InvestmentEnergy transition: What if the Real Change came from Finance?

Energy transition: What if the Real Change came from Finance?

There seems to be a growing consensus in the finance sector that going green is becoming mandatory. Risky investments in “dirty” sectors are far less attractive than they might have been a decade ago, leading investors to put their money in far more sustainable projects with the spectre of irrevocable climate change ever-looming over the global markets. SRI requirements and ESG criteria are rapidly turning finance green, and not just for profit.

If the 2015 Paris Agreement has achieved anything, it is that profit is no longer the be-all and end-all of investment practices in the finance sector. Investors across the board are embracing green finance as the future, ensuring favourable environmental outcomes become a key metric in measuring financial success.

The World Economic Forum highlighted the findings of Bloomberg Green, showing that the value of green bonds issued in the first six months of 2021 exceeded that for the whole of 2020, at $248.1 billion. With growth surpassing expectation, and real, sustainable investment projects appearing far more attractive than in the past, the finance sectors of Europe, the US and China have all begun to lead the way in a post-pandemic green recovery trajectory.

Sustainable financing

The movement of capital into projects that reinforce, enhance and support sustainable development has become a mainstay of corporate ethical responsibility, SRI requirements and ESG criteria for actors in from the private sector, pension funds, central banks, and non-profit organizations around the world.

Investments adhering to ESG principles are therefore attracting more and more interest, encouraging financial innovations in the framework of net zero targets, energy sustainability and economic transition to reimagine their global business strategies. “Sustainable finance products are the pipes that connect global pools of capital to the companies transitioning their business to more sustainable outcomes,” according to Andrew Hinchliff, Group Executive, Institutional Banking and Markets at Commonwealth Bank.

Indeed, the transition to more sustainable practices is being encouraged by governments and supranational entities, not least the European Union. The new EU taxonomy in the framework of the European Green Deal, for example, encourages business entities, investors, policymakers and financial institutions to transition by providing them with a proper baseline of definitions and practices that will help them properly identify trustworthy, transparent sustainable projects and avoid ‘greenwashing’. Banks and private equity firms are embracing this new approach.

Banks leading the way

Banks have been quick to realise not only that ESG requirements have become non-negotiable for investors, but that embracing a sustainable strategy can actually drive-up value creation and lead to outperformance. According to a recent study by Deloitte, “banks with good performance on material ESG issues outperform banks with bad performance on the same issues by more than 2%.”

Banks have realized that they have a key role to play in reducing global carbon emissions and have subsequently embraced this new strategic approach. Barclay’s, for example, has pledged £100 billion for the facilitation of green financing (2018-2030) to help boost the global green transition. The Qatar National Bank and HSBC have teamed up to launch a green energy-focused financing instrument.

Launching a new green product is an important development for the bank and our clients, and further increases liquidity for the institutional green finance market,” said Antoine Maurel, HSBC’s head of markets for the Middle East.

Private equity following suit

The irrevocable transition to greener business practices in finance has also made its way into the private equity sphere. For over 20 years the sector has been expanding exponentially, becoming ever more attractive to potential investors and adding $US trillions in assets under management. ESG requirements have therefore become crucial for their ability to attract investment.

Sustainable development is no longer the future, it is here, now. Goldman Sachs, for example, has been pushing for further investment in hydrogen for meeting net zero targets, and its Sustainable Investment Group has raised over $800m in a first close on its debut Horizon Environment and Climate Solutions Fund. J.P. Morgan recently announced the creation of a new private equity investment team focused on sustainable growth.

Firms have been focused on ESG for over a decade, and others are quickly beginning to follow suite. Ardian, one of Europe’s largest private equity houses, has set out long-term sustainable investment goals focused on climate change, diversity and equal opportunities, profit sharing and good governance and ethics. This involves turning employees into actors that create sustainable value for all stakeholders and maximising societal contribution through sustainable investments and corporate action.

As a private investment house, we are convinced that the most sustainable companies will have the greatest long-term value to all stakeholders,” said Dominique Senequier, Ardian’s founder and president, “my philosophy has always been investing must be a force for good.” 

The global financial reorientation towards sustainable investment is in full swing, encouraged by a general urgency as humanity come to terms with the biggest crisis of the century. The finance sector can be a real asset in the fight to regain control of our climate and move towards a more sustainable future.

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