Reflections: Green Finance

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Green finance is a thing, but what is it all about?

We thought we’d share some reflections:

Unless you’re a purist, “green finance” can generally be accepted to identify asset or debt investment in instruments which have a ‘green’ (environmental, combating climate change, anti-pollution) focus. “Sustainability” pushes the definition further and generally signifies an investment in companies that have a positive impact; such positive impacts could be ‘green’ projects, technologies or products, or could signify social initiatives embedded in robust corporate governance, manifested in Corporate Social Responsibility policies.

With such a broad range of definitions, some of which are as contentious as the nuances between strands of the same religion, we find it easier to think of green finance as being a potential way to invest in a way which is true to increasingly shared values/concerns, but without sacrificing returns.

If we accept that global capitalism has caused much of the ecological damage to the world, then it must also be part of the remedy.

The UK is the largest world economy behind the USA, China, Japan and Germany, but when it comes to the net export of financial services, we’re the biggest, with Croner’s suggesting our financial services generate an industry trade surplus of £68billion.

UK financial services practice, procedure and governance is therefore a major influence on investment behaviours domestically and around the world.

Interest in sustainability, environmental, social and governance-related investing has taken centre stage in recent years. Inflows into such active funds reached a record £392m in September, taking the quarterly total to £1bn, according to data from funds network Calastone. 

A similar dataset gives equally promising data, recording that investment in funds with an environmental, social and governance (ESG) priority have never been more popular. Between April and July, some £1.2bn was invested in UK-based ESG funds, and some investment managers are expecting perhaps one third of all their work now to be with such sustainable projects.

Additionally, over the past three years, the amount raised in green bonds on the London Stock Exchange (LSE) has almost tripled, from £8bn in 2017 to £22.4bn this year. 

There are now 22 green funds listed on the London Stock Exchange and more than 100 green companies which generate at least 20 per cent of revenue from green economy industries.

Reflecting the shift in societal attitudes, there can be little doubt that over the last 20 years, green finance has morphed from the perhaps eccentric margin to the developed and proven mainstream.

As the UK government seeks to build it’s own green credentials, harnessing the influence of the financial sector has become increasingly important. Minister of State for Business, Energy and Clean Growth Kwasi Kwarteng  is reported to have recently stated:

“Transforming our financial system for a greener future is crucial as we build back better from Covid-19 and to meet our legally binding target for net zero carbon commissions by 2050”

Colleague Alok Sharma, Business Secretary has called for the coronavirus pandemic to be used as the catalyst to reshape the global economy to achieve sustainability goals. Sharma stated: 

“By investing now, to reduce our emissions, build resilience, and adapt to climate change, we can create jobs and generate growth; And at the same time, we can protect the planet for future generations.”

Whilst Western Europe’s financial sector continues to dominate the sustainability, infrastructure and human capital financial league tables, the latest Z/Yen index suggests that London has lost its world crown for green finance quality; slipping behind Amsterdam and Zurich after more than two years at the helm. Both Amsterdam and Zurich ranked in the top two positions for green finance depth and quality, indicating the extent of their green finance markets and the quality of the products that can be traded there.

However, the UK is fighting back with a renewed commitment to the UK’s Green Finance strategy ahead of a fresh round of global climate talks.

The strategy, part of plans to strengthen Britain’s economic policy for balanced growth in line with climate change commitments, has seen the government pour investment into the low carbon economy.

The British Standards Institute (BSI), has developed a new set of standards alongside the Department for Business, Energy and Industrial Strategy, as well as representatives of the UK financial services industry.

The new voluntary (BSI) UK standard sets out the requirements to establish, implement and manage the process of integrating responsibility and sustainability considerations into asset management, issues which increasingly we find our clients are concerned about, however, we think that the environmental lobby will have to become more comfortable cooperating with high finance and demonstrating the profit-earning potential of its cause.

INVESTING RISKS CAPITAL but we wonder if investing in a way which is true to our values for the benefit of the planet or people might help to mitigate our fear of investment risk, particularly if such investment should not sacrifice returns?

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