14 October 2019

Project Syndicate: Financing the Green Transition

Changing the energy-financing models of banks, or developing sustainability-linked loans and green bonds, will simply not be enough to facilitate the transition to a more sustainable economy. A new approach that is effective and scalable must take investors’ expectations fully into account.

The financial sector will need to play a leading role in scaling up green initiatives, de-risking projects for investors, and optimizing funding costs. And, given the integrated nature of sustainable growth, financial institutions must work more closely with national and local governments, regulators, businesses, NGOs, and citizens.

To that end, the banking sector, including central banks, recently established the Principles for Responsible Banking and the Network for Greening the Financial System. These platforms, along with the Principles for Responsible Investment that were adopted in 2006, can be the basis for financial initiatives that make all economic actors more sustainable.

Many financial institutions have already committed to the energy transition by shifting capital allocation away from fossil fuels and investing more in low-carbon and more resource-efficient businesses and infrastructure projects. The volume of sustainability-linked loans, which offer better financing terms to companies that reduce their carbon footprint, increased from zero to €40 billion ($43.8 billion) in Europe between 2016 and 2018. And worldwide issuance of green bonds – which also originated in Europe – is likely to reach $200 billion this year, with China alone accounting for 20% of this amount.

In order to meet the SDGs and the aims of the Paris accord, we need to encourage everyone to become greener – whether they are large polluting businesses, smallholder farmers, or consumers. That means providing concrete financial support for green transitions, rather than shunning and alienating less environmentally friendly actors.

But changing banks’ energy-financing models, or developing sustainability-linked loans and green bonds, will simply not be enough to facilitate such “transition journeys.” It is therefore time for a new approach that is effective and scalable, and takes investors’ expectations fully into account.

The two transition bonds issued so far in 2019 have raised the question of how to define and apply universally accepted standards of “transition.” Currently, there are no “transition principles” through which issuers can factor the Green and Social Bond Principles into their financing needs. As a result, bond proceeds are not necessarily being used in ways that respect these principles.

Full article on Project Syndicate

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