking off its Cinderella status. Sustainable investing assets reached a new high of $30 trillion in major markets in 2018, representing an increase of one-third from two years previously. To meet the goal of limiting the global temperature increase to 1.5 degrees by 2030, however, at least $90 trillion in assets will be required. The future of finance is looking green but is it happening fast enough?

"We are in the midst of a complete transformation of the way we identify risks and how they're managed in investment markets, with green finance taking centre stage," says Carolina Angarita-Cala, sustainability and responsible investing manager with Cantor Fitzgerald. "Our exposure to nature-related risks is ubiquitous and this poses a significant threat to financial stability. It makes sense for consumers and investors alike to opt for low carbon options, whether that's taking advantage of low-cost loans to improve the energy efficiency of their homes or reducing their exposure to high carbon assets in their investment portfolio."

And they’re voting with their money; according to Mark Jordan, chief technologist with Skillnet Ireland, there has been “expediential growth” in the issuance of climate-related investing instruments such as green bonds, sustainability bonds and social bonds, which provide a greater range of investment options and cover a whole host of environment, social and corporate governance (ESG) remits for the issuing companies. These offer a “timely and topical” attraction to investors, he says.

“The prevailing view is that these types of sustainably focused investments will continue to grow and challenge the funds flowing into more traditional green finance investments such as renewables. For banking institutions, the offering of sustainable infrastructure products enables access to less explored territory, which helps meet evolving consumer values,” Jordan explains.

Awareness and demand

The growth in sustainably managed assets proves that sustainable investing is rapidly becoming mainstream, agrees Sandra Rockett, director in wealth and corporate distribution at Irish Life Investment Managers.

“There is a notable increase in awareness and demand for more sustainable investment options coming from all segments of the market – consumers to institutional investors like pension schemes,” she says.

From an investment perspective, while the regulatory agenda coming from the EU is certainly supporting the adoption of sustainable investment models, Rockett believes the overall push towards green finance is largely driven by two key factors. “Firstly, the now well-established investment case for considering sustainability especially climate change in terms of its role in helping to manage risk and deliver longer-term returns and also the growing customer demand for sustainable investment products.”

It’s also increasingly relevant to even the casual investor. “Banks and financial institutions now understand that both professional and non-professional investors can, with a few taps of their smartphone, tablet, or laptop, invest and earn a return from businesses focused on clean energy, affordable medicine, education, sustainable housing, and values-based projects like drinking water provision or solar power distribution to third world countries,” Jordan says. “This accessibility along with the elevated global focus on climate and biodiversity challenges will ensure ‘green finance’ stays-the-course and attracts future investors.” Indeed, technology is playing a key role in unlocking the potential of green finance. For example, fintech companies are helping to facilitate ecological transformation through the promotion and distribution of green finance instruments, notes Jordan.

Low-carbon future

Enterprise Ireland’s Aidan McKenna says the growing global appetite to embrace sustainability among all stakeholders is influencing major business decisions as we face a low-carbon future. “International customers are requesting more evidence of sustainable credentials from our clients as they compete for business in a variety of markets,” he admits.

McKenna is manager of the newly established Climate Enterprise Action Fund at the State organisation, which aims to help their clients embrace opportunities to become more sustainable by availing of green finance and developing sustainable business plans and models.

“What has become clear is the increased pace and urgency of the climate action agenda from an international, EU and national perspective and this is reflected in the Government’s ambition to reduce greenhouse gases and emissions by 51 per cent by 2030,” he says. “As we launch this fund, we want to use it as an opportunity to encourage a large number of companies to start this journey or accelerate actions such as measuring your carbon footprint or developing a comprehensive sustainable business strategy. Indeed, there are many opportunities for our clients with the increased focus and investment around sustainability internationally.”

And contrary to popular belief, investing in green assets does not come at the expense of returns. Angarita-Cala notes that Cantor Fitzgerald’s own Green Effects Fund has outperformed the market since inception in 2000 with an annualised return of 6.5 per cent, relative to the MSCI World’s annualised return of 5.1 per cent over the same period.

Driving change

Although we can see the green shoots of progress, “there is still a long road ahead”, says Rockett. “No one party can lead the way on this agenda – it’s a bigger issue than any of us individually and will require us all to work collectively to bring about the fundamental change to the global financial industry that is urgently required to tackle the sustainability issues we face. I feel very proud to work with an organisation which is taking this responsibility seriously and feel very optimistic that based on what I see, I do believe that the financial sector can and will respond strongly and quickly and will begin to drive that change on a more widespread basis.”

The question of green finance isn’t “if” anymore but “how to”, with the transition to a low-carbon economy “unavoidable”, says Angarita-Cala. A large proportion of Cantor Fitzgerald’s clients have already fully divested from fossil fuels and are taking aggressive steps to reduce the carbon footprint of their portfolios and to invest in climate solutions, she adds. “There is a growing support for companies that contribute to a green and resilient economy, bolstered by investor demand, policymakers and civil society. This reorientation of markets towards green finance is about managing risk, staying competitive and planning for resilient growth.”

Danielle Barron

Danielle Barron is a contributor to The Irish Times