The market for green finance is growing globally
Climate change is no longer a future threat – it has already had a devastating impact on the financial sector. However, it also presents opportunities for investors.
Financial institutions are exposed to the physical risks associated with more frequent severe weather events, as well as the transition risks associated with the changes necessary to achieve a low-carbon economy.
Mortgage, commercial real estate, business and agricultural loans, as well as derivative instruments tied to these markets, are susceptible to losses related to severe weather events and other environmental changes. For example, the increase in the brutality and frequency of droughts, floods, fires and other natural disasters have damaged borrower assets and collateral and decreased their value, thus putting a strain on borrowers’ ability to repay lenders – leading to increased levels of default and losses on credit portfolios.
The 2019 bankruptcy of the Pacific Gas and Electric Company because of wildfires in California is a harsh demonstration of the credit risks that banks face due to climate change. This is why some banks have started taking active steps towards providing sustainable financing, treating climate risk not only as a reputational risk but also as a financial risk.
Climate change presents corresponding financial opportunities in the form of green bonds, impact investing, microfinance and credit for sustainable projects and development, and because some nations have considered reducing their dependence on fossil fuels and are instead leveraging new renewable energy sources.
At the end of 2018, the market for green and sustainable finance was already worth $30.7 trillion (about R458 trillion). In the first half of 2020, more than $275 billion of new sustainable financing had been raised on capital markets.
In the past year, despite the coronavirus pandemic, we’ve seen various forms of green and sustainable financing transactions and initiatives, including the following highlights:
◆ Nedbank’s listing of an innovative bond linked to the UN’S Sustainable Development Goals, on the Green Bonds segment of the JSE.
◆ HSBC’S launch of a “green deposit” product with a commitment to on-lend the accrued inflows to finance sustainable projects and initiatives.
◆ A $225 million loan by the World Bank’s International Finance Corporation (IFC) and Dutch development bank to Firstrand Bank to finance green projects and to support climate-friendly initiatives.
◆ Barclays PLC announcing a new climate policy with the aim of being a net zero bank by 2050 and committing to align its entire financing portfolio to the goals of the Paris Agreement on climate change.
◆ Standard Bank’s sale of Africa’s largest green bond, raising $200m from the IFC to finance climate-related projects.
◆ Energize Venture’s $70m injection into Aurora Solar, a software firm that has designed panels for more than four million solar projects.
◆ JP Morgan Chase’s announcement that it would facilitate $200bn by 2025 for sustainability finance.
◆ The launch of the Green Assets Wallet, a blockchain database for issuers and investors of green bonds.
◆ The launch by Investec of its Environmental World Index Autocall, providing exposure to the Euronext CDP Environment World EW Index, which selects the highest-ranked 20 North American and 20 European companies, on the basis of their environmental performance.
In Africa, as the number of solar and wind renewable energy projects multiplies, the continent is expected to attract significant green financing in the coming years. According to the IFC, South Africa’s climate-smart investment potential between now and 2030 is $588bn.
Steve Chemaly is a senior director, Roxanne van Rooyen an associate designate, and Maxine Rodrigues a candidate attorney at Norton Rose Fulbright South Africa.
This article first appeared in the law firm’s Financial Institutions Legal Snapshot newsletter. It is published with kind permission.