Sustainable finance has grown exponentially in recent years, but it is still not enough to fund the energy transition. Meeting the Paris Agreement target of limiting global warming to 1.5°C by 2050 and growing the global economy will require not only strengthening existing sources of finance, but also attracting new sources of funding and fresh ideas. , must be utilized by various expanding countries and companies. Pivot to zero carbon growth.
- Equity and debt financing for the green economy has increased significantly in recent years, but needs to accelerate further to limit global warming to 1.5°.
- Equity market exposure to the green economy must accelerate rapidly through 2030, while new borrowers and sources of capital are emerging in the bond and loan markets.
- But financial markets are not enough to deliver funding, they must also deliver innovation.
Green economy companies are now 7% of the world stock market – More than the oil and gas sector – Market capitalization of USD 7 trillion. Also, the size of the green bond market will grow 100-fold in less than a decade, reaching US$3 trillion by 2022. We compared this to the cumulative investment of US$109-275 trillion needed to develop renewable energy, low-carbon transport, energy-efficient buildings, industrial process electrification, recycling and more. At a London Stock Exchange Group webinar on 17 November 2022, experts identified new ways to close the gap in sustainable finance.
Closing the sustainable growth gap
The four main ways to close the discussed sustainable growth gap are:
- Green bonds are already one of the big successes of sustainable finance, but developing countries are starting to get on board. In 2022, sovereign countries such as Chile and Uruguay will issue sustainability bonds related to nationally determined contributions, or emission reduction targets. In the Middle East, Saudi Arabia’s Public Investment Fund became the first sovereign wealth fund to issue a green bond.
- In the bond market, the issuance of green sukuk is expanding as Islamic investment from oil-producing countries turns to green investment. The sukuk market is expected to reach $30 billion to $50 billion in the next few years, according to Mustafa Adil, head of Islamic finance, data and analytics at LSEG. In fact, in his recent LSEG survey, he said 54% of Islamic investors have incorporated his ESG considerations into their portfolios. Mustafa says. “And some frontier markets, who happen to have Sharia-sensitive investors, are issuing sukuk to take advantage of excess liquidity in the GCC oil producing markets.”
- But as the era of low interest rates and cheap financing comes to an end, sustainable loans are increasing their share of debt financing.“Debt markets remain important, but I think the move to loan markets will continue,” explains Matthew Toole, Head of Debt Markets and Commodity Origination at the London Stock Exchange. “The lending environment and the ability of banks to continue to mobilize the commitments they have made to lend and underwrite will undoubtedly have a significant impact going into 2023.”
- Meanwhile, for listed equities, the green economy exposure in equity benchmarks should more than triple from 2020 to 2030. According to an FTSE Russell study, Green equity exposure of 1.5℃ scenario, which translates recent estimates of the overall investment levels needed to meet the Paris target into stock market exposures. From 2030 to 2050, exposure to the green economy will increase more slowly.
Need to invest in new fields
However, money alone is not enough, according to Nigel Topping, the UK’s high-level climate action champion, speaking in early 2022.
“Private finance needs to be an innovation partner, not just an execution partner, as some of the required investments are in relatively new areas such as adaptation, which have different types of cash flow profiles. It’s an emerging market that hasn’t been a major investment destination until now.”
Looking ahead, climate change can only be contained if investors and lenders step up financing of the green economy. In particular, the next few years until 2030 will be critical. It’s gaining momentum. Whether it goes fast enough depends partly on finding creative ways to fund a burgeoning sustainable economy.