Green finance – where funding is used for environmentally sustainable projects or activities – is growing at a rapid rate, increasing from $30 trillion in 2018 to $130 trillion to date. It’s clear that green finance is increasingly popular with investors – but what does its future look like?
Green Finance special report looks at how there has been an exponential growth in sustainable finance over the past number of years.
A pledge of $100 trillion will increase the pool of funding available
At COP26, the Glasgow Finance Alliance for Net Zero pledged $100 trillion to finance climate action projects, says Brian Haugh, head of BDO valuation and financial modelling centre. "This represents an unprecedented commitment to providing finance to projects that will either reduce the amount of greenhouse gases released into the atmosphere or that seek to mitigate the impact of climate change.
“This means that there will be a large pool of money ring-fenced specifically for environmentally sustainable activities. This should make it easier for people and businesses who are seeking finance for green projects, particularly given that activities that do not have an environmental focus will not be able to compete for this pool of funding.”
Increased financial regulation and attention
The financial regulator is driving sustainable finance action across banking, investment and insurance, says Laura Heuston, co-founder of Sustainability Works.
"The focus of the regulator is on climate risk due to concern about global systemic financial risk and the exposure of individual firms, as well as on greenwashing. The recent 'Dear CEO' letter on climate from the Central Bank of Ireland got the attention of all regulated firms. If they haven't been thinking about climate and ESG to date, they are now!"
EU ESG taxonomy will improve the allocation of finance to truly ‘green’ activities
The European Union ESG (environmental, social, and governance) taxonomy will be a game-changer in the prevention of greenwashing, says Haugh. “It sets out tightly defined criteria as to what actually constitutes a sustainable activity.” The regulation focuses on activities in key sectors which are capable of making a ‘substantial contribution’ to the reduction of greenhouse gas emissions or to climate change mitigation.
“Importantly it also requires that the activity do no significant harm, which guards against the funding of activities that may have a positive impact in one regard but has other significant negative impacts on society or the environment.”
Beginning in January 2022 large financial companies must disclose the extent to which their activities meet the criteria for sustainable activities, he says. While the regulation currently applies only to large companies, the taxonomy requires that the EU and member states utilise the taxonomy when developing labels for green bonds or other green financial instruments.
“This will provide a great deal of clarity around what constitutes a ‘green’ investment and hopefully will cut down on greenwashing.”
Social issues are gaining ground
“Covid and now the war has increased the focus on S in ESG,” says Heuston. “In addition to getting the basics right around employees, suppliers, communities, etc, business and finance increasingly need to be seen to be playing their part in tackling these global social challenges – or to suffer reputational damage.”
War in Ukraine will increase the imperative to deploy green finance
The war in Ukraine will increase the imperative to deploy green finance to dramatically restructure Europe’s energy market, says Haugh.
“Russia’s invasion of Ukraine has brought to the fore the enormous extent to which Europe relies on fossil fuels from Russia to power its economy. With fuel prices rising and an increasing possibility that Russia may reduce oil and gas supplies to Europe in response to sanctions, it is clear that we must take swift and far-reaching action to wean our economy off of imported fossil fuels. Green finance has a leading and critical role in enabling this transition.”
He says that Europe has vast untapped resources of offshore wind energy, with an estimated 85 gigawatts of floating offshore wind resources off the Irish coast alone. Combining these resources with the production of hydrogen and liquid ammonia has the potential to transform the EU economy.
“If we scale up our ambition, and the level of funding provided to the sector, it has the potential to both secure our energy independence from Russia and also accelerate our transition to net zero.”