We brought together 3 experts in Green Finance to understand what Green Finance is, its implications and how we can help.
Find out about the experts and what they have to say:
- Helene Li — Cofounder GoImpact
- Ines Galichon— Manager at ENEA Consulting
- Michael De Witte — Director Energy Finance & Advisory APAC, Societe Generale
Who are these experts?
What did we ask them?
“Climate change may still be a matter of debate for some politicians, but investors are increasingly decisive. Money is gushing into any kind of asset labeled green or sustainable.”
Source: Bloomberg article titled “Green Finance Is Now $31 Trillion and Growing”
We asked these experts how Green Finance affects them in their daily job, what is the “gap” between the needs of green finance and existing financial flows, who should be educated on this topic and what drives demand for it in Asia and globally.
How would you define Green Finance and its implications on your daily job?
There are so many loosely defined terminology and acronyms in this space, it is one of the issues that slow down the mainstream adoption of this. Green Finance refers to investments targeting opportunities that improve climate change, energy efficiency and mitigate climate and environmental risks. It is no doubt one of the key elements in the sustainable investment universe, but by no means the only one.
There is no one single universally accepted definition of Green Finance. But it could be defined as all the financing and investment instruments targeting assets and activities which bring positive environmental impacts, and first and foremost GHG emission intensity reductions, in the broader context of the fight against climate change.
There is still a lack of precise criteria to define whether an asset could be considered as green or not, what are the eligibility criteria, what is the baseline to consider when assessing the positive environmental impacts.
The close relations between energy transition & climate change, which ENEA has built its core expertise on, and green finance have made ENEA’s move to finance very natural. We leverage our energy and industrial expertise and track-record with corporate to support financial institutions in the way they navigate energy transition, climate change and sustainability business risks and opportunities.
Green finance is my daily job.
What is your perspective on the “gap” between the needs of green finance and existing financial flows?
The heart of the matter lies in better knowledge sharing and education. An uninformed investor will invest very little, if at all. Until we can collective improve the investor education, it is very hard to accelerate deal flows.
To fight climate change and live in a much more sustainable word we must act on infrastructures and the real economy (we need to change the way we consume energy, water, rely on transports, live in buildings, consume goods, …). ESG integration will not solve the problem and we should spend less time in assessing what is good, bad or in between in what we already do and finance.
The key is to do much more and to innovate, to finance green champions and help them grow for instance.
- Infrastructures / real assets are a fast-growing asset-class but still needs to accelerate.
- On the other hand, corporate must develop projects and real assets faster.
Today > US$ 100 bn available to finance projects (dry powder).
Green assets are scarce while investors are all looking for “good” green assets. The challenge is not about the money, there is plenty of pockets of money which have been committed to be deployed in Green / Sustainability businesses by large asset owners and asset managers.
The real challenge is about the lack of green “investable” / “bankable” assets. Investors must better understand the business risks and opportunities related to such assets on one side. Corporate need to diversify faster and to structure projects and assets in a bankable way leveraging technical and business innovation.
As an example, energy transition is unlocking a lot of new business opportunities. But most of the future investments will be on smaller, more decentralised and probably more complex assets and business models. There is a need for massification and standardization of such assets and business models to reach scale, so that they can be eligible to those large financial flows and fit into large asset owners and managers investment strategy. Regulatory frameworks can foster the development of more predictable cash-flows business models and assets, corporate would be thus more able to accelerate assets deployment in bankable business models for investors.
Innovative financing models are also required to “value” the positive impacts and potential lower risks of eligible assets to green and sustainable finance. However, there is still a big challenge about how to value and price positive externalities of green / sustainability assets. New financing instruments have emerged to go beyond “100% green” finance and navigate the transition to a lower carbon intensive and more sustainable economy, like the Sustainable-Linked Loans and the Social and Climate Action Bonds. Indeed a 100% green world is not physically feasible in the mid/long-term with the existing available technologies. Many critical economic sectors have limited flexibility to shift to carbon-neutral businesses, like the mining sector.
Finally, frameworks are to emerge to help channel the existing financial capitals towards green / sustainable assets. Having a common definition of “Green” and/or “Sustainable” activities and assets which could be eligible to “Green” / “Sustainable” finance instruments is required to foster investors’ interest and confidence in those developing markets.
The same way the Green Bond Principles have catalyzed the green bond market over the past years (even if it has been largely criticized: refinancing vs. financing new assets), having a robust framework is critical. The TEG recently published a draft of the EU Taxonomy which will help to have a common vocabulary shared by the corporate and financial institutions on what can be considered as Green / Sustainable. The major challenge is now to make this theoretical framework implementable.
Financial flows are plenty for renewable energy financing. There is no gap as such. The issue is to channel those funds to the “good” projects. The ones with good returns, a decent risk allocation in countries where the commitment to renewable energy is for the long-term. Players capable today of analyzing or assessing this risk allocation, with global structuring experience are not that many. It is not just about funding panels or wind turbines, it is about taking a long term view on the technical robustness and on the cash-flows of the project
It is important to empower and educate citizens to engage in green finance or is it reserved for Financial Institutions?
What is the best way to do this and which demographic should be targeted?
(Focusing on “The Milennial Effect” in terms of green finance investments)
To engage in this agenda is not only the remit of finance industry. Indeed, educating and empowering citizens at large is part of the drive. While millennials are a prime target for this, as they are readily receptive of this agenda and keenly aware of the pain points behind this, I believe we should not single out one demographic segment, democratizing the knowledge of this across generations and sectors is truly needed, in order to accelerate the adoption of sustainable finance.
It is obviously crucial to educate both citizens and financial institutions on green finance opportunities. However, financial institutions have a much powerful lever to drive real change at scale and channel capitals to green / sustainable assets. We believe the issue is more on the offer side, financial institutions need to develop relevant green products instead of looking at this topic from a communication standpoint.
Citizens can have a direct mean of pressure on financial institutions particularly through pension funds and retail banking. Millennials are looking for “for purpose investment” which encompasses green and sustainable finance where positive environmental and social benefits can be evidenced. However, the Millennials still represent a very small pool of decision makers among the asset owners.
The real estate sector could be a relevant entry door to target the Millennials to structure real assets, particularly in Asia-Pacific where it plays a significant role for HNWI.
Today, crowdfunding platforms for renewable projects do exist. Most of them however do lack scope and or experience. Working on the credit assessment and credit quality of the projects should be the core competency that those platforms sell to their investors. If they want to grow in scope they will need systematization of this credit scoring. One of the key advantages for those platforms is that they can bring local engagement and commitment to a project. The NIMBY phenomenon is still sometimes an issue for renewable energy in OECD countries.
What drives demand for sustainable finance in Asia and globally?
We have observed there are two significant forces driving this agenda — regulatory requirements and market demand from capital owners. Regulators are increasingly demanding greater transparency on specifics of ESG disclosure among listed companies and asset managers, much more so than just an annual report. Capital owners are also demonstrating greater appetite to ensure ESG integration into their portfolios. Believe this combination of forces will help to drive this urgent and timely agenda.
Sustainable finance opportunity is huge. If we just take one example: over $17tn will be invested in energy transition assets worldwide, with about 50% in Asia-Pacific. It is the largest asset class investment opportunity. Many Asian corporate will benefit directly from those market trends (e.g. corporate champions in EV / battery manufacturing), while Asian investors are perfectly positioned in front line.
Climate change imperative is pushing investors to act on the topic from a risk and opportunity perspective. Climate change is a systemic financial risk which must be considered as such by financial investors, regulators and corporates. More and more large institutional investors have pledged to invest in green / sustainable assets, some are going even further taking strong commitments on divestment from sectors like coal mining and Oil & Gas.
The regulatory pressure on corporate in terms of extra-financial disclosure is increasing in Asia, following the same path Europe and the US have experimented a few years ago. More transparent corporate disclosure will also enable sustainable finance to be mainstreamed across asset classes.
The market is much more mature in Europe than in Asia-Pacific where investors are still at the “ESG integration” stage while some European investors have already adopted a more proactive engagement strategy, really acting at the board level when possible to push corporates to integrate climate change risks and opportunities in their core strategy.
It is driven by the fact that it is good for the planet but let’s not forget that today in a country like India for example, solar and wind energy are more cost competitive than most sources of thermal energy (gas, coal, HFO). Hence there is also strong economic rationale for this development and a question around energetic independence for many countries i.e. no need to import fossil energy.