World Environment Day – turning a grey economy to a green economy

"We need a green economy not a grey economy" Antonio Guterres, the Secretary-General, United Nations.

As the UN marks another World Environment Day today, at Ashurst we've been thinking about how we make the transition from a 'grey' economy to a 'green economy'. In December 2015, 196 countries committed to the Paris Climate Agreement, pledging that they would work together to keep global warming to no more than 2 degrees Celsius above pre-industrial levels during the course of this century. The International Energy Agency estimates that US$53 trillion of investments are needed to bring us close to the Paris Climate Agreement commitments. So what can we do accelerate investment in sustainable investment? Here's my top five thoughts:

1. Talk the same language

There needs to be a common language when we talk about sustainable investment. There is wide variance in the level of detail in disclosure of 'green', and that's a problem for investors, companies and banks looking for sustainable finance opportunities. What is required is a universal taxonomy which allows our green apples to be compared against our green pears. A clear and transparent classification system will also protect against charges of 'greenwashing'. Many steps have already been taken (GBP, SBP, GLP, TFCD) and more work is underway in this space –the European Commission is committed to an EU classification system. The sooner we start talking the same language, the quicker we boost investment.

2. 50 shades of green

How green does green have to be? Surely we should be encouraging all shades of green. Any financing which incentivises or promotes environmentally responsible behaviour could potentially be considered "green". Possibilities include major renewables projects, an investment fund with a sustainability-orientated investment criteria, a green bond or a loan to a company looking to improve its positive environmental, social and governance (ESG) behaviour. The broader the definition, the bigger the growth in sustainable behaviour and investment.

3. Greening the boardroom

There are a growing number of organisations focused on producing systematic research, data and analytics around sustainable companies performance and the returns to investors in sustainable investing. One important role that this data is doing is providing hard evidence that there are correlations between environmental and financial performance. The more organisations see that being green is a critical aspect of future proofing their companies as well as the wider economic system which relies on this planet, the more compelling green finance becomes.

4. Green securitisation anyone?

Securitisation is one way to make the investment net wider. Securitisation enables companies and lenders to sell off existing financial assets to free up capacity for more business. An issuer creates financial instruments – asset backed securities (ABS) – backed by financial assets. The ABS bonds are sold to investors who receive a return drawn from the cash flows of the underlying assets. Where the underlying cash flow relates to green assets or the proceeds are to be invested in green assets, we have green securitisation – and a sure fire way to increase investment.

5. Governments putting their money where their mouths are

Poland, France, Nigeria, Belgium, Indonesia, Ireland and the Netherlands are just some of the countries that have shown their commitment to climate action via the issuances of sovereign bonds. The UK government has been commendable in its backing of green finance initiatives – its surely time for a green sovereign bond issue!

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