The issue with green issuance

• The financial industry is talking the talk on climate change; it must make more effort to walk the walk

By Daniel Klier

The green movement can look back on the past couple of months with some satisfaction. In May, green parties in many countries gained significant ground in the European parliamentary elections. In June, Theresa May committed the UK to reaching net zero carbon emissions by 2050, the first major economy to do so.

This is welcome progress. Political action is a necessary step towards limiting global temperature increase to two degrees, as set out by the 2015 Paris Agreement. But it is not sufficient.

An estimated $ 100 trillion (£ 79 trillion) of new infrastructure spending is required by 2030 to transition to a low-carbon economy and stay in line with the Paris targets. Governments and public sector bodies cannot do this on their own.

Banks, investors and issuers must pull their weight on climate change. So far, we aren't doing enough.

Awareness towards green and sustainable issues in the financial sector has grown significantly in recent years. However, this has not been matched by a big enough growth in hard, green cash - green bonds issuance grew by a paltry 3% from 2017 to 2018, totalling $ 167.6 b by the end of the year. Total sustainable debt issuance reached $ 247 b in 2018. These figures look big but they just aren't enough to make a dent in the climate change problem.

What can be done to change this? First, we need to be confident in the business case for green finance. Returns on green products typically equal or even exceed those offered by equivalent non-green offerings.

We need to move green finance out of its niche position, just as is happening in politics. Too often we see green investment shunted out to smaller, offshoot operations of mainstream funds. The investment community can tick a box and shout about specific projects on social media, but this will never achieve the critical mass of investment we need.

Our future relies on sustainable projects no longer being seen as unique, or special or outlandish. We need to make them the norm, and shift carbon-intensive ventures to as small a share as possible.

Any boost in demand has to be matched by an uptick in supply. Here, investors face a problem - what truly counts as sustainable? What factors should they consider when evaluating a product that touts itself as green? How can they trust its bona fides? A lack of certainty has so far impaired the uptake of green and sustainable investment.

Here's where issuers must play their part with improved disclosure. It might not be a particularly exciting term, but disclosure could be the key that unlocks the true power of sustainable finance.

Proper disclosure gives investors more information when they come to allocate their cash.

HSBC and other financial institutions have been closely involved in the Task Force on Climate-related Financial Disclosures (TCFD), which has developed a voluntary disclosure benchmark for green and sustainable issuance. So far, more than 340 investors with nearly $ 34 trillion in assets under management have committed to engage with corporate issuers and use the TCFD recommendations. This number needs to be much higher.

As disclosure improves, investors will become more confident in the integrity of green finance projects, increasing the demand for more issuance. We support voluntary disclosure, but the private sector has very little time left to show that this can work. Otherwise it will become mandatory. If regulators go down that path, we need to be very careful about building an internationally consistent standard.

The final step brings us back to the individual in society. Just as people can exercise their power at the ballot box, we need to let them exercise the power of their wallets. We need to foster a much closer relationship between the consumers of everyday financial services – mortgages, insurance, pensions – and green finance.

In many countries, consumers can specifically choose electricity providers that generate 100% of their power from renewables. There should be the same freedom of choice with retail investment and other financial products. That comes down, again, to more disclosure. Consumers are increasingly green-savvy. We should ensure they have all the right information in front of them so they can make financial decisions that align with their personal values.

If our climate problem is to be solved, it will be through countless incremental changes across every area of our lives. The financial sector is uniquely placed to help make this happen. Our industry cuts across every layer of the economy and society. It covers governments and businesses and individual citizens. It can channel cash flows from across the world into the right places. We must meet the challenge in front of us, and open the taps on green finance.

(This article first appeared in the Daily Telegraph.)

(The writer is the Head of Sustainable Finance, HSBC.)