February 10, 2020

By: Emile Lavergne, Consultant, The Delphi Group, elavergne@delphi.ca

Once upon a time, climate and environmental considerations were rarely discussed in boardrooms and on trading floors around the world. How times have changed. Investors are increasingly engaging on these issues and have signed on to various initiatives demonstrating their support of sustainability and climate action. These include:

  • The Climate Action 100, an investor initiative launched at the One Planet Summit in 2017 that has over 370 supporters representing over $41 trillion in assets under management BlackRock Inc., one of the world’s largest asset managers, is a recent addition.
  • The United Nations Principles for Responsible Investing (UNPRI), which has 1,184 signatories representing over $70 trillion in assets under management.

Increasingly, financial institutions are integrating climate change-related scenarios into their business models by (1) working to define and implement relevant climate-disclosure frameworks, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), and (2) offering new financial products targeting green and sustainable projects, initiatives, and organizations.


Setting the Framework: The Task Force on Climate-Related Financial Disclosures

In 2015, the Financial Stability Board, led at the time by Chairman Mark Carney, the Governor of the Bank of England and former Governor of the Bank of Canada, established the TCFD. The TCFD issued its final report and recommendations in 2017, with the aim of increasing the quantity and quality of climate-related disclosure so that investors and lenders understand how exposed their portfolio is to climate risk.

As of early 2020, 930 organizations representing over $11 trillion of market capitalization have signed on in support of the TCFD. The recommendations were piloted by financial institutions seeking to understand how they apply to their lending, investment and insurance practices.  The pilots included banks and investors from around the world, including the United States and Canada, and identified tools, indicators and methodologies for climate-related disclosure.

An increasing number of investors will expect firms to disclose their climate data and strategies (including scenario analyses, when relevant) using these new TCFD frameworks. Ultimately, this will empower investors to engage with firms around their climate risk exposure or restructure their portfolios in a way that exposes them to acceptable level of climate risk. Cleantech companies may become increasingly interesting to investors looking to shield their portfolios from transition risk—the risk arising from policies supporting the transition to a low-carbon economy.


Sust-eh-nable Finance

In 2018, Canada’s Minister of Environment and Climate Change and Minister of Finance appointed the Expert Panel on Sustainable Finance to (1) take stock of the sustainable finance field in Canada, (2) identify opportunities, and (3) make recommendations on how to capture these opportunities. The panel’s final report—Mobilizing Finance for Sustainable Growth—was published the same year and made 15 recommendations on the way forward for sustainable finance in Canada.

The report supports the implementation of the TCFD recommendations in Canada. It also recommends the expansion of Canada’s green fixed income market (e.g., green bonds). The report finds that one of the key factors slowing the growth of the market is a lack of alignment around definitions of what both ‘green’ and ‘in transition’ mean in a fixed income context. The report supports the development of a global standard for transition-oriented financing, referring to the transition to a low-carbon economy.

To that end, the CSA Group is in the process of working with financial institutions and industry to define ‘green’ and ‘transition’ finance in a Canadian context. These definitions would help domestic and foreign market actors understand which projects, initiatives and organizations, are considered ‘green’ and ‘in transition’ in Canada. Although the lack of a standardized taxonomy is identified as a barrier, it hasn’t prevented the green and sustainable debt market from developing.


Bond, Green Bond

Bloomberg New Energy Finance (BNEF) reports that over $250 billion in green bonds were sold in 2019. Green bonds are debt issuances, primarily offered to institutional investors, that are allocated to ‘green’ products and services, as defined by a corresponding framework. First issued by the World Bank, green bonds are now widespread across the world. Issuers range from governments to financial institutions (such as the largest Canadian banks) to companies seeking to raise capital for green projects and initiatives. The growth in the green bond market follows a greater demand from capital markets for financial products that support the transition to a low-carbon economy.

Green bonds are one of the main ways in which capital has been moving towards low-carbon projects, initiatives and/or organizations. Other sustainability-related bonds are also being introduced. As with green bonds, multilateral development banks, like the World Bank and the Asian Development Bank, and sovereign nations like the Seychelles, are paving the way by issuing the first of these bonds, including:

  • Blue bonds (related to oceans),
  • Sustainable Development Goal (SDG)-related bonds (in support of the United Nations’ SDGs),
  • Social bonds(in support of socially impactful organizations and initiatives), and
  • Gender bonds (in support of gender equality).

Sustainability-linked bonds, and those tied to the SDGs, are the most popular sustainability-related bonds to emerge. Similar to green bonds, they align capital with a sustainability framework, which includes but is not limited to green initiatives, and often references the United Nations’ SDGs. Over $59 billion of social, sustainability and sustainability-linked bonds were sold in 2019, according to Bloomberg.


Green Loans are Growing

Loans are another main conduit of capital towards low-carbon projects. Green loans have been around for the last few years, and target projects and initiatives that lead to positive environmental or sustainability impacts. Sustainability-linked loans are newer, and target firms that (1) have sustainability metrics and targets, and (2) offer incentives in the form of lower borrowing costs, if borrowers can meet sustainability targets or reduce GHG emissions. Green loan sales have topped $45 billion per year since 2017, with over $55 billion sold in 2019. Sustainability-linked loans have grown quickly, from $5 billion in 2017 to $93 billion in 2019, according to Bloomberg.

Green and sustainability bonds have been issued and offered in Canada, although not by all financial institutions. The market for these products is still developing and growing. Looking at the urgent need for climate action, it is clear that, as Mike Gerbis, the CEO of The Delphi Group and GLOBE Series, puts it: “Now is the time for bold ideas, strong leadership, significant deployment of capital,  and the adoption of cleantech solutions on a much larger scale and at a faster pace than we have ever seen before.”


Looking Ahead

In Larry Fink’s annual letter to CEOs, the Founder and CEO of BlackRock lays out his firm’s view that climate risk is relevant and that climate disclosure in line with the TCFD recommendations is key. He also says that climate change will lead to a “significant reallocation of capital”. The letter, closely watched by markets and investors, states clearly that BlackRock will put sustainability at the heart of the firm’s investment strategy.

With the world’s largest asset manager focused on climate change, and a variety of green and sustainability-linked financial products available, climate disclosure will likely become an expectation of organizations seeking capital. At the same time, companies that are embracing the transition to a low carbon economy, and deploying cleantech will likely become increasingly attractive investments. If BlackRock, the Expert Panel on Sustainable Finance, the Financial Stability Board, and the world’s largest banks (among others), are correct, a large reallocation of capital is underway, driven by an improving understanding of the risks and opportunities that climate change presents.

All costs in this article are listed in USD