Financial Services

Financing A More Sustainable Future

June 28, 2021

Global

Financing A More Sustainable Future

June 28, 2021

Global
Phillip Cornell
Senior Editor, The Economist Intelligence Unit

Phillip Cornell is a Principal at the Economist Intelligence Unit where he leads the EIU’s consulting practice in the Americas. He is also a Senior Fellow at the Atlantic Council Global Energy Center; chair of the Regional & Global Energy Interconnection initiative of the Clean Energy Ministerial; and advisor to the World Bank and other institutions.

Prior to joining the Economist Group, Mr. Cornell held senior advisory and management positions at Saudi Aramco, the International Energy Agency, and NATO. He has conducted economic and policy research at the Naval Postgraduate School (Monterey), the Royal United Services Institute (London), and the Center for International Security and Cooperation (Stanford). Mr. Cornell holds Masters degrees with distinction in International Economics from the Johns Hopkins School of Advanced International Studies, and received his BA cum laude from Stanford University.

 

How policymakers and the financial services can help the sustainable finance market to scale

The sustainable finance market has grown significantly in the past year. This stems from a range of factors, from the COVID-19 pandemic to the election of a new administration in the US to the development of new financial tools to an increasing consensus around standards for sustainable finance instruments and disclosure of environmental, social and governance (ESG) factors. It is underpinned by a growing consensus among governments, business, and the public that climate change represents a clear and present threat to human welfare and natural resources, as well as to asset portfolios.

Financing a more sustainable future: How policymakers and the financial services can help the sustainable finance market to scale is a report written by The Economist Intelligence Unit and sponsored by Pillsbury Winthrop Shaw Pittman LLP. This report, based on desk research and expert interviews, explores how policymakers and the financial services industry can enhance the value of sustainable finance tools to create ecosystems where these products can scale. Key findings include:

  • Global green bond issuance reached $269.5bn in 2020 and is predicted to hit $400-$450bn in 2021. Sustainability bonds also saw strong growth in 2020, with issuance 81% higher than the previous year, at $68.7bn. The green bond market remains just 3.5% of the broader bond market, but by traditional liquidity measurements—market growth, new issuance activity, dealer inventories and bid/offer spreads—the signs of growth are encouraging.

  • Demonstrating the US government’s shift in focus on climate change, Treasury Secretary Janet Yellen has called it “an existential threat” and the biggest risk to the health of the US financial system. The Treasury, Federal Reserve (the Fed) and the Securities and Exchange Commission (SEC) now are considering how to identify corporate and systemic risks from climate change, how both financial services companies and corporates should disclose their performance on ESG factors, and what other tools they can use to encourage greater private sector involvement in the transition to a low-carbon economy. 

  • The financial services industry is stepping up with pledges from banks to use ESG criteria to inform their lending, and from asset managers and owners to reach net zero. They are also innovating with new products such as sustainability-linked bonds and transition bonds.

  • Covid-recovery plans from governments—including US President Joe Biden’s $2trn infrastructure plan—will be a major source of investment in green infrastructure and incentives to crowd in greater private sector investment.

  • Challenges remain in the form of a lack of agreed global definitions of sustainable finance tools, but the EU’s taxonomy for sustainable activities and the Green Bond, Social, Sustainability and the Sustainability-Linked Bond Principles are expected to provide greater clarity about how to define sustainable investments, with the US also looking at how to advance a consensus.

Efforts by governments, supranational organizations and the financial services industry are helping the sustainable finance market to scale, making these instruments more attractive both to corporate issuers and investors. Companies are now looking at how they can use sustainable finance to transition their businesses for the low-carbon future, including investments in carbon technology by large energy consumers such as technology companies.

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