As societies begin to grapple with global environmental issues, the art of investing and lending for environmental goals has now taken root promoted by bold venture capitalists and investment managers. Green finance is no longer a fringe industry but is spreading its roots pushed by like minded governments and technological breakthroughs in alternative energy and environmentally friendly solutions.
Ignoring this trend comes at a risk to traditional investment and finance managers. Climate related investment opportunities and mitigating such risks are gaining prominence in the boardrooms of major companies. Gone are the days of multinationals prompting their green credentials by catchy slogans and cheesy adverts, as hard economic realities have forced a rethink.
Buoyed by an apparent shift towards clean energy, the growth of ‘green finance’ whose aim is providing environmental benefits in the broader context of environmentally sustainable development, has taken off. The growth in assets under management in this sector has been nothing less than dramatic.
According to the Global Sustainable Investment Alliance, there was nearly $ 23 trillion of professionally managed funds in 2016 in a broad range of sustainability sectors, up from $ 18 trillion in 2014.
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A key issue however, is what constitutes an acceptable definition of ‘sustainable development’ that can be effectively screened against so-called ESG or environmental, social and governance criteria. This allows for investment managers to accommodate one or more aspect of ESG against another.
For example, the popularity of ‘Green Bonds’ accommodates investments in projects bringing environmental benefits such as energy efficiency, rather than new or clean sources. This clear focus has made the issuance of green bonds very popular, with around $33 billion issued in 2015 by China alone, and today, according to some estimates there are around $230 billion of green bonds outstanding.
Who knows, but such ethical investments could also trigger some exciting new technological breakthroughs in the Gulf creating a sustainable economic and environmental baseDr. Mohamed Ramady
The role of private finance is crucial if the momentum for ethical investments is to become the norm rather than an exotic option. Surveys amongst global banks has indicated that some two thirds of global institutional investors such as insurance companies and other risk underwriters, were planning to increase their low carbon investments and this was also driven by a generational impulse.
Younger investors are more likely than traditional older investors to invest in companies with sustainable goals but even so many investors are also still cautious. The reason is that investment in ethical and environmental investments comes at a higher price than traditional investments, and, for those still seeking high returns, the lower returns from investing in sustainable projects might deter some.
Those who hold passionate views about environmental issues will see this erosion in returns as a small price to pay for the longer term health of the global economy and seem more determined to force investment managers to consider global warming and extreme weather events as a common norm rather than exceptions.
For these global eco warriors, the lining in the cloud is the fast evolution of new environmental efficient technology which would, in the long term, reduce the cost of investments made by companies and create higher returns.
Governments are taking note too. At the behest of the G20 Group of major economies, an international watchdog is seeking to improve patchy disclosures and lack of information on the financial implications of global environmental changes.
The task force headed by the former New York Mayor Michael Bloomberg have made some initial recommendations in 2017 for annual climate related financial disclosures which covered risk management, disclosures, governance and the use of metrics and targets for different climatic scenarios to assess the resilience of financial stress and planning.
Several key global sectors were covered in the task force, including energy, transportation, materials and building, agriculture, and food and forestry. Insurers around the world are especially vulnerable to the seeming increasing catalogue of global environmental disasters.
The devastation wreaked by multiple hurricanes in the Caribbean Islands and the USA in 2017 has highlighted the risk of rising liabilities from such natural violence and pushing up the value of exposure in high risk areas.
Some countries have gone further and adopted even tougher legislation than the G20 task force with France mandating institutional investors to disclose how their portfolios align with climate targets and in the UK the government has set up a task force to boost green finance and the shift towards a low carbon economy.
Gulf countries are also moving fast in this area as they not only try to diversify their economies from fossil fuel revenue dependency, but also to cut back on wasteful energy consumption by promoting green building regulations and energy efficiency.
Some financiers are now requiring borrowers to explicitly identify their ESG goals to get borrowers to change their ways, but unfortunately such progressive partnerships are still the exception rather than the norm.
While green finance is only just starting to sprout in the Gulf, it will not be long before we see the launch of government green bonds to finance some of the new mega projects and lead the way for private sector investment funds to follow suit.
Who knows, but such ethical investments could also trigger some exciting new technological breakthroughs in the Gulf creating a sustainable economic and environmental base.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co author of ‘OPEC in a Post Shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.