Sustainable Finance

Four ways to bridge the sustainable growth gap

Cornelia Andersson

Head of Investment Banking and Capital Markets, Refinitiv

Sustainable finance has grown exponentially in recent years but even that’s not enough to fund the energy transition. As well as stepping up existing sources of funding, new sources and fresh ideas must be tapped by an expanding range of countries and companies if the Paris agreement’s goal of limiting global warming to 1.5°C by 2050 is to be met and the global economy is to pivot to zero-carbon growth.

  1. While equity and debt funding for the green economy has grown substantially in recent years, further acceleration is needed for global warming to be limited to 1.5°
  2. New borrowers and sources of funds are appearing in bond and loan markets, while the equity market markets’ green economy exposure must accelerate quickly until 2030.
  3. Yet it’s not enough for financial markets to only deliver funding execution – they must also deliver innovation.

Green economy companies now account for 7 percent of global equity markets – more than the oil and gas sector – with a market capitalisation of US$7trn. And the size of the green bond market has expanded by 100 times in less than 10 years to US£3trn in 2022.

However, recent high-profile studies have compared that with the US$109-275trn of cumulative investment needed to develop renewable energy, low-carbon transport, energy-efficient buildings, the electrification of industrial processes, recycling and more.

At a London Stock Exchange Group webinar held on 17 November 2022, experts identified new ways to bridge the sustainable finance gap. Entitled Where is the finance coming from for sustainable growth?, the webinar was held in the final week of the UN’s COP27 climate conference in Egypt.

Bridging the sustainable growth gap

Here are the four main ways to bridge the sustainable growth gap that were discussed:

  1. While green bonds are already one of sustainable finance’s great successes, developing markets are beginning to join in. In 2022, sovereigns like Chile and Uruguay issued sustainability bonds linked to their nationally determined contributions, or targets for cutting emissions. In the Middle East, Saudi Arabia’s Public Investment Fund became the first sovereign wealth fund to issue a green bond.
  2. Also in bond markets, green sukuk issuance is expanding as Islamic investments from oil-rich countries turn to green investing. The sukuk market is expected to reach a size of US$30bn to US$50bn in the next few years, according to Mustafa Adil, LSEG’s Head of Islamic Finance, Data and Analytics. Indeed, in a recent LSEG survey, 54 percent of Islamic investors said that they had incorporated ESG considerations into their portfolios.“GCC markets like Saudi Arabia, the United Arab Emirates, Kuwait and Oman, as well as Malaysia and Indonesia, are utilising sukuks to help address their climate agenda,” says Mustafa. “And, some frontier markets are issuing sukuks to tap into excess liquidity in the GCC oil-producing markets that happen to have Sharia-sensitive investors.”
  3. Yet as the era of low-interest rates and cheap financing comes to an end, sustainable loans are increasing their share of debt funding. “I think we will see a continued shift to the loan market, although the bond market will continue to be important,” explains Matthew Toole, London Stock Exchange’s Head of Debt Markets and Product Origination. “The lending environment and the banks’ ability to continue to mobilise on the commitments that they’ve made for lending and underwriting will certainly have a big impact as we move into 2023.”
  4. In listed equities, meanwhile, green economy exposure in equity benchmarks will have to grow more than threefold from 2020 to 2030, according to a FTSE Russell study, Green equity exposure in a 1.5°C scenario, which translates recent estimates for the overall level of investment required to meet the Paris goals into equity market exposures. From 2030-2050, green economy exposure would grow more gradually.

Investment needed in new areas

Money alone is not enough, though, according to Nigel Topping, the UK’s High-Level Climate Action Champion, who spoke earlier in 2022 on the Net Zero Conversations series.

“Private finance needs to be an innovation partner, not just an execution partner, because some of the investment needed is in relatively new areas, such as adaptation, which has a different kind of cash flow profile; and emerging markets, which haven’t been major investment destinations before.”

Looking forward, climate change can only be limited if investors and lenders step up their financing of the green economy, especially over the next few crucial years to 2030. Momentum is growing. Whether it will do so fast enough will depend partly on finding creative ways to fund a burgeoning sustainable economy.

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