The COP21 climate meeting last December was successful in many ways. Countries are currently in the process of ratifying the Paris Climate Agreement and planning the actions needed to guide their economies towards a declining emissions trend. The country level targets are to be renewed every five years. Two conclusions can be drawn. Firstly, the public sector cannot drive the transformation to a low carbon economy alone fast enough and action by private companies and individuals is called for. Secondly, in order to demonstrate a declining trend, companies like countries need to establish and publish the baseline of current carbon emissions.
The active support that the business community demonstrated in the Paris negotiations was new in its openness, and many believe, also contributed to the outcome. Financing industry signatories committed to the Montreal Pledge, We Mean Business and similar initiatives. This reflects the increasing number of investors which integrate non-financial information into their asset selection criteria. For instance, signatories to the Principles of Responsible investments (PRI) – a partnership with the UN and the financial community – already manage USD 59 trillion of global assets. They regard environmental, social and governance (ESG) considerations as a relevant contribution when evaluating the risks and future potential of a company, and not least the quality of the management. ESG facts complement the financial information that is already easily available and well understood.
So more non-financial information is needed. The increased transparency requirement is partly being met. CDP run the world’s largest public databank for carbon emission data based on voluntary reporting. Companies that represent 85% of market capitalisation in the Nordic exchanges already report carbon emissions to CDP. Professional ESG rating providers support investors with insight to the ESG qualities of a number of companies, primarily based on the public information. Banks are building their own capacity to evaluate ESG risks and opportunities.
Besides information, product innovation and new thinking from the financial sector is also required. On the debt side the green bond markets are becoming global with issuers like Apple and Agricultural Bank of China entering the stage after supranational banks and European renewable energy companies have lead the way. Green bonds finance assets that have positive impact on the environment and thus provide the investors an unforeseen opportunity to select assets on the basis of the use of proceeds. The bonds are repaid from the company cash flow like other senior debt. The credit risk, and therefore return, is the same as for other senior bonds of the issuer. Climate Bond Initiative (CBI) and Green Bond Principles (GBP) support market integrity with frameworks and recommendations. The frameworks present the first attempts for standardisation, albeit there is still a long way to go before we reach the IFRS type of joint standards used in financial reporting.
Non-financial information is relevant, and banks and investors do take it into account. So yes – money is less blind after Paris.
Aila Aho, Director of Sustainable Financing, Wholesale Banking at Nordea