Despite multiple crises afflicting the world right now, the outlook for sustainable finance and green investment is generally positive, say experts.
It is estimated that an additional USD 5 to 7 trillion is needed meet the UN’s Sustainable Development Goals by 2030 – required from the private sector as well as the public purse investing into sustainable finance. The fact that wallets are opening to fund this bill might seem counter-intuitive, given rising prices of food, commodities and energy, climbing interest rates and falling economic growth. But in fact, it seems the turmoil might be encouraging green investment.
Russia’s invasion of Ukraine is indeed spiking energy prices. But on the flip side, it is accelerating investment in green energy and making clear the urgency of reducing reliance on fossil fuels such as Russia’s oil and gas, said Mark Carney, the UN special envoy on climate action and finance.
“A resilient system needs more diversified and reliable supplies…. once built, clean energy systems are more affordable, efficient, resilient, and reliable,” Carney said in remarks to the Net Zero Delivery Summit on 11 May 2022. “No one owns the wind or the sun, and hydrogen is literally everywhere.”
“This situation is giving a direct push to the alternative energy sources that would already be considered relevant, but perhaps wouldn’t have had the same pace of development as we are seeing now,” says Nicoletta Centofanti, sustainability adviser and interim general manager with the Luxembourg Sustainable Finance Initiative (LSFI). The not-for-profit association designs and implements the Sustainable Finance Strategy for Luxembourg while promoting sustainable finance initiatives in and beyond the country.
“A healthy, more resilient and equal planet is a key goal of sustainable financing and green and social investments, which emphasize the social and environmental impacts of an investor’s decision instead of financial returns only,” she says.
Sustainable finance is loosely defined as investment decisions based not only on financial returns but also environmental, social and governance (ESG) factors. Although sustainable finance is relatively new – the first ‘green’ bond was issued only 15 years ago – more than USD 1.6 trillion in sustainable debt instruments were issued in 2021, according to BloombergNEF. That set a record and brought the total market value to over USD 4 trillion last year. According to Centofani, this significant growth is due to increasing interest from investors and response from institutions through attractive new financial products and mechanisms.
“This is a period when we all reflect on our priorities and values, and the medium- and long-term outlook for our society,” says Centofanti. “We are all now directly facing, in our everyday lives, what climate change means and what potential biodiversity loss means. So, people are willing to pay a premium for investments that meet their goals and values… after all, you are investing in a long-term sustainable future for ourselves and the future generations.”
Such a high level of buy-in reflects interest from investors and institutions in financial products that meet ESG goals. That, in turn, is driving authorities in many regions of the globe to examine how they can standardize markets with policies such as taxonomies, or classifications and criteria for investment products.
The E.U., for one, is implementing a taxonomy – a kind of rule book – on which parts of the economy or activities could be marketed as ‘green’ or ‘environmentally sustainable’ investments to make these options more visible to investors. With that, the E.U. is acknowledging concerns about the underlying credibility of the green finance market.
Preventing greenwashing – false claims that products are sustainable when they aren’t – will be essential to supporting confidence and ensuring the long-term viability of the sustainable finance market, says Ludwig Liagre, the sustainable finance lead for the Global Landscapes Forum (GLF), which partners with Luxembourg through the Luxembourg-GLF Finance for Nature Platform. Not doing so could undermine confidence in the system and work against ESG goals, he said.
On a more positive note, recent developments on biodiversity finance are encouraging, building on the momentum of the Global Biodiversity Framework. A Biodiversity Finance Reference Guide being developed by the International Finance Corporation of the World Bank is one such sign.
“It shows that beyond climate impacts, investors are looking more and more toward biodiversity outcomes as well,” said Liagre.