- The rise of green finance is creating a growing market of sustainable investments.
- The UK’s Green Investment Bank (GIB), demonstrates the positive impact green finance can make.
- By understanding and promoting green principles, CAs can help businesses thrive economically and meet their new responsibilities.
By Louise McCabe.
Until recently, green investments were widely considered the domain of a particular investment personality – deeply ethical, but not necessarily very savvy. Now, as the threat of global warming looms, new financing initiatives are transforming the sector and creating access to new investment opportunities.
A key driver of this change is the 2016 Paris Agreement, in which 197 countries committed to reduce emissions to keep global warming below 2°C. To meet this goal, it is estimated that more than US$90 trillion will need to be invested up to 2030 in city, energy and land use.
The OECD estimates these incremental costs will be up to 10% each year compared to business as usual. And in emerging markets alone, PwC estimates a $US23 trillion investment opportunity in green infrastructure. For this investment to take place, there needs to be an appetite to finance it – and that’s where green finance comes in.
What is green finance?
The G20 defines green finance as the funding of investments that provide environmental benefits in a broader context of sustainable development.
As a passionate supporter of green investment with more than a decade of experience in environmental groups, alternative energy and clean tech investing, Australian Jeremy Burke FCA, a trustee at leading environmental data platform CDP Worldwide, has been at the forefront of the growth of green finance. He says the concept can be tricky to pin down.
(Pictured: Jeremy Burke FCA)
“There are as many elements to green financing as there are shades of green,” he notes. “Some green finance initiatives may focus on adapting to a changing environment, while others take a strong risk management perspective. As well as analysing an asset’s impact on the environment, it also looks at the environment’s impact on the asset.”
Burke says determining what constitutes a green investment can be harder than it sounds. “What’s green in one country today may not be in another country tomorrow – particularly as our climate targets tighten.”
For example, not many would think that green finance techniques apply to high-carbon investments. “But it’s crucial to analyse all investments for impacts, such as whether high carbon assets will be stranded as the world shifts its energy reliance to renewables.”
Transforming offshore wind
Burke became deeply involved in green finance while working for the government in London, where he was tasked with setting up governance structures for the UK Green Investment Bank (GIB).
One of the first of its kind, the GIB was a financing entity designed to boost the funds available to meet the UK government’s policy commitments, as set out in the Climate Change Act 2008.
“The GIB’s Offshore Wind Fund investors included UK and Scandinavian pension funds and a sovereign wealth fund,” Burke says.
As such, the framework and governance structure of the GIB had to be set up to satisfy both external investors and Her Majesty’s Treasury, which had entrusted £3 billion (around A$5 billion) to invest in green, profitable investments.”
GIB created the world's first offshore wind fund. The project was an outright success, delivering healthy returns to investors while creating a new offshore wind industry in the UK. It was also a win for consumers – since it started operating, energy costs from the windfarm have fallen by 50%. And in September 2017, UK auctions revealed energy from offshore wind was even cheaper than gas.
We’re seeing strong support among banks through green bonds, which didn’t exist five years ago
Burke says the rapid price drop of offshore wind exceeded GIB’s expectations and clearly demonstrates that renewables and profitable investment can go hand in hand.
“GIB helped bring the offshore wind sector from niche to mainstream, and showed it was a place where we could make sensible, risk-adjusted and long-term returns,” says Burke.
“We also helped establish and solidify the offshore wind industry in the UK, reducing construction costs and showing that renewables can be a reliable source of long-term jobs.”
A new partnership
Despite this success, the UK’s GIB has not been without controversy. Its sale this year to Macquarie Group, who renamed it the Green Investment Group (GIG), drew some criticism, based on Thames Water’s poor environmental record under Macquarie’s stewardship. There have also been fears that Macquarie Group could strip GIG’s assets, weakening its green mission.
Others are more positive, saying Macquarie Group’s purchase indicates just how important green banks and investments have become. The bank has committed more than £3 billion (around A$5 billion) over the next three years to investments that are in line with the bank’s original green purposes – and with scope to expand globally. The sale of GIB also provided a significant profit to the UK taxpayer.
Burke says Australia and New Zealand can learn lessons from GIB’s achievements. These include understanding that long-term investors want sensible, long-term renewable targets with emission reduction plans – and that government can help back an industry and bring down local costs, just as UK GIB did in the offshore wind industry.
The mainstreaming of green finance
While there has been a rise in the number of green banks such as GIB, around the world, Burke says traditional banks also play a critical role in green financing.
“We’re seeing strong support among banks through green bonds, which didn’t exist five years ago, but which hit over US$83 billion in value this year,” says Burke.
“By bringing significant capital, established networks and working processes, banks can rapidly shift the investment landscape.”
Bank investment isn’t the only factor having an impact. Many investors have divested fossil fuel-based assets, putting pressure on new projects such as the high-profile Adani Carmichael thermal coal mine in Queensland. That project has been refused funding or has had it withdrawn by all of Australia’s Big Four banks. More and more, green considerations will become part of corporate activity.
“Considering environmental impacts will continue to move from being an environmental working group’s remit to a board and C-level management discussion.”
Climate change presents business risks and opportunities
Climate change risk does not discriminate and organisations are feeling the heat.
Burke says measuring the green credentials of investments was a key early challenge for the GIB. As finance director, Burke and his team designed green principles to measure each investment, presenting the results in the same way they would their financial results.
“Each annual report had a green profit and loss, and a green balance sheet, so people who were used to reading financials could easily understand them,” he says. “We also got our methodology assured by a Big Four audit firm, which we then took to the market.”
GIB also developed a green impact measurement report, which can be applied globally to other projects. Burke hopes it won’t be long before all investors will receive a green impact report along with their annual statements, enabling investors to make better decisions about where they put their money.
“Done well, green investments offer a safer investment opportunity,” he explains. “They use the same decision tools and cash flow analysis as traditional investments, but look at environmental issues in much more detail, including supply-chain analysis.
“This granular approach can reduce investor risks – say, by avoiding investing in an asset that’s likely to be affected by flooding or impacted by water scarcity, or stranded because of climate change, competition or regulatory issues.”
Being part of the change
Clearly, there’s plenty to be done to green the economy, and Burke says everyone has a role to play, including CAs. He advises that CAs who sit on boards should start by understanding the big picture globally, so they can link corporate strategy to green principles to remain competitive.
Burke also sees a huge opportunity within the accounting profession to examine whether current regulations, such as disclosure in reporting, are adequate. But most critically, he says the profession also needs to realise that climate change is a real and present danger – and that it will change the investment world and company directors’ responsibilities forever.
“Last year, the Centre for Policy Development in Australia released a legal opinion on directors’ duties, outlining that they need to take climate change into account,” says Burke.
“To stay competitive – and meet their obligations to shareholders – companies need to start acting now.”
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Louise McCabe is a Sydney writer specialising in banking and finance.