Five minutes on… the green finance revolution

Funding for a London-based specialist institute is just one of many signs that green finance is coming of age, writes Matt Packer

On 10 September, the City of London Corporation signalled a commitment to invest £2m in the forthcoming Green Finance Institute, which is set to launch next year.

Announced in June, the Institute will – in the Corporation’s words – “champion green and sustainable finance in the UK and overseas, enhancing London’s position as a world leader in this field by bringing together the private and public sectors to develop new opportunities”.

Isn’t this a measure that runs the risk of becoming a mere talking shop?

Not with the potential scale of finance at stake: according to the Global Commission on the Economy and Climate Change, around $93 trillion of global infrastructure investment up to 2030 will have to be green, in order to meet nations’ climate change commitments.

Between 2016 and last year, the green bonds market grew by a startling 78%, reaching $155bn in issuances.

By any assessment, the Institute will put London in a strong position to become the world’s pre-eminent thought-leading location for devising and coordinating strategies to make the best use of a rapidly growing asset class.

The Corporation’s funding package, it says, will play “an important role” in helping the Institute get up and running.

With this finance in the pipeline, and enthusiastic backing from UK chancellor Philip Hammond already in place, the Institute is in a position to significantly galvanise green bonds – and other forms of sustainable finance – at home and abroad.

This could be rich terrain for corporate treasurers to explore.

They’ve already done far more than that.

As our recent snapshot of this year’s ACT Annual Conference explains, green finance was one of the most prominent themes on the agenda.

One of the treasury professionals who appeared at the event was Ines Faden da Silva, deputy treasurer at water and waste management firm Tideway, which has become the UK’s largest issuer of green bonds – raising some £775m.

Another was Adam Richford, group treasurer at recycling firm Renewi, who told us in a separate piece on his work that his firm has shifted entirely to a green finance model.

With the ACT introducing a new Green Finance category into its Deals of the Year Awards last year, there’s every sign that more and more treasurers will be taking these sorts of bold and innovative steps as the relevant financial products become a more visible economic force.

There’s an issue, though – I can see how green finance would easily slot into firms such as Tideway and Renewi, as these firms operate in sectors with inbuilt environmental sensitivities. But what about a massive, traditional industry with a notoriously sooty infrastructure… the oil sector, for example?

Others have pondered that very question. In April, former BP veteran Nick Butler wrote in the Financial Times that oil firms – having survived untold disruption from wars and other crises – could readily adapt to the changing industrial landscape, if they are prepared to diversify.

Butler posited the idea of existing oil companies taking on the role of ‘parents’ to new ‘daughter’ firms, designed to pursue interests in various forms of sustainable energy, such as wind and solar. Those firms could then attract green finance.

“Daughters require investment, and the chance to develop skills of their own, and patience,” Butler wrote. “Initially, they need support, but with time they build a life of their own.”

Butler explained: “The creation of daughter companies in the sector does not mean that the existing parent businesses lose all control. Nurture will involve appointing management, establishing the initial strategy and cross funding until the new business is self-sufficient. There will be some shared services where it makes sense. But some degree of separation is necessary and useful.”

He noted: “Above all, the two entities will need separate capital allocation methods that are able to test and judge project proposals in each specific area. Daughter companies can begin life as wholly owned subsidiaries, but over time there is a case for bringing in external capital to create businesses of the scale necessary to take on a global market.”

What about sectors such as agriculture, with its record of felled trees, chemical fertilisers and insecticide?

Just like the oil sector, that industry is changing, too. Leading standards body the Climate Bonds Initiative recently launched a consultation on opening up protected agriculture projects – ie, enclosed crops based in greenhouses – to the green bonds market.

Its underlying rationale is that, compared to open-field crop production, “more precise and efficient use of nitrogen-based fertilisers in greenhouses ensures that a much higher percentage of the fertiliser reaches the plant, decreasing waste, lifting productivity and significantly lowering emissions of nitrous oxide”.

The consultation notes that Mexico in particular has experienced “dramatic growth and geographic expansion in the use of protected agriculture, with greenhouse-based production rising from 790 hectares in 2000 to over 23,000 hectares in 2015”.

With that sort of scale emerging in just one country’s protected agriculture space, the consultation asks, why shouldn’t these types of projects be eligible to access green bonds?

It points out: “Green bonds represent a viable financing strategy for horticultural greenhouse projects (for example, installation, operation, maintenance, decommissioning). Investment opportunities need to be calibrated to specific geographic and sub-sectoral contexts, with consideration of success factors such as socioeconomic conditions, tenure arrangements [and] market access.”

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