July 2019 saw the launch of the Green Finance Institute at the City of London’s Green Finance Summit. The Institute’s mission is to support green finance initiatives, finding ways to move the global economy towards a more sustainable future.
The organisation launches at a time of climate emergency, when the pressing environmental issues created by our current systems present both a massive challenge and an opportunity to those looking to mitigate them. Investors seeking safe, long-term homes for their funds want to find projects that reflect the switch to a low-carbon economy.
Companies are facing questions from shareholders and major investors, such as pension funds, as environmental concerns rise up the agenda. No one wants to be the corporate ‘bad guy’, funding products or practices that damage the planet. Nor do insurers want to keep paying out for environmental damage as a result of extreme weather events, such as the recent typhoon in Japan. As a result, green finance is on the increase with investors considering the climate emergency when they deposit their funds.
Energy Saving Trust is increasingly working with major financial providers who are keen to future-proof their investments. Major investors are divesting trillions of dollars worth of fossil fuel shares from their portfolios, as study after study concludes they’re bad for the balance sheet as well as the environment.
We’ve seen the start of products around green mortgages and savings. We’re also seeing investment in businesses that badge themselves as green as even the bankers see the value in saving the planet.
But how do investors know where to put their money if they want to keep it clean and green?
Environmental social and governance (ESG) criteria are part of the answer. ESG criteria are a set of standards that socially conscious investors use to screen potential investments. Environmental criteria self-evidently examine how a company’s activity affects the global and local environment.
Social criteria look at how a company behaves to its people, its suppliers, customers and the community it operates in, while governance itself is about how the company runs itself in terms of leadership, executive pay, internal controls and so on. Altogether ESG criteria sort the ‘good’ from the bad, showing potential investors what sort of company they’re putting their money into.
These ‘softer’ measures used to be seen as a trade-off with financial acuity. However, following ESG criteria can protect investors from risks associated with unethical practices that have an effect on the stock price – think about the Volkswagen emissions scandal for example.
One organisation, which openly supports investors to make ethical investment decisions, is the CDP, formerly known as the Carbon Disclosure Project. The CDP collects and publishes information about the greenhouse gas emissions of the world’s largest companies.
While the CDP can’t force companies to disclose their greenhouse gas emissions, a failure to disclose speaks volumes. Increasing numbers of organisations now report on their environmental performance, given that it’s of interest to ever larger numbers of shareholders.
The companies monitored by CDP have a combined worth of $35trillion – twice the GDP of the USA in 2015. Companies of this size have far greater potential impact on the level of global carbon emissions than any of us will do as individuals. The level of influence of individual organisations was demonstrated recently by reporting on the 20 companies across the world that are responsible for 35% of all carbon emissions since 1965.
Despite the ups and downs of politics and economics, there’s still plenty of money out there looking for a home. Happily, the growing realisation that the future needs to be low-carbon means we’re likely to see increased funding for projects that work towards a more sustainable future.