In just over a decade from now, a host of objectives outlined in the UN Sustainable Development Goals (SDGs) will come due. This call to action is wide-ranging, with targets including clean water for all, responsible production and consumption, and tackling climate change and environmental degradation.
But even as attitudes among some policymakers and business leaders shift towards sustainable initiatives, embarking on a genuinely green model of growth comes with hefty costs. The Asian Development Bank states that $26 trillion in infrastructure needs to be invested in Asia by 2030 to maintain economic expansion, eradicate poverty and respond to climate change. Meanwhile, lowering carbon emissions alone will require $2.4 trillion a year, according to some estimates.
Measures to plug this massive funding gap will certainly have major consequences for the world’s markets. However, judging from discussions at the Asia Sustainable & Responsible Capital Markets Forum in Hong Kong, it’s clear that industry stakeholders not only recognize the need to act quickly but also welcome the disruption to established frameworks that this entails.
As Roshel Mahabeer, executive director of sustainable finance at Standard Chartered, noted: “The finance sector sees this as something to take on board to stay relevant to their clients and to consumers, and to direct capital where it can be profitable but also make a big social and environmental impact.”
Strengthening public-private partnerships
Weaving environmental and social governance (ESG) considerations into investment decisions and financial instruments is undoubtedly gaining traction. Global green bond issuance has passed the $100 billion milestone this year, indicating a robust appetite for products that prioritize sustainable development. But this remains a small fraction of the roughly $100 trillion global bond market, so there is plenty of scope to grow and evolve.
Conversations at the forum revealed the challenges in mobilizing capital to nascent markets where there are perceived risks and concerns about trustworthiness. The consensus was for a concerted effort between public and private participants to nurture an attractive space for investors.
“Setting up regulations is important because it sets the tone from the top and accelerates change,” said Sylvain Augoyard, WWF’s sustainable finance engagement manager.
He singled out the provision of incentives, such as training and capacity building, so that “the regulator is not just the stick but also brings some kind of carrot and works with the different stakeholders to ensure the banks can benefit… and are equipped with the right tools.”
For Daniel Hanna, global head of sustainable finance at Standard Chartered, public-private collaborations are “absolutely critical” in getting more projects to a state of bankability.
One potential solution he cited that has already begun to show results is the use of ‘blended finance’, which encourages private investments by deploying development capital from the public sector to mitigate risks.
Adding blue to investors’ portfolios
As a rising number of emerging economies – especially those in Asia and those most vulnerable to the ravages of climate change – begin to contribute to this growth, there is reason to be hopeful.
For instance, several provinces and cities in China have set up their own green development funds; and, in 2018, Indonesia became the first country in the region to sell green bonds internationally. In Africa, Nigeria issued the first Climate Bonds-certified sovereign green bond in December 2017.
Last year, Standard Chartered’s pioneering use of blended finance played an integral role in helping the Seychelles launch the world’s debut ‘blue’ sovereign bond, after the country's eight-year absence from capital markets. Supported by the World Bank and the Global Environment Facility, the government bond raised $15 million to assist the Indian Ocean archipelago nation in protecting and managing its marine resources.
“The World Bank guarantee attracted third-party commercial capital into a fund-raising and provided much-needed capital to a country that was genuinely investing in protecting its coastline and the ocean,” explained Mahabeer.
The bond also brought into focus the planet’s often-neglected oceans, which are estimated to contribute $1.5 trillion annually to the global economy. Protecting marine resources is crucial as their health impacts scores of businesses – be it trade, food or tourism – and the livelihoods of millions around the world.
The landmark Seychelles bond sale has sparked interest among other nations and could be the first of many, as Paul Courtoisier, head of sustainability bonds and loans services at rating and research agency Vigeo Eiris, observed.
“Just in Africa, you have 38 countries which are coastal or island countries, so it gives you a sense of how big the blue economy is, and it applies to all the continents,” he said, predicting that the blue bond market will gradually expand and trigger a spectrum of related instruments.
No longer on the side lines
Although sustainable finance is in its early stages, the pressing threats posed by pollution and rising temperatures have moved it higher on the agenda at boardrooms and policy conferences worldwide. But with that momentum comes the need to address a variety of issues that could block capital flows.
For emerging markets, in particular, there is room to improve environmental controls, accountability and disclosure, as well as access to reliable data. A standardized system to allow comparison across borders and mechanisms is another requirement.
Experts at the Hong Kong event were confident that steps are being taken in the right direction, with governments, funds and investors deepening their understanding of how and why ESG risks are detrimental to communities as well as balance sheets. An enhanced understanding of the problem is also aiding the ideation of innovative products such as ‘green mortgages’ and ‘sustainable deposits’ to raise money for projects aligned to the SDGs.
Through greater knowledge and collaboration, market participants will foster the creation of a broader sustainable finance ecosystem that brings ESG investments into the mainstream and, ultimately, guarantees a sustainable and more prosperous way of life for future generations.
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