Eight reasons why green finance is becoming mainstream

It’s shaping up to be one of the busiest weeks of the year for sustainability in the UK’s finance calendar. On the same day that the UK’s new Green Finance Institute launched in London, the Government published its much-awaited Green Finance Strategy detailing how the finance sector and better climate disclosure from corporates can drive progress towards wider action on climate change and the push towards net-zero emissions.

This all begs the question of how the UK got to this point in the first instance. Although green finance accounts for just 6% of global finance, it has undergone exponential growth over the past few years – a trend which has been driven by moves from policymakers, investors, central banks, businesses and consumers. 

Here, edie rounds up some of the key drivers for green finance growth, as cited by experts at events held to mark London Climate Action Week. 

1) Climate change is no longer theoretical for investors

Opening up the discussions at the Green Finance Summit in Guildhall on Tuesday (2 July) Sir Roger Gifford, chair of the Green Finance Institute set the tone for discussions by claiming that climate change was no longer a “theoretical” concern for investors.

From the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations to the launch of the Green Finance Strategy (GFS), green finance, in the UK at least, is now becoming a key consideration for investors and businesses alike. Climate change is now impacting the strength and resilience of investor portfolios, driven by greater awareness from the sector and public calls for firms to divest away from fossil fuels.

2) MPs expect disclosure and could make it mandatory

A key aspect of the new GFS is the call for publicly listed companies and asset owners to disclose climate risk and impact data by 2022. The GFI and will work with regulators as to whether this becomes a mandatory requirement.

During the Green Finance Summit, City Minister, John Glen said, in no uncertain terms, that policymakers “expect disclosure”, using the 2022 deadline as a date where disclosure could become a legislative requirement if the response isn’t deemed adequate. Already, some public bodies have to disclose climate data, and many within the industry view it as a great way to strategise climate action and mitigation plans.

3) Net-zero is not a burden for the investor community

The chair of the Intergovernmental Panel on Climate Change (IPCC), Dr Hoesung Lee, has dismissed fears from investors and nations that reaching net-zero emissions will place too much strain on the global economy.

The IPCC’s landmark study revealed that transitioning to net-zero would require the current 2% of global GDP currently spent on energy to increase slightly by 0.4%.

Dr Lee claimed that studies had proved that there wasn’t a lack of finance or financial instruments to facilitate that transition, but rather a “lack of political will”. He suggested that policy was standing between scientific findings and climate action, highlighting the lack of movement on global carbon pricing as a key example.

4) Investors are moving from A to C on climate mitigation

The financial services sector has traditionally been a risk-averse sector, meaning it has been slow to act on climate change. However, those with the industry believe that attitudes towards climate change are scaling up.

Dame Elizabeth Corley, former chief executive of Allianz Global Investors, and current chair of the Social Impact Investing Taskforce noted that investors were now moving “up the alphabet” when it came to climate change.

Investors had previously been operating in the “A” bracket of avoidance of risk but have now firmly transitioned beyond “B” and into the “C” bracket of actually contributing to climate mitigation by offering a range of green products and services to help fund sustainable infrastructure.

5) A dedicated institute is helping mobilise new financial services

One of the key recommendations of the Green Finance Taskforce was the creation of a dedicate institute that could mobilise new green finance projects across an array of sectors.

This week, the Green Finance Institute, which is jointly funded by the City of London Corporation and HM Government, was officially launched. The Institute’s new chief executive Dr Rhian-Mari Thomas told edie that the institute would help “grow the sector of green finance” while helping banks to “finance green” by targeting sustainable businesses and projects.

6) National banks are on-board with – and starting to lead – the transition

Amid a string of Extinction Rebellion protests and school climate strikes across the UK this spring, the Network for Greening the Financial System (NGFS), which unites of 40 central banks in leveraging the financial sector’s collective power to spur the transition to a low-carbon and climate resilient economy, was formed.

A key player in this coalition, which accounts for around 44% of global GDP and serves almost one-third (31%) of the world’s population, is the Bank of England.

Speaking at The Economist’s Climate Risk Summit in London, the Bank of England’s executive director for international banking supervision Sarah Breeden said that the next year will likely see much more collaborative action, led by national banks, on greening entire financial systems.

“We started working on this issue by raising awareness in 2015, when we talked about the risks in the insurance sector – but we, and others, have been much more actively involved since then,” Breeden explained. “[The NGFS] is a coalition of the willing and it is really encouraging that this group is growing so rapidly.

“Going forward… we want to be more prescriptive and share best-practice so there is, quite frankly, a ’to-do’ manual that everybody can get off the shelf and use to better manage [climate] risks.”

7) Finance giants are offering more ‘green’ products

From mortgages to small, short-term loans, you can now find a “green” version of almost any financial product.

Last year saw Lloyds Banking Group launch a further £2bn of funding for sustainable investments, increasing its total UK green finance commitments to £3bn; Barclays develop new green trade loans to help companies secure working capital for activities such as renewable energy, energy efficiency and waste management projects and ING unveil a €100m Sustainable Investments fund to help start-ups and innovative new business models scale up concepts and projects tailored to energy, water and resource efficiency, to name but a few moves in this space.

And this trajectory doesn’t seem to be slowing down for 2019. This week saw HSBC launch a sweeping range of green finance propositions for businesses, including a Green Loan, a Green Revolving Credit Facility (RCF) and a Green Hire Purchase, Lease and Asset loan. The RCF is notably the first within the sustainable finance space in the UK.

HSBC’s UK head of commercial banking Amanda Murphy said the move was taken as a result of customers asking for more specific green finance products, amid increased stakeholder demand for transparency and ambition on environmental issues.

8) Investors are now seeing huge opportunities in climate action

Last month, CDP revealed that a group of 221 big businesses disclosing climate-related information through its platform collectively estimated that switching to low-carbon products, services and business models would generate $2.1trn of additional revenue within the next five years, compared to an initial outlay of $311bn.

Discussions at The Economist’s Climate Risk Summit proved that such optimism on the opportunities of investing in climate adaptation and mitigation is also present across the investment community.

The Lightsmith Group’s founder and managing director Jay Koh said: “There needs to be enormous opportunity to make action on this argument meet the scale of what’s needed.

“This will be great for entrepreneurs and investors alike, who are increasingly starting, right now, to invest in the tools, products and services needed to address and analyse opportunities as the scale of the problem grows bigger.”

Matt Mace & Sarah George