Urgent need to ramp up corporate green investment

To combat climate change, recent research reveals the urgent need to develop strong linkages between providers of green finance and companies that require such funding

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In order to transition to a low-carbon economy, recent research indicates an urgent need to mobilize even more capital to help build a more sustainable economy.

While 17% of current investment by large public corporations is already green, and while less than 5% of 2017 corporate green investments were financed via certified green bonds, they have the potential to play a much larger role.

Those are the key conclusions of a report by Corporate Knights Research and the Climate Bonds Initiative.

"To meet the environmental and social goals to which the world has committed in the Paris Agreement and through the UN Sustainable Development Goals (SDGs), we need to accelerate the funding of the transition away from harmful activities and towards more sustainable ones," says Stephanie Sfakianos, head of sustainable capital markets for BNP Paribas, which sponsored the report.  

The 17 interdependent SDGs, and 169 associated targets, cover a broad range of social and economic issues. This includes, for example, needs for climate change action, and universal access to clean water and electricity. The SDGs were adopted by resolution of the UN General Assembly in 2015 as part of its 2030 Agenda.

"SDG alignment" refers to the investment levels required to support achievement of the SDGs by 2030. Estimated investment increases calculated by the Global Infrastructure Hub (a G20 initiative) have been used. Across most economic sectors, an overall 23.4% increase in current investment levels will be required for SDG alignment. In high-carbon sectors, a smaller overall investment increase is required, but a significant re-allocation of existing capex and R&D – from non-green to green investments – will be required.

The assessment encompasses more than 7,000 of the world's largest companies, representing all publicly traded companies with over US$1 billion in revenues. Collectively, these companies were found to have made capital and research and development expenditures of US$3.6 trillion in 2017. Corporate Knights then applied a recently developed, sector-specific taxonomy to determine what proportion of their revenues – and, by extension, their capex and R&D – can be classified as having clear and specific environmental benefits. This yielded a figure of US$611 billion in green investments in 2017. 

The taxonomy is among the research helping to guide various national and international initiatives to better define green economic activities. 

"It's heartening to know that so much of global corporate capital flows already supports carbon reductions and a cleaner and more circular economy," says Corporate Knights CEO Toby Heaps.

"And it's not surprising, since the green economy is growing much faster than the regular economy. But we're still falling far short of the green investment needed to put the global economy on track to meet the UN SDGs," adds Heaps.

To reach "SDG alignment"– which must include urgent action to combat climate change – Corporate Knights estimates that total corporate capex and R&D spending needs to be boosted from US$3.6 trillion to US$3.8 trillion annually, while the green component of that investment needs to rise from US$611 billion (17% of the total) to about US$1.07 trillion (28% of the total). Over 87% (US$399 billion) of the additional annual green investments required arise in the most transition-exposed sectors (energy, utilities, automotive, steel and cement).

"Less than 5% of corporate green investments are currently financed via certified green bonds," says Climate Bonds CEO Sean Kidney. 

"There is enormous potential for companies to serve up green bonds as part of their brown to green transition and no shortage of institutional investors looking for quality low-carbon opportunities particularly in the most transition-exposed sectors where the bulk of incremental green investments are required," adds Kidney.

While large, the incremental investment requirement identified in the report is modest in proportion to the estimated US$117 trillion in assets under management and loan books held via publicly traded financial corporations.

There is strong and growing investor interest in financing green activities. But with 2018 annual issuance of certified corporate green bonds of only US$78 billion (including US$49 billion from financial corporations and US$29 billion from non-financial corporations), much stronger linkages are needed between green-motivated capital providers and the corporate initiatives that urgently require such funding. Potential solutions include:

·         Agreement on taxonomies and definitions for green activities, revenues and investments, in particular to facilitate "Clean Transition Bonds" – a form of green bond that would finance de-carbonization activities within high-carbon sectors that would otherwise likely be bypassed by conventional green bond issuers.

·         Broader efforts on the part of banks and other financial issuers to raise and recycle capital through securitization of their green loan books (the report estimates banks have outstanding green loan books of US$390 billion, which could be securitized and issued as green bonds).

·         A move away from strict, in-or-out specifications of how green bonds proceeds are used by companies, in favour of an approach though which companies that pass a credible test for their own SDG alignment would see all of their debt issuance qualified as green.

The report also evaluates the green bond issuance potential of a representative cross-section of 21 of the 2019 Global 100 Most Sustainable Corporations in the World. This includes a determination of likelihood of green bond issuance, and percentage of green investment requirements that could be covered by such an issuance. These companies alone have incremental green capital requirements of approximately US$43 billion annually in order to move to full SGD alignment, a significant portion of which could be covered by green bond offerings.   

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Date

8 Mar 2019

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