- Geopolitical changes are predicted to have a significant impact on green finance growth in 2024, with some markets likely to retreat while others are predicted to grow
- Transparency, scrutiny and accessibility remain paramount to increasing the amount of investment in green and other sustainable projects
- New and improved regulatory framework will help prevent greenwashing and make markets more attractive to investors
2023 wasn’t exactly a great year for some segments of the sustainable finance market. Global sustainable finance issuance reached $1.3 trillion last year, down from $1.55 trillion in 2022 and on track to peak at $1.8 trillion in 2021, according to Bloomberg New Energy Finance. It has decreased since then.
According to ING's Sustainable Finance Pulse, green bond issuance increased by 11% in 2023 compared to the previous year, while sustainability-related bond issuance decreased by 24% and sustainability-related loan issuance decreased by 55%.
“It is clear that the market has experienced two years of total volume decline, and at the beginning of the year many were still quite positive that 2023 would bring growth, but in reality there is no such thing. “That doesn't happen and we've seen it happen.' And that's reflected in our sustainability products,” says Jacomidine Vers, global head of sustainable finance at ING.
ING believes that last year's weaker demand for sustainable finance debt was due to investors reassessing the market, concerns about greenwashing and the need for regulatory clarity. While demand for sustainable financial products remains strong, investors and lenders will continue to seek “higher quality” structures, ING said.
ING researchers predict global ESG bond issuance will be 820 billion euros this year, compared to an estimate of 815 billion euros at the end of last year, with 40% of total issuance expected to be euro-denominated. .
However, Wels says it is not easy to predict what direction the sustainable finance market will take in 2024. “The US election is likely to be more negative than positive for sustainable finance. The closer we get to the election, the more clients are considering how anti-ESG sentiment will impact bond issuance. There will be more companies. That's the area I'm least confident in.”
In the United States, Donald Trump has added his voice to condemning ESG investing to the Republican Party, and it is expected to become a major issue in the presidential election later this year. The FT reported last year that at least 49 “anti-ESG” bills were introduced across the United States, accusing investors such as BlackRock of failing to fulfill their fiduciary duties by applying ESG to investment decisions.
Nick Robbins, a professor of sustainable finance at the London School of Economics, believes the ESG backlash is partly due to companies shying away from investing in sustainable projects for fear of reducing profits. It is said that it has been successful and is having an impact. Some regions have more than others. “In the field of finance, green finance is no longer a kind of purely technical issue, but a highly politicized topic in the market, especially within jurisdictions like the US,” he says.
At the heart of the ESG backlash is whether investment managers and other institutional investors are allowed or even required to consider ESG issues when fulfilling their obligations to end customers and beneficiaries. This is the argument. Many critics believe that ESG investing violates management's primary obligation to provide returns for investors.
Robbins said the US presidential election has created some uncertainty about the direction the US will take in terms of regulation and whether local institutions still have the “courage” to continue making sustainability-related investments. He said that this is occurring.
Bright signs for emerging economies
However, other regions of the world are seeing positive growth momentum. In the Asia-Pacific region, ING is expected to continue to see healthy growth. The bank last year hired sustainable finance experts in Australia and South Korea as it looks to expand in the region. “We see traction starting to emerge in Asia-Pacific,” Wels said, adding that Asia is a difficult region given the challenges it faces from a green transition perspective.
Many economies in Asia remain heavily dependent on fossil fuels and are not expected to move to net zero as quickly as other regions, such as Europe, where regulations and investments are more aligned with the “greening” of their economies. .
Robbins expects investment in so-called emerging markets to increase this year. “2023 was the year that sustainable finance and green finance really landed in India and we believe this trend will continue this year as well. We also expect further growth in Brazil in 2024.”
Transparency and accessibility
To achieve the goal set by the Paris Agreement, which aims to limit global warming to 1.5 degrees Celsius above pre-industrial levels, companies from various sectors are taking steps to decarbonize their operations. needs to be expanded. Green finance plays an important role in the transition, but certain structures such as green loans are not necessarily more popular among investors compared to sustainability-related loans.
Arash Mojabi, head of UK sustainable finance at ING, says the reason green loans haven't taken off so far is because many borrowers don't want to be restricted in how they can use the proceeds. “They had not yet identified the type of financing that would make it worthwhile to do a separate green loan.”
Increasing the transparency of the requirements associated with green bonds, green loans and sustainability-related loans is essential to increasing investor demand in the market.
Ingrid Holmes, executive director of the Green Finance Association, said the advent of green taxonomies and transition plans would introduce a level of oversight of green claims from customers and financial institutions, improving quality as well as improving quality. , you'll be able to better understand what you actually need to fund.
“Banks have successfully integrated climate change into their risk management systems, but as financial systems become more environmentally friendly depending on economic conditions, the focus will now be on how to better generate green transactions. We need to move it,” she says.
Corporate investors wonder why they can't just opt for a “regular” loan, rather than putting in the effort required for sustainability-related loans, which must be clearly linked to verifiable and robust key performance indicators. You may think so.
However, Mojabi said that in terms of sustainability, it is important to hold clients accountable as they have set targets for 2030. “On the one hand, we have made a long-term commitment to be net zero by 2050, so we need to transition our portfolio. We quickly understand who is on that journey with us. Because the most disruptive thing is having to sell part of your portfolio to achieve those goals.”
How does regulation impact green finance?
Despite significant advances in green finance, the risk of greenwashing remains a concern for customers, financial institutions and regulators alike. Last year, the European Parliament approved voluntary standards for companies wishing to use the European Green Bond Label. As reported by Sustainable Views, the standard requires issuers to disclose “substantial information” about the use of proceeds, at least 85% of which is allocated to activities covered by the EU's sustainable finance taxonomy. It is mandatory to do so.
The Sustainability Linked Loan Principles, released last year, have also helped the market by providing direction on what to do to ensure ambitious and appropriate KPIs are set, says ING's Bells. . “It also provides the guidance you need to have them.” [KPIs] Externally checked and verified for all borrowers. It actually helps build sustainable financing. ”
The introduction of regulations such as the EU's Corporate Sustainability Reporting Directive will allow banks to engage more transparently with customers on KPIs, she added. “We hope that this transparency will give us more information about what capital investments will be made.” [capital expenditure] Required for client to fund migration. Ultimately, regulation will help the market grow and hopefully help clients know where to invest as well. ”
But Wels argues that regulation should not only be about disclosure, but also provide tools to stimulate investment in the transition. “What I'm concerned about is that there will be stricter disclosure regulations, and we won't get the incentives that come with that,” she says.
