The world of finance is changing as investors become ever more aware of the need to create a clean energy economy. Speakers at a recent conference in Dublin, Ireland highlighted how regulations need to be fit for purpose and the advantages of wind and solar as superior investment assets better understood to allow investors to pull the energy transition forward at the required speed

A palpable sense of urgency and excitement reigned at a recent finance-focused climate innovation conference in Dublin, Ireland, where high-level representatives from government, business, banks, investors, regulators, NGOs and academia gathered to discuss innovative ways to shift the flow of trillions of dollars of investment to the low carbon economy. While acknowledging the need for more and quicker action, speakers at the event organised by Climate-KIC, a European knowledge and innovation community, agreed change is afoot in the world of sustainable finance. “Eighteen months ago the notion that central banks would set up a network for greening the financial system, which sounds like something Greenpeace would do, was unthinkable, yet they have,” said Nick Robins of FC4S, the United Nations’ international platform of financial centres for sustainability. The network, which was set up in Paris, France in December 2017, now includes the central banks of Spain, Mexico, Morocco, England, Finland, Malaysia, Luxembourg, France, Netherlands, Germany, Belgium, Austria, China and Australia. “These central banks have got it that climate change is a big system risk and that we have to move to a low carbon economy and they are trying to work out what their role is.” The network is aimed at accelerating the expansion of green and sustainable finance by “exchanging experiences and taking common action on shared priorities”. Equally noteworthy is the new sustainable growth action plan produced by the European Commission, the EU executive body, said Sandrine Dixson-Decleve, newly appointed co-president of the Club of Rome, an international sustainability think tank. “For the first time we got total buy-in from all 28 finance ministers. For those of us who have been working in the environmental and climate field, myself for 30 years, that is remarkable. We are starting to build a system that underpins the capital flows we need to see and to put in place criteria so investors understand what is green.” The EU has calculated that around €180 billion a year in additional new investment will be required in Europe alone to get the trajectory for carbon emissions down to the level that would stabilise global warming at 1.5°C above pre-industrial levels, said Richard Bruton, Irish climate action minister. “Governments cannot fund that,” he stated. They can help to create a better regulatory environment and better pricing signals for investors, but ultimately “creative funding” solutions will be needed to shift investment from fossil fuels towards cleaner technologies.

Best in class

Aligning financial regulations to support this flow of capital is vital, said Teresa O’Flynn of BlackRock Real Assets sustainable investing division. She cited the EU insurance industry regulation, Solvency II, as an example of a rule hindering the energy transition by discouraging investment in funds which have more than 10% application in emerging market infrastructure funds, which are prime for renewable energy development. She also underlined the importance of understanding the needs of institutional investors to raise funding. “Institutional capital is the lowest cost capital,” she said. “It is not necessarily the right capital for early stage development risk or technology risk, but it is absolutely the right type of capital […] for project level investing.” Wind and solar projects today account for about 30% of global infrastructure investing cashflows, said O’Flynn. They are driven “by the sun shining or the wind blowing, not what is happening in the stock markets”. As such the asset class has an “edge” over others and this should be clearly understood if the trillions required to finance the decarbonisation of the economy are to be found, she insisted. O’Flynn urged innovators to think, in particular, about the built environment which accounts for 20% to 30% of global emissions and generally has an extremely long lifetime. “In a European context, 60% of the buildings we have today will be here in 2050.” While asset managers can choose to invest in energy efficient new buildings, the real challenge is finding the capital to retrofit the existing building stock, she said. Another area which deserves special attention is leasing, said Pierre Rousseau of BNP Paribas. He urged investment solutions, not only for professional investors, but also for the general public, especially with the move to electric cars, many of which will be leased. Rousseau suggested that derivatives and securitisation could play a role. They are largely seen “as products from the bad boys”, but could be espoused for “the right purpose” and aid the energy transition, he said, calling for a change in European regulation to allow long-term investors to use them as is happening in China. “I am extremely amazed by what I see in China. I see a [financial] regulator which is extremely pragmatic.” Robins also highlighted the changes taking place in China, noting that the country had been “quicker than the West in giving preferential ratings for green”. He credited the focus on aligning China’s financial system with its government’s over-arching policy aim of creating “an eco-civilisation”. For the first time, a major shift in the global financial system is being shaped largely by Europe and China, without the active involvement of the US government, added Robins.

Forward thinking

A number of speakers, including Rousseau, underlined the need to stop taking investment decisions based on companies’ historical performance data. “For some forward thinking investors the value is where the company will go in the future,” said Andrew Parry, head of sustainable investment at Hermes investment management. Investors need to ask companies questions around strategy, purpose and the future rather than the last quarters, he said. More interaction, or collaborative innovation, between the financial sector and consumers is needed, said Robins from FC4S. Sixty to seventy per cent of Europeans say they would like their investments to be more environmentally and socially sustainable, but in a recent survey in France only 3% had been offered such products, he stated. This shows a “major market failure” in Europe. There is demand for sustainability, but the financial sector is not stepping up and providing, he added. Emil Stigsgaard Fuglsang of Penstable, a Danish fintech startup specialising in sustainable investments in pensions, also stressed the potential impact of getting ordinary people more involved. “Forty to fifty per cent of all the stocks in the world are owned by pension funds,” he said. “We help individual pension savers connect back to their money to create sustainable pension funds so they can track the impact their money is having.” People have shown up at pension fund AGMs and been told that divesting their funds from fossil fuel and including green investments instead is not possible, said Stigsgaard Fuglsang. He suggested this can change with more “bottom up” engagement and support by “technological innovations and regulatory possibilities” that will encourage companies to offer alternatives and “allow each of us to vote with our feet”. For him, this is a key way to “unlock the trillions” needed to push forward the move to a clean energy economy.

Data driven

For Thomas O’Neill of the non-profit InfluenceMap, which aims to empower investors with data-driven and clearly communicated analysis on climate change, investor engagement with companies is key. “[It] is probably as important, if not more important, in shifting the global economic system, than simply reallocating capital,” he said. O’Neill cited the cement industry where low carbon methods of manufacture are possible and proven, calling on investors who own cement companies to say: “It’s in our long term strategic interests that you move to low carbon and have a place in the future transition.” Engaged conscious investors likewise have a role to play in stopping companies lobbying against low carbon policies and holding back the whole system, he said. O’Neill’s organisation is putting together asset level data with mainstream financial ownership data and making it public as a way of pressurising asset managers. “We can show you any listed fund or asset manager and how much carbon they effectively own,” he said. If an asset manager is concerned about climate change they can be called out if found to be betting on an Indian coal company. “Asset managers have a responsibility to ensure the company diversifies or they divest from the company,” he insisted. Vincent Farrelly, of Aquaroot technologies, a start-up based in Ireland focused on environmentally sound hydroponic crop systems, added: “The aspirations and ambitions of investors need to be raised to take on board more innovative technologies.” He urged them to be patient to support the growth of these businesses. “From a European perspective you can cobble together the public funding but it’s very much a start-stop, slow process. We need a rocket under this to speed up things a lot, lot faster because we don’t have the time. Time is precious.” We need a “revolution” in how we live involving “every citizen, every community, every enterprise, every public service,” said Irish minister Bruton. Admitting his country was well-off course in its efforts to reduce emissions, he committed to a new, all-government approach akin to that employed to rebuild the country’s economy after the devastating economic crash of 2008 when all government departments worked together on an integrated campaign.

Writer: Iva Pocock