For ESG financing, the outlook remains positive despite the global turmoil

Despite the multiple crises currently affecting the world, the outlook for sustainable financing and green investment is generally positive, experts say.

An additional US$5 to 7 trillion is estimated to be needed to achieve the UN’s Sustainable Development Goals by 2030 – which requires private sector as well as public money to invest in sustainable finance. The fact that wallets are being opened to fund this bill might seem counterintuitive, given rising food, commodity and energy prices, rising interest rates and falling economic growth. But in fact, it seems the turmoil could encourage green investment.

The Russian invasion of Ukraine really raises energy prices. But on the other hand, it accelerates investment in green energy and makes clear the urgency of reducing reliance on fossil fuels such as Russian oil and gas, said Mark Carney, the UN’s special envoy for climate action and finance.

“A resilient system needs more diverse and reliable supplies… Once built, clean energy systems are more affordable, efficient, resilient and reliable,” Carney said in remarks at the Net Zero Delivery Summit on May 11, 2022. “No one owns wind or sun , and hydrogen is literally everywhere.”

“This situation gives a direct boost to alternative energy sources that would already be considered relevant, but might not have the same pace of development as we see now,” says Nicoletta Centofanti, sustainability advisor and interim CEO of the Luxembourg Sustainable Finance Initiative (LSFI). The non-profit association designs and implements the Sustainable Financing Strategy for Luxembourg, while promoting sustainable financing initiatives in the country and abroad.

“A healthier, more resilient and more equitable planet is a key goal of sustainable finance and green and social investments, which emphasize the social and environmental impacts of an investor’s decision rather than just financial returns,” she says.

Sustainable finance is loosely defined as investment decisions based not only on financial returns but also on environmental, social and governance (ESG) factors. Although sustainable finance is relatively new – the first “green” bond was issued just 15 years ago – more than $1.6 trillion in sustainable debt instruments will be issued in 2021, according to BloombergNEF. This set a record and the total market value last year was over 4 trillion dollars. According to Centofani, this significant growth is the result of increased investor interest and the response of institutions through attractive new financial products and mechanisms.

“This is the period when we all think about our priorities and values, and the medium- and long-term prospects of our society,” says Centofanti. “We are all now facing directly, in our daily lives, what climate change means and what the potential loss of biodiversity 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 us and future generations.”

Such a high level of purchase reflects the interest of investors and institutions in financial products that meet ESG objectives. This, in turn, is forcing authorities in many regions of the world to examine how they can standardize markets with policies such as taxonomies, or classifications and criteria for investment products.

The EU, for example, is implementing a taxonomy – a kind of rulebook – on which parts of the economy or activities can be marketed as ‘green’ or ‘environmentally sustainable’ investments to make these options more visible to investors. The EU thus acknowledges concerns about the credibility of the green finance market.

Preventing greenwashing – false claims that products are sustainable when they are not – will be essential to support trust and ensure the long-term viability of the sustainable finance market, says Ludwig Liagre, head of sustainable finance for the Global Landscapes Forum (GLF), which is partnering with Luxembourg through the Luxembourg-GLF Finance for Nature Platform. Failure to do so could erode trust in the system and work against ESG goals, he said.

On a more positive note, recent developments in biodiversity financing are encouraging, building on the momentum of the Global Biodiversity Framework. The Biodiversity Financing Reference Guide developed by the World Bank’s International Finance Corporation is one such sign.

“It shows that in addition to climate impacts, investors are increasingly looking at biodiversity outcomes,” Liagre said.

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