Green finance: responsibilities and opportunities

There is strong growth in the interest and attention being given to green finance.

The third Green Finance Summit was held this July in London where the Government announced its Green Finance Strategy and the Green Finance Institute was launched.

The reason for this increased interest is that there has been a greater appreciation of the urgency to respond to climate change and the need to ensure that the potential negative impacts of climate change are limited. Climate change will lead to more extreme weather, in both severity and frequency, water and food shortages, reduction in biodiversity and the melting of sea ice. It has become clear that climate change will lead to impacts on the ability of companies to create value, and therefore, will impact their long term plans and valuation.

Green finance refers to ways in which capital is distributed to sustainable development projects, and is seen as a key mechanism for achieving a future where climate change is a reduced threat. In order to achieve the UK Government’s target of net zero emissions by 2050, and the target of the UN’s Sustainable Development Goals, huge reinvestment of capital is required. Green finance is a way for that necessary redeployment of capital to happen.

Companies have a responsibility to consider their impact on the environment and the financial risks that come with climate change. These considerations will need to influence the decision-making in the business, and also be discussed within their corporate reporting. The Government’s green finance strategy sets out a clear expectation that companies will report against the Task Force on Climate-related Financial Disclosures (TFCD) recommendations, which require companies to report on how the business is responding to climate change. These reporting disclosures are not mandatory but could become so in the future.

This increased focus on companies reporting on their approach to dealing with environmental issues offers up an opportunity for companies to gain a competitive advantage. Investors make it clear that the lack of investment in sustainable development is not due to a lack of capital or a lack of interest on their part, but a lack of green finance investment opportunities at scale. Green finance opportunities tend to be in smaller companies that can’t offer the investment return that investors require. 

At one of the panels in the Green Finance Summit, Anglian Water presented their approach to green finance. The company has raised money for capital expenditure through green bonds. Green bonds are financial instruments that are linked to investments in sustainable development projects. Anglian Water ensure that all of their investments will lead to a reduction in carbon emissions. Green bonds have a highly liquid market, with far more buyers than sellers, and there is a perception by investors that green bonds tend to hold their price better, compared to other types of bonds.

This shows that a company of a large size that could demonstrate sustainability credentials would easily attract the capital it required. This could be done through the use of green finance instruments and clear and transparent reporting that allow investors to assess the company’s response to climate change and other sustainable development issues. 

At the Green Finance Summit, it was clear that the TCFD recommendations will be a focus when it comes to assessments by investors around climate change and the UN’s Sustainable Development Goals will be a key framework for assessing the sustainable development impacts of companies across a larger range of issues.

The increased interest and attention in climate change and sustainable development issues means that is a clear responsibility for companies to address these issues in the way that they run their business and in their corporate reporting, but also an opportunity for companies to attract finance from investors by standing out amongst their peers.

If you would like more information on how we can help you to report on sustainability, get in touch or request our sustainability guide here.