What now for environmental finance?

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By:
Helen Avery
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The momentum for environmental finance had been growing, but Covid-19 has forced a pause. Can environmental finance help economies to ‘build back better’? And how can that movement boost environmental finance?

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This was supposed to be an important year for the environment. Amid high hopes for engagement by the private sector, it was named the ‘Super Year for Nature’ at the Convention for Biological Diversity (CBD) in China in September.

It was also supposed to be the year for the climate, with even higher hopes for bold private and public commitments at the United Nations Climate Change Conference (COP26) in Glasgow in November.

In this story
The need for an integrated approach
Managing for greater complexity
Corporates remain committed
A greater connection between green and jobs
How finance will help us build back better

The momentum towards greater environmental finance and policy was indisputable. At the World Economic Forum in Davos in January, bank leaders declared they were all in for climate issues; and there was finally serious debate around ensuring the ‘E’ of environmental, social and governance (ESG) would include natural capital more broadly and not just carbon emissions.

But now with a global health crisis in full swing and an evolving economic crisis, the CBD and COP26 meetings have been cancelled. Davos seems a lifetime ago. It has left those who were pushing the global green agenda asking: ‘What now?’

In March, after the World Health Organization had declared the coronavirus Covid-19 outbreak a pandemic, the sustainable finance community found itself in a predicament.

This was not the time to be pressing an environmental agenda, and indeed those that did – chiefly a few environmental activist groups – came across as tone deaf.

All attention would need to be on the immediate impact of the pandemic. Anything other than a Covid-19 response would just be noise.

But there were concerns that the environmental momentum that had been boosted at the World Economic Forum would grind to a halt – perhaps reverse. Those concerns were valid early in the outbreak and continue to be.

Despite the announcement by the G20 on April 15 saying the group would “commit to support an environmentally sustainable and inclusive recovery,” some countries have paused green policies and even cancelled some.


In January, we were on the cusp of something big changing, and now we are on the cusp of something big changing – just not the ‘thing’ we had anticipated 
 - Maha Eltobgy, World Economic Forum

Among many examples, South Korea’s coal plant builder Doosan Heavy Industries received a $825 million government bailout. In South Australia the government moved to defer taxes and other commitments for oil and gas explorers.

In the US, president Donald Trump directed the Strategic Petroleum Reserve to be filled to its maximum capacity to “alleviate financial hardship” on the US fossil fuel industry as a crash in oil prices has been a parallel issue to Covid-19.

The US Environmental Protection Agency has said it will indefinitely suspend pollution violations if they are deemed to be driven by the impact of the virus. And in the UK a ban on plastic drinking straws that was due in April was postponed.

All this is in stark contrast to what had become a steady stream of positive news coming out of the private sector on environmental commitments and from the financial sector announcing new funds, changes in policy, sustainability-linked loans and green bonds.

While in March corporate bond issuance boomed and social bonds began to find their legs, only $2.8 billion of green bonds were launched, according to the Climate Bonds Initiative – less than 20% of the activity in February.

In the short term at least, there are valid reasons for this setback. Green finance, although part of the solution to longer-term issues, is not an answer to the immediate health and economic crises.

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Hervé Duteil, chief sustainability officer for the Americas at BNP Paribas


And a pause is welcome, not least “because it offers an occasion to draw on the lessons that can help us contain the looming sustainability crisis,” says Hervé Duteil, chief sustainability officer for the Americas at BNP Paribas.

It also offers a chance to absorb what the scientists have been saying for decades now.

“For a long time, we have collectively warned of the health and socioeconomic impacts that climate change will bring – including pandemics stemming from biodiversity disruption or mass migration caused by resource shortage, such as water or arable land – but it has mostly been an intellectual exercise for many in the developed countries,” says Duteil.

“It is sad that people have been experiencing these firsthand now, but perhaps it will afford us to gain a better understanding of the larger environmental crisis. While this virus is unrelated to climate change, we are having a taste of what is to come: diseases, displacements, severe economic disruptions and job losses. The best thing for us all to do now is to allow that understanding to unfold and not remain silent.”

Indeed, this crisis might actually boost momentum rather than stall it.


It is a time for being thoughtful, considered and working collaboratively to think about green finance in the context of recovery 
 - Rhian-Mari Thomas, Green Finance Institute

Maha Eltobgy, member of the executive committee at the World Economic Forum, says: “In January, we were on the cusp of something big changing, and now we are on the cusp of something big changing – just not the ‘thing’ we had anticipated. But the momentum is continuing and also, positively, evolving.”

Sustainable finance bankers, as well as those working in the public sector, say that while the green agenda may have slowed, it is still going on, despite Covid-19 and remote working.

For example, Daniel Klier, global head of sustainable finance at HSBC, says he has been positively surprised by how active the dialogue around climate finance has been during the pandemic.

“Perhaps it is not the right time to be talking about green products, no; but conversations are still happening,” he says. “In spite of the Covid-19 focus, climate change is one topic that has remained on the board’s agenda.”

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Rhian-Mari Thomas, CEO of GFI


Rhian-Mari Thomas, chief executive of the UK’s Green Finance Institute (GFI), points out that the GFI has continued to host meetings, albeit virtually, on topics from COP26 to transition finance.

“Yes, there is limited bandwidth right now for anything new, for new products, but there is not a feeling that we have lost sight of our goals,” she says. “It is a time for being thoughtful, considered and working collaboratively to think about green finance in the context of recovery.”

She says she has been heartened to see politicians around the world “flanked by scientists as they explain their Covid-19 responses.”

She adds: “Their actions and decisions are all evidenced-based and science has never been as important as it is right now. That gives me hope that we will keep climate at the top of the agenda when the recovery begins.”

It is the recovery that all those who work in sustainable finance across public and private sectors are now fully focused on.

“Are we able to maintain focus on something that may be an even bigger test for society?” asks Klier “What will the climate agenda look like post Covid-19? Will it need to be a different shape?”

The need for an integrated approach

It was the Club of Rome that broke the collective silence on finance and the environment with its open letter to global leaders on March 26, reminding them that discussions of response, resilience and stimulus packages should incorporate the environment – given that Covid-19 was playing out within a larger, if slower-moving, crisis of climate change.

“We call on leaders to have the courage, wisdom and foresight to seize the opportunity to make their economic recovery plans truly transformative by investing in people, nature and low-carbon development,” the letter declared. “In so doing, they will help secure a path to net zero emissions by 2050, improve global health, rebuild our relationship with nature, rethink how we use land and transform our food systems.”

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Sandrine Dixson-Declève,
Club of Rome

Among its first signatories were Carlos Manuel Rodriguez, minister of environment for Costa Rica, Sandrine Dixson-Declève, co-president of the Club of Rome, Christiana Figueres, former executive secretary of the UN Framework Convention on Climate Change, and Kate Raworth, author of ‘Doughnut economics’.

Dixson-Declève’s comments about the decision to issue the letter hint at how perhaps the climate and broader environmental agenda will, in Klier’s words, have to be a “different shape”.

“We’d received comments that there would be pushback to talk about focusing on nature and the environment, given the health and socioeconomic crisis occurring – which we understood,” she says. “We have always said that people need to be at the centre of environmental discussions. This isn’t a discussion of people versus nature but rather people living within nature.”

It is a point echoed by Margaret Kuhlow, who leads WWF’s finance practice globally.

“You cannot pull humanity and nature apart,” she says, “but we are seeing from this crisis that nature doesn’t need us. There are environmental recoveries taking place because we have stepped back. And at the same time we are really seeing our dependency on nature.”

She points to the simple fact that many of us are realizing that time spent with family and walking in nature have a value we may not have fully appreciated just months ago.

“Yet we do not count them within GDP,” adds Kuhlow.

The connection between society and the environment has never been fully explored by the environmental sector.

In finance similarly, the three components of environment, social and governance that make up ESG have been viewed in silos. Likewise green bonds, while clearly being of benefit to society, are considered as separate to social bonds, which themselves often have positive environmental outcomes.

“The political and economic landscape are going to look very different post-Covid, and climate finance will have to adapt and respond,” says Thomas. “While it is too soon to predict how profound those changes will be in the long run, it is clear we have to put people at the heart of what we do.”

Audrey Choi, chief sustainability officer at Morgan Stanley, points to the UN’s Sustainable Development Goals (SDGs) as another example of where there needs to be more recognition of the interconnection between social and environmental issues.

“It is hard to think about health outcomes without thinking about clean water and clean air, for example,” says Choi. “I have always felt it was helpful to have the different SDG areas, but we can’t make progress on them in silos. We have to get away from ignoring the interconnectedness of them.”


It is very hard for the finance community to deal with such complex systems interactions and be able to formulate a risk perspective 
 - Margaret Kuhlow, WWF

It is a point made by the UN itself. Mahmoud Mohieldin, UN special envoy for the financing of the 2030 agenda, says that while SDG3 (good health and wellbeing) is clearly on everyone’s mind, many more of the goals are being impacted by the pandemic. These include SDG2 (zero hunger), as poverty and weak food supply chains leave people hungry, and SDG13 (climate action) as commitments are reduced.

Decent work and economic growth (SDG8) has also been shown to be connected to the health crisis – which, as the Club of Rome’s letter points out, could ultimately be linked back to a zoonotic disease born from human interaction with nature – SDGs 14 (marine resources) and 15 (terrestrial ecosystems).

Dixson-Declève says considering this interconnection will be crucial to building the resiliency needed for the climate-related crises to come.

“We have taken events and our responses to those events in isolation,” she says. “We tackled the financial crisis of 2008, we tackled Ebola, we were tackling climate change – we have failed to join the dots, look at these holistically and understand that resiliency requires a holistic view.”

How do we do this?

Mohieldin says the UN agenda provides a framework for recovery and should be seen not as a 10-year target but as something to take steps towards month by month.

That has been the advice of UN Secretary General, António Guterres, who also included the Paris Agreement on Climate Change as a guide for approaching recovery in his letter to G20 leaders at the end of March.

Managing for greater complexity

But while integrating the goals is a helpful overarching intention; in practical terms, many in the finance sector question how it could be done.

Some bankers contend that a move towards a systems view will require a change in thinking, saying that they are speaking with systems change experts outside the environmental sector for ideas.

However, another banker admits that while it makes sense, system change approaches and interconnectedness thinking can become too abstract.

It is hard to “operationalize” he says, and “decision makers can tune out.”

At Goldman Sachs, John Goldstein, who heads up the sustainable finance group, says both complexity and over-simplification are risks.

“There’s no magic answer here but to be mindful of when complexity is causing paralysis.”

He says his division’s approach has been to start with a thesis to distil down, but ultimately ensuring it is grounded in substance in terms of “business and investing” and of “risk and growth”

The WWF’s Kuhlow agrees that complexity can deter action, but she also says that complexity is here to stay. That’s something the sustainable finance community may struggle with.

“It is very hard for the finance community to deal with such complex systems interactions and be able to formulate a risk perspective,” says Kuhlow.

“For example, we’ve been looking at the links between finance and biodiversity loss. Biodiversity loss will make climate-impact modelling more complicated, and figuring out what that means for financial institutions is even more complex.

“When you add the additional screen of human health, then it is obvious that organizations like ourselves will need to provide much clearer recommendations, tools and methodologies; but unmistakably the pandemic has only further pushed sustainable finance further along a complex path.”


The traditional approaches to thinking about how to measure that impact on the SDGs have not been effective 
 - Thomas Kuh, Truvalue Labs

Mohieldin says this is where better data is needed – particularly data during this lockdown period.

Helpful data for boosting environmental support could include the extent to which nature has helped mental health during shutdowns, the extent to which lower production has led to cleaner air and simultaneously improved respiratory health, or how fish stocks have recovered as fish consumption has slowed and the impact on fishermen’s livelihoods.

Thomas Kuh, head of index at ESG alternative data firm Truvalue Labs, agrees with the need for better data.

“The SDGs have come to a point where they are considered an important standard for understanding the impact of economic activity on people’s lives and the environment,” he says, “but the traditional approaches to thinking about how to measure that impact on the SDGs have not been effective. Bringing to bear new sources of data, including alternative data, will be critical to measuring real impact.”

For the financial industry the useful data would be whether companies with a strong ESG scoring, or that have addressed risk within their supply chains, prove more resilient than others at the end of the crisis.

Klier says it is “a live debate” as to whether or not some of the sectors affected by transition risk will find it harder to recover and to raise fresh capital. But he is expecting companies whose business models “are aligned with the next industrial revolution to come out of this crisis much better.”

Already there is data to show ESG indices have been outperforming.

In BlackRock’s annual letter to shareholders at the end of March, chief executive Larry Fink noted that “the pandemic we’re experiencing now highlights… the value of sustainable portfolios. We’ve seen sustainable portfolios deliver stronger performance than traditional portfolios during this period.”

However, it may be too early to draw conclusions about the extent to which sustainable funds are outperforming this crisis, particularly given that many could simply be benefiting from having no exposure to the collapsing oil and gas markets.

That said, firms with sustainable commitments have proved themselves to be resilient.

“This space was ready for a stress test, and this was the ultimate one,” says Kara Mangone, chief operating officer of the sustainable finance group at Goldman Sachs.

Goldstein at Goldman says: “The evidence is here that those that were truly committed and not just sustainable for a ‘label’ are resilient during a crisis”, adding that this period has also “burned off the chaff.”

Corporates remain committed

Morgan Stanley’s Choi says that while it may be premature to claim ESG has outperformed, at her firm she has seen more interest from clients saying they want to align with brands that they can trust – ones that work for employees, people and the planet.

“There is an increased view that the private sector needs to be a part of the solution to the big challenges that the world is facing,” she says. “So I would guess that appetite for sustainable investing is going to increase.”

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Audrey Choi, chief sustainability officer at Morgan Stanley


That would also mean refinancing costs for companies with high ESG scores could well be lower.

The good news is that companies also don’t seem to be slowing down their environmental agendas. Indeed, Choi says there will likely be greater innovation result from this crisis.

“For example, at present maybe health concerns have caused people to be less committed to reusing items which cause more pollution. That doesn’t mean we’ve stepped back. We’re smart, complicated people who can think of smart, complicated solutions.

“There will be people who say they want to feel safe but also cannot abide the concept of waste. It possible for us to hold multiple, seemingly contradictory ideas in our heads, and that will fuel the need and desire to innovate.”

Indeed, many companies are already responding. Marisa Drew, Credit Suisse’s chief executive of impact advisory and finance, says she has seen one business create a laundry bag from a material that acts like plastic, is non-toxic and completely compostable.

“It means healthcare workers can strip off their clothes, put them in the bag, which then dissolves in the laundry machine so there is less touching and risk of infection spread.It leaves me hopeful that we will see new companies emerge or current companies become more innovative.”

Even at larger firms there seems to be no sign of reneging on environmental commitments.


Over the rest of 2020 we will need to collectively consider the impact of the pandemic and explore how to progress the world’s transition towards a green economy without leaving anyone behind 
 - Mikkel Larsen, DBS

Peter Bakker, president and chief executive at the World Business Council for Sustainable Development, says nearly all his member companies have said that while climate may have to take a backseat as the focus is firmly on health, inequality and livelihoods, there is greater impetus than ever to ensure the climate conversation is continued.

“We all knew climate would create shocks, but we never fully understood the extent to which shocks would play out,” he says. “Covid-19 has shown us how connected we are. How one event in one country can impact us all. Companies are very aware of the parallels that can be drawn with climate risk.”

In a McKinsey report in April, called ‘Addressing climate change in a post-pandemic world’, the consultancy firm advised companies to “seize the moment to decarbonize”.

It also pointed out that “companies have fresh opportunities to make their operations more resilient and more sustainable as they experiment out of necessity – for example, with shorter supply chains, higher-energy-efficiency manufacturing and processing, videoconferencing instead of business travel, and increased digitization of sales and marketing.”

Some of these practices may become important components of a company-level sustainability transformation, it added.

Sue Garrard, a sustainability consultant and former executive vice-president for sustainable business and communications at Unilever, points out that for those businesses that have not adopted a people-and-planet agenda, there will likely be increased pressure from governments for them to do so – particularly if they receive bailouts.

“There are discussions about whether in some countries and in some sectors we may witness the end of free markets,” she says. “That may be extreme, but we are already seeing bailouts, and governments will be under pressure to make sure those that do receive financing are serving society.”

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Daniel Klier, global head of sustainable finance at HSBC


HSBC’s Klier echoes Garrard’s point: “The European banks in which governments took stakes during the great financial crisis have arguably adopted environmental and social agendas, for example. Similar government intervention could happen in several sectors where a positive influence could be made.”

Airlines would be an obvious choice. In mid April the Austrian government revealed that it was talking with Germany’s national airline, Lufthansa about offering financial aid to its subsidiary Austrian Airlines.

Austria’s environment minister, Leonore Gewessler, said that given such aid would be taxpayers’ money it would need to be linked to “conditions.”

She was quoted in the Austrian press as saying: “When it is about an industry that particularly needs to contribute to climate protection, then it makes a lot of sense to use this situation to support this transformation.”

A greater connection between green and jobs

If there were early concerns that government recovery policies and financings might not build in ‘green’ considerations – and indeed that companies might not take part – those concerns seem to have eased in the European Union at least.

In mid April, a coalition of European business leaders, politicians, NGOs, trade unions and academics called on the EU to help tackle the economic fallout from the coronavirus pandemic through a green investment programme.

The coalition had 180 signatories, including executives from blue chips such as Enel, E.On, Volvo Group, L’Oréal, Danone, Ikea, Twitter, PepsiCo and Microsoft.

The statement, designed to encourage bold targets in the European Commission’s ‘Green deal’ at risk of being weakened due to the pandemic, called on “a global alliance of cross-party political decision makers, business and financial leaders, trade unions, NGOs, think tankers, stakeholders.”

It asked them “to support and implement the establishment of Green Recovery Investment Packages acting as accelerators of the transition towards climate neutrality and healthy ecosystems,” stating that “Covid-19 will not make climate change and nature degradation go away.”


The priority right now from philanthropists is response, but that could shift to look at recovery and resilience 
 - Marisa Drew, Credit Suisse

It highlighted the role that positive environmental policies could play in supporting job growth, stating that “the transition to a climate-neutral economy, the protection of biodiversity and the transformation of agri-food systems have the potential to rapidly deliver jobs, growth and improve the way of life of all citizens worldwide, and to contribute to building more resilient societies.”

This point on job creation is going to be crucial in encouraging the inclusion of the environment in recovery packages. Current estimates from the International Labour Organization suggest as many as 25 million globally stand to lose their jobs due to the pandemic. The US alone could see its unemployment rate rise to 32%, according to the latest projections from the St Louis Federal Reserve.

In the 2008 global financial crisis the connection between jobs and clean energy was never made and as a result the 2008 recovery packages were devoid of much in the way of environmental commitments. There is a collective agreement that this crisis has to bear different fruit.

“Jobs and economic prosperity were always a part of the green economy story,” says GFI’s Thomas. “There isn’t an intellectually coherent, scientifically sound, high-carbon economic story.”

Last year the ILO reported that a shift to a greener economy could create 24 million new jobs globally by 2030 if the right policies are put in place.

How finance can help us build back better

How can the finance sector play a role in the recovery? As before the crisis, financing a transition to a net-zero carbon global economy will remain key.

However, Mikkel Larsen, chief sustainability officer at DBS in Singapore, says that the ‘just transition’ movement will be more important now, given high unemployment and the relative impact of Covid-19 on emerging economies.

“Over the rest of 2020 we will need to collectively consider the impact of the pandemic and explore how to progress the world’s transition towards a green economy without leaving anyone behind,” he says.

That transition finance, in addition to green finance, had already gained traction before the pandemic outbreak is helpful.

Thomas says another way the finance sector can play its role is by ensuring that, when it is time to enter a recovery and building phase, governments can turn to the private sector for actionable projects.

“The next few months give us an opportunity to think hard about the relationship between the policymakers, creative financial instruments and private sector,” she says. “We also need to build on the disclosure and reporting agenda and move to action so that when the time comes, we have oven-ready projects.”

Speaking about the UK, she adds: “We need to also prepare by speaking with the cities that will need local financial support to rebuild their economies.”

It is a point the UN’s Mohieldin makes: that this is the time not just for large global and national finance packages but also for finance at a community level.

Returning to the concern that complexity will stall execution, bankers suggest now is the time to start designing an actionable framework. Thomas points out that a sectoral approach might be a means to practically embed the ambitions of meeting broader combined environmental and socioeconomic criteria.

Working through transport, agriculture, steel, cement and other sectors could offer some structure that allows banks to develop focused and innovative financing, working with both the private and public sector, for example.

If companies are indeed becoming more convinced of the importance of meeting ESG criteria, then their participation will certainly support this strategy.

Within this, some suggest a ‘capitals approach’ might provide a helpful framework for identifying the risk and impact of sectors upon human capital, natural capital and social capital. It could ensure that a holistic viewpoint is taken and therefore a just transition.

This is work that has been done by DBS Bank and ABN Amro with the Impact Institute in Amsterdam.

Finally, a global, national, regional and local finance approach should be cohesive – with every participant of equal importance; from those tailoring sovereign green bonds down to a niche impact loan for a specific county or city.

There are, of course, questions of where the finance will come from – especially if one considers that the UN SDGs already had a $2.5 trillion funding gap.

Mohieldin suggests that to find capacity, finance must become more integrated and calls for all components of finance to be put to use, including domestic and international, public and private-sector funding, debt management, debt relief, trade finance and community finance. That is blended finance in its fullest expression.

Credit Suisse’s Drew also points to philanthropy playing a larger role.

“The priority right now from philanthropists is response, but that could shift to look at recovery and resilience,” she says.

Drew adds that she expects more innovative blended finance structures. Blended finance has never really hit its stride, so this may well be its moment for change.

That will require more reporting. As Thomas explains, with a squeeze on capital for everyone, impact measurement is going to become more critical.

It is an enormous task in an uncertain period, but the development of the sustainable finance industry since the great financial crisis means that at least the tools are in place to support a green recovery that works for all people, if the financial industry can collaborate better.

And there are positives for the environmental finance industry to take away from the horror of the pandemic.

For one, remote working is actually supporting greater collaboration, bankers say. Without the heavy commitments of international travel, they are better able to attend meetings that have been converted to virtual ones.

Faced with such enormous challenges, they also say there is greater willingness to work across banks and across stakeholders.

That the CBD and COP26 have been delayed, also offers more time for this community to prepare how it can best play a role in new global commitments.

Furthermore, the current economic and market reactions have shown us that the impossible is possible. At DBS, chief economist Taimur Baig says that the immediate and large stimulus packages have also made clear that governments can finance positive change.

“In the future when politicians say they cannot spend money, activists will simply point to this period of printing money as evidence that they can do it,” he says.

“We were told that oil and gas prices would not drop despite the increasing competitive economics of electric mobility,” says Duteil at BNP Paribas. “We were told that developed countries could not change behaviours and had to maintain the same level of travels and consumption. Yet here we are today with negative oil prices and virtually all airplanes grounded to the runways around the world.

“How much longer will we be in denial – that the world can change and that we can change?”