What green finance could (and should) look like in 2017 and beyond

From multi-party circular economy initiatives to rooftop solar leasing for SMEs, a collaborative, creative ethos underscores the new breed of green financing.

While the need to transition to a low-carbon economy became enshrined in political and corporate policy in 2015 with the signing of the Paris agreement, these signatures won’t, on their own, propel us towards a clean and green world.

In practice, neither the temperature target to limit global warming nor the UN sustainable development goals (SDGs) agreed in the same year will be met without an unprecedented effort by financial institutions, both private and public, to provide funding.

Money matters. Historically, however, the relationship between sustainable development and global finance has been something of a slow-burner. Things are increasingly heating up now, though, argues Martina Macpherson, head of ESG, at S&P Dow Jones Indices.

“While sustainable investing is not a new concept, it was overlooked in financial markets up until a few years ago. Thanks to a few key catalysts, namely the UN-backed principles for responsible investment (PRI), environmental, social, and governance (ESG) research, and academic studies focusing on evidence around materiality, sustainability is now in the day-to-day conscious.”

The good news for 2017 and beyond is that the risks and opportunities associated with the transition to a low-carbon economy, and implications for green finance, will likely remain a key area of focus, concludes Macpherson: “In January this year, the International Organization for Standardization (ISO) gave the go ahead to develop official guidelines on climate finance, which could include the first internationally-accepted certification of climate performance and alignment with 2C emissions targets.”

 

A collaborative and creative approach

Herry Cho, director, head of sustainable finance, ING Asia, and chairperson, Sustainable Finance Collective Asia (SFC Asia), says that collaborative ways to allocate and structure risk are key for funding circular economy initiatives involving multiples parties and large infrastructure projects in emerging markets.

For SFC Asia, the challenge lies in bridging gaps between traditional funding expectations and sustainable investment prospects.

Many funders feel there are not enough funding-ready projects and new technologies - those connected to biomass and waste-to-energy, for example - are often misunderstood. Consequently, many project initiators struggle for capital.

In response, SFC Asia looks to accelerate funding by calling on experts - who can advise from a technical, legal, financial and sustainability perspective - at the beginning of the funding assessment of a project. It’s key at this stage to highlight the varying risk associated with different types of capital - for example, from donors, banks or facilitators (ie the UN Social Impact Fund), explains Cho.

It is the collaborative approach that really makes the difference, she suggests. “It provides more rapid understanding of, and confidence in, the proposed projects, as the panel members themselves go through a faster learning process, bouncing off each other. This is ideal for facilitating projects that are not plain vanilla, with known financing structures – such as the majority of sustainable innovation.”

Also actively supporting low-carbon transition in Asia is the India Innovation Lab for Green Finance, which recently selected four new finance instruments to move forward for further analysis, development, and piloting. Drawn from a pool of 72, they could help catalyse millions of dollars for clean energy and sustainable urbanisation.

Indicative of the breadth of innovation in the marketplace at present, the mix comprises: a solar investment trust; a matchmaker service to marry investors with opportunities; solar agro-processing power stations, replacing diesel-fuelled mills with off-grid village systems; plus, sustainable energy bonds for impact investors.

Another example of joined-up thinking across and between sectors is the Cities Climate Finance Leadership Alliance, comprising over 40 organisations together exploring ways to mobilise investment worldwide in low-carbon and climate-resilient urban infrastructure.

Here again, collaborative working will be key to unlocking huge investment potential, explains Kyra Appleby, head of cities at CDP, one of the alliance members. “Action by cities is essential for achieving a low-carbon economy, but cities cannot do it alone. Collaboration with the private sector is vital to deliver the billions of dollars of investment needed to reduce emissions and adapt to the impacts of climate change. This represents a massive opportunity for investors, with CDP data showing over 270 cities seeking $26bn [£20bn] of private-sector investment for climate projects.”

 

The role of banks

Traditionally, banks have organised their knowledge and expertise around existing markets. However, transition to a low-carbon economy means new activities on every front: new technical innovations, new business models and development of new markets.

In response, collaborative approaches are called for internally within individual banking groups, as well as externally across the whole finance community, suggests Marc Borghans, head of sustainable project finance at ING bank. “One solution is to set up small agile teams, who are able to bridge different pockets of knowledge and expertise in various parts of the bank, to create new financing propositions in response to this new market demand. Once they have been proven in pilot projects, they can then be scaled-up and integrated into the main operations of the bank.

“Within ING, the sustainable project finance team is one such example. The team focuses on smaller-scale sustainable projects in the Netherlands and has developed a range of financing propositions, for rooftop solar leasing and ‘greening’ of apartment buildings with CHP [combined heat and power]. These propositions combine the bank’s international project finance expertise with local market knowledge and provide a financing solution for investments in low-carbon projects by SMEs.”

Ultimately, it is this collaborative ethos and willingness to rethink, that epitomises the new breed of funder.

 

Image: Willow trees to be harvested and used as biomass fuel on a UK farm. New technologies - those connected to biomass, for example - are often misunderstood and are therefore difficult to fund. Photograph: Alamy.

 

For more information on this article or subject please mail to: Herry.Cho2@ing.nl