1. Stakes related to climate related and green finance
Implementation of the Paris Agreement and the Sustainable Development Goals (SDGs) will require an urgent transition towards a low carbon economy, which implies an incremental role for green finance, and therefore for everyone who works in the financial sector. Trillions in long-term investments in green and climate resilient infrastructure are required, including in renewable energy, transport, energy infrastructures, energy efficient buildings, and industrial processes.
2. Increasing political momentum at the global and EU levels
A participant in the panel further stated that 2017 is a special year, not just due to the recent changes in the political landscape. Although, before COP 21, there has been momentum behind the climate and sustainability agenda, there have never been as many private and public sector led finance initiatives as there are in 2017 post COP 21/22 and adoption of the Sustainable Development Goals. These include the Portfolio Decarbonisation Coalition, the UN Principles for Sustainable Investment, the Catalytic Finance Initiative, the NDC Initiative, the launch of COP 22, and many more. The G20 has its Sustainability Working Group, and the G20 Green Finance Study Group and Energy Efficiency Working Group are making good progress. The FSB-hosted task force on climate related financial disclosure and the new European Commission High Level Expert Group on Sustainable Finance are also worth mentioning in this context.
A person stated that public institutions play a key role in climate change transition policies, and its climate strategy has a number of themes: reinforcing the impact of climate financing, including the support that European institutions can provide for nationally determined contributions to green targets; building resilience to climate change, and increasing support for adaptation; and further integrating climate change considerations across the institution’s standards, methods and processes.
2.1. Scope and size of green financing needs
In the CMU communication in 2016, the European Commission highlighted that finance is key for the transition into a low carbon, climate resilient, resource efficient and circular economy.
A representative of a public authority stated that the transition to decarbonisation is irreversible: in the context of the Paris Agreement and the Sustainable Development Goals adopted in September 2015 in New York, the direction of travel is towards a low-carbon, resilient, resource-efficient circular economy. There is universal agreement in this area, and these international commitments have been the biggest exercise in levelling the playing field that has ever taken place. It is also very encouraging that the private sector and the member states fully support this goal.
A solid regulatory framework is also being established, and the EU is in a very good position. There is an advantage in being the first mover: Europe has developed climate policies and advanced regulatory environmental frameworks e.g. in the areas of water, waste, clean air, the chemical sector, and biodiversity. Europe’s leadership in this area is appreciated, and has allowed it to engage with other regions of the world, including particularly close cooperation with China.
Sustainable/green finance goes beyond climate change: it also encompasses sustainable development, natural capital and the circular economy. The financial needs for sustainable development and climate change are estimated at $90 trillion over the next 15 years, or $6 trillion per year, which represents a doubling of the current flows. Public budgets will need to be enabled to provide these funds, which will be a significant challenge.
All sectors are involved in this process, the most obvious are transport, energy efficiency, mobility, water, waste and renewable energy. Policy efforts that take place are also linked to stimulating investment; for instance, the EU is currently in the process of reforming its waste legislation to double recycling targets. The objective is to recycle more, be more resource efficient, and to engage in an industrial symbiosis where the waste material of one industry becomes the raw material of another. This will trigger significant investment in the area of waste management; €12.5 billion is invested per year, but in the coming years, this sum might double. There are important economic benefits to be gained from this investment, including in terms of competitiveness, lowering energy costs, producing resources, generating revenue, and there are in addition innovation, growth, employment and environmental benefits. It is also a challenge that SMEs must address: to be more resource efficient, to maximise resources, minimise waste, and be more competitive.
2.2. Policy initiatives underway in the EU
A public authority representative stated that very good recommendations are expected from the High-Level Group on Sustainable Finance. Issues of definitions and benchmarks will need to be resolved, but there is not a shortage of instruments, whether in terms of regulation or of funding. The European Fund for Strategic Investments (EFSI) – the first pillar of the Juncker Investment Plan for Europe - has already supported important investments in energy and climate change transition. The Commission has now proposed to almost double it to €500 billion over 5 years. Moreover, Horizon 2020, the biggest innovation programme in the world with €80 billion over 2014-20, is a very important contributor to the development for the circular economy. Finally, climate transition is a key priority under the EU's regional policy and significant amounts are allocated by the member states and co-financed by the European Structural Funds in this area.
However, although the right instruments exist, it is difficult to identify projects. There should be more transnational projects; in this space, the EIB has a very important role to play. More can be done with the EIB and the Commission working in conjunction: next week, the first natural capital finance facility project will be signed. There also needs to be closer cooperation with the private sector, not to create further regulation but to find the right balance, and establish common standards and benchmarks. Capital Markets Union will be very important in this context. Mobilisation of these new sources of finance will need to be discussed collectively, to successfully manage the transition to the green economy.
2.3. Outcomes of the Task Force on Climate-related Financial Disclosures (FSB)
2.3.1. A successful consultation
An expert explained that the main objective of the FSB task force is to mainstream climate into financial decisions, and bring climate-related risks and opportunities into financial reporting. If the group is successful in meeting its goals, in a few years, every large corporation in the G20 countries will include climate related risks and opportunities in its annual report. The FSB task force released its report in mid December 2016, with a two month consultation period, and received around 300 comments. Many of these comments were from Europe; slightly fewer were from the United States, and not many were from China. More were from data users than from data preparers, but overall, there was a lot of support for the recommendations.
The recommendations were for corporations to answer four simple questions: ‘How are you organised around climate risk in your corporation?’, ‘How does climate-related risk feed into your strategy going forward?’, ‘How are you managing this risk from a risk management basis?’ and ‘Have you, as a corporation, given yourself metrics and targets?’ These recommendations were developed for eight sectors, including banking, insurance, asset management, pension funds, heavy industry, light industry, and transportation. The feedback has been very positive, and the recommendations have been widely recognised as being forward looking, linking governance to metrics, and constituting a durable framework.
2.3.2. Challenges raised by defining appropriate scenario analysis
The main questions received relate to scenario analysis. The task group suggested that sectors for which climate risk is very significant would use scenario analysis, employing one of the established two degree scenarios, and explaining how they perceive the strategy going forward. Corporations’ questions included how scenario analysis should be done and what the right benchmark would be, and the task group is now refining the report to answer these questions and take these comments into consideration.
The report will go to the FSB in June, and then to the G20 in July; at this point, the task force will review the communique, because the main question is whether the G20 will continue to support this. Although thus far, the G20 has been completely supportive, the Baden Baden meeting saw climate change fall off the G20’s agenda, and the task force will need to decide what it should do if there is no longer political support at the G20 level.
2.3.3. The creation of the High-Level Expert Group on Sustainable Finance
This question has already been partly answered, because the European Commission has already defined the next group that will look at transposition in Europe in a broader sense: this group is not only focused on climate issues, but also sustainable financing, encompassing environmental, social, and governance issues. This work has now begun, and the expert regards this work as valuable, because it highlights the value of political leadership in this area. The High-Level Expert Group on Sustainable Finance was constituted in January, and the interim report will be presented in Brussels on 18 July, which will define the policy options. Recommendations will then be presented in December.
The Group is looking at three main work areas, the first of which is to create a vision for sustainable finance: what is meant by sustainable finance, and what the characteristics are of a sustainable financial system. Integration is the second main question: i.e. how ESG and the related criteria can be incorporated into the EU’s policy and regulatory framework. This work involves looking through all of the relevant legal texts, relating to banking, insurance, market, and consumer protection regulation, and identifying how sustainability could be integrated into these. Going beyond this, the goal is to achieve a two degree world, but current market benchmarks will likely create a four degree one; the speaker noted that the biggest weighting in the EURO STOXX index comes from the oil and gas sector. To re orientate capital flows, there will be a need to consider what can be done with benchmarks.
The final work area is mobilising capital flows, and identifying how more capital flows can be mobilised into investments in infrastructure, energy transition, and related areas; in other words, how supply can be made to meet demand. While demand and supply are both very high, the connection between them can be improved. The main value of this work is that it will help to orientate the financial system towards the long term. As a result of the crisis, there has been a focus on short tern stabilisation, but all of the challenges are long term ones; they include employment creation, education, retirement financing, technology, energy transition, and climate financing.
An industry representative commented, in relation to a question from the audience, that they see the biggest issue in this respect as being supply, rather than demand.
2.4. Improvements in Public Policy
2.4.1. Restoring and improving carbon price incentives (EU ETS) to promote static and dynamic efficiency and enable consumers to make informed choices
A representative of the industry noted that markets work on the basis of information, and require better information to make better informed decisions, particularly with challenges relating to the very long term, which is the nature of the challenges in the climate related financing space.
When the real economy works towards the goal of decarbonisation, it is much easier for investors and for financial flows to follow the real economy’s incentives. The most important requirement for decarbonising Europe is the existence of a properly functioning carbon market and price signals throughout the economy, that promote static, dynamic and allocative efficiency. Over the last five years, the carbon market has been ‘completely dysfunctional’, leading to situations such as in Germany where, although the country has led the global revolution in renewable energy, its emissions from the power sector have not significantly fallen since 2005. Over the last 12 years, emissions from coal and lignite have essentially been static, and if this is going to change, the carbon price needs to work.
The Maltese Government managed the recent EU Council meeting on the ongoing reform of the European carbon market very successfully. For the first time that the industry representative can remember, the EU Council has created a proposal for reforming the EU Emissions Trading System (EU ETS) that is even more ambitious than that of the European Parliament. If these amendments are accepted, the carbon market will begin to function again, and a meaningful price signal will be re-established, although the trialogue discussions are ongoing.
A properly functioning carbon price would significantly contribute to decarbonising the two most important sources of emissions: the power sector, which is the largest, and the industrial sector. ‘Static efficiency’ within the carbon market means having a price that is sufficient to enable short term fuel switching, to have gas plants be more competitive than coal plants. This was the case from 2008 until 2011, but as a result of the global financial crisis and the recession leading to a reduction in demand, carbon prices fell very sharply. Since 2011, the price has been around €5 per tonne, which means that even in the short-term, coal and lignite plants are much more competitive than gas plants.
The next stage will be to have a price that is high enough to promote dynamic efficiency: i.e. to send a signal for investment in low carbon technology, particularly as Europe moves away from a feed in tariff or subsidy led incentive scheme for renewables. Given EU policy for its renewables target after 2030, the carbon price will become even more important in ensuring that the renewables revolution continues. Onshore wind is the cheapest source of new electricity in most European countries, but at the present time, the wholesale electricity price is so low that there is no incentive to build any form of new electricity generation. If the carbon price were €25 to €30 per tonne, this would probably be enough to ensure construction of onshore wind capacity, without any further subsidy.
Finally, regarding allocative efficiency, the carbon price needs to feed through to end user prices, so that consumers are able to make informed choices and opt for lower carbon fuel sources of energy. Although this is already happening in the power sector; the price is too low to make it meaningful. Within the (current) European ETS, most other sectors will continue to benefit from the free allocation of allowances until 2030, which will not promote this kind of allocative efficiency. Much will be achieved if the carbon market and carbon price signal can be set right, and static and dynamic efficiency can be promoted; the industry representative is ‘cautiously optimistic’ that the current trialogue discussions are moving in this direction.
Another industry representative added that a functioning carbon market in Europe would encourage deal flow; this will help to shift the balance of risk and return, and will also link to the TCFD, because a material carbon price will overcome the barrier of what is considered financially material for reporting. Many of the companies that this person deals with are concerned about how the principle of financial materiality can be incorporated into what is disclosed; they commented that a proxy could potentially be used.
2.4.2. EU policy in the areas of sustainable growth and energy transition translates progressively into legislative packages, such as clean energy and electromobility
A representative of a public authority stated that the EU has the most advanced policy in the areas of sustainable growth and energy transition, and is very persistent in promoting it. Clean energy for all is a key fundamental component of the Energy Union Strategy. The EU initiatives are comprehensive and include clear policy targets, legislative initiatives and financing. However, at present there is room for more alignment with the private sector and capital markets. Going forward, it will be very important to align the vision of the private sector with the vision of the policy makers. The European Commission and the EU’s member states have agreed on the extent to which greenhouse gas emissions need to be reduced; up until 2030. They have also agreed clear targets on renewables and energy efficiency. The way forward is quite clear, including in the UK.
Over the last two years, the European Commission put forward almost all of the legislation that is necessary to accompany these goals. The last big package, the ‘clean energy package’, was adopted in December, and addressed issues related to renewables, energy efficiency, buildings, new electricity market design, and the ETS revision. The only area that has not yet been agreed upon, is electro mobility for vehicles. A proposal on how to modernise our transport system and promote low carbon mobility will be presented later this year.
2.4.3. Improving the efficiency and leverage of public money and reducing subsidies requires additional efforts, of which the Juncker Plan is one
A public authority representative stated that significant advances have been made in mainstreaming sustainable financing in all of the Commission’s policies. The right components are in place, and over the next two or three years, a lot more can be achieved.
The European Commission has been providing substantial financial support to climate change and energy transition financing. With the support of European Structural Funds Member states have pledged €40 billion over the next five years in these areas, with the goal of facilitating energy transition. The Juncker Plan has made this area one of its key priorities. But there is potential to further improve the way in which the money is leveraged and targeted. State aid to the energy sector in Europe has gone up by €10 billion every three years, and now stands at around €120 billion, which is the wrong direction for this trend to be going in. At the international level, the EU is also the biggest donor in sustainable financing. However, partnership with the private sector and, in particular, with capital markets is not yet good enough.
The Commission is working very closely with the EIB– as per the Juncker Plan / EFSI – and is trying to leverage public resources better and crowd-in private investors. There is a deficit in the capital market area, despite the fact that in individual areas like the green bond market, there has been a significant increase notably in volume and performance. More can be achieved by working together, and some priorities will need to be defined for the future,. Groups such as the High-Level Expert Group on Sustainable Finance will help with this prioritisation process.
3. Current financing trends and observed needs
3.1. Fast growing interest among investors for green finance
An industry representative stated that there has been a tremendous increase in investors’ interest in green finance over the last three years. The surge in demand from institutional investors for sustainability linked products, and therefore for research on this topic, is increasing greatly. The FSB’s global initiative and the European Commission’s High Level Expert Group have both been very useful at the global and European level, increasing transparency and increasing information.
Another industry representative added that the implementation of the task force on climate disclosure will be crucial for bringing more funding and capital into the low carbon economy. Investors have appetite for these kinds of products, including green bonds and yield-cos – which are equity structures for renewable energy assets – as well as the green influenced smart beta. It appears that there is significant interest, but a shortage of deal flow.
3.2. Green bonds showcase a very positive trend; however, there is still a lack of adequate and legible investment products
A representative of the industry stated that the trend in the area of green bonds is very positive. The representative’s institution and its investors regard these bonds as a ‘wonderful’ asset class, which has emerged from insignificance to become a $200 billion asset class in only a few years. This is unlike anything else that has been seen in the area of green financial products, and has been very successful in this sense, but at the same time, green bonds only constitute a small fraction of sustainable investment in assets under management. Globally, these are worth around $23 trillion, and a significant proportion of green bonds are issued in China, which makes them off limits for most advanced country institutional investors.
This situation is ‘paradoxical’: there is both demand and supply, but the two are not connected well. Of the $23 trillion of sustainable investment, around $12 trillion is in Europe, and around $10 trillion of that is invested in negative screens: i.e. not invested in areas that do not meet social, environmental or ethical (SEE) criteria, including weapons manufacture and oil. This money, in a sense, does not contribute positively to the goal of financing energy transition. However, since this money does exist, there is a need to identify products, and pipelines to direct the money towards these kinds of products.
3.3. Product labels consistent across the EU, and additional large public issues or investments, should contribute to magnifying the market and reassuring investors
A representative of the industry stated that their institution has some ideas about how to direct funds towards energy transition. Labelling is very important; there is a shadow industry of so called ‘green aligned bonds’ that is very dangerous. Investors want to have certainty that they are investing in legitimately green finance, rather than ‘green laundering’. The European authorities creating a label, rather than 27 separate labels, would be helpful. Issuing would also be helpful, and the EIB is playing a valuable leading role in this area: the French Government issued the first sovereign green bond earlier in 2017, which was a great success, but ideally, there should be a full yield curve in these instruments. The more this is done, the easier it will be, and the public sector can assist in increasing the size of this market. The representative noted that their institution is not struggling to sell the green bond funds that it creates to its institutional investor clients, but it is very reassuring to be able to say to a private pension fund or insurance company that an official sector entity or sovereign wealth fund is also investing in these green bond funds.
Ultimately, however, what matters is the real economy, and the environment in which that corporates evolve. They need to be put under pressure; carbon price is part of this incentivisation process, as is disclosure. The task force has done a very good job in this area; however, the only concern of the speaker’s institution is that the right kind of pressure might not be applied. Telling companies that they need to show their carbon footprint, or telling asset owners and managers that they need to be clear about the carbon footprint of their portfolio, is a good step, but it is not enough. Companies need to be pressured about what they are doing to address their exposure to climate risks, and if they are, they will begin to issue green bonds.
3.4. Adequate return characteristics of these investments
A member of the audience noted that much of the discussion has been focused on how to get private money into green bonds. They asked the panel to comment on what the return characteristics of these investments would be, as good – or relatively good – return characteristics would be the best way to encourage investment in such bonds, and whether capital charges on green bonds would be a potential method of fostering investments.
An expert replied that the High-Level Expert Group is looking at the question of capital charges. One issue that needs to be borne in mind is the dichotomy between these being long term issues and investments, while the financial system at present is very focused on short term stabilisation. The main question is how to reconcile the instantaneous measurement involved in mark to market accounting, quarterly co operative reporting, continuous time transparency and pressure on the institutions and so on with the concept of long-term investment.
John Maynard Keynes once observed that markets can be irrational for much longer than individuals can remain solvent, and the biggest challenge is how to enable people to withstand short-term fluctuations while maintaining their illiquid long term investments. There is a need to examine whether capital charges might be the solution: green bonds have lower risks, but these may prove to be only very slightly lower. The conflict that arises is how to reconcile a risk based system with the goal of promoting green finance, and thorough analysis will need to take place on how to do so.
A representative of a public authority added that the European Commission is working in collaboration with the European Mortgage Federation to ensure that the valuation of energy efficiency aspects is integrated into all aspects of the risk model. In pursuit of this goal, a database has been created that integrates data from all mortgages provided by members of the Federation. This then constitutes a platform from which institutions can securitise, differently evaluate risk, and perform related activities. The Commission has achieved a certain degree of mainstreaming of green issues in public spending, and is trying to mainstream sustainable financing in public spending priorities as well, but will need to do more work to mainstream this in different capital markets or banking products. Although this is complicated work, the outcome will encourage investment in green bonds.
Another aspect of public incentives is the prudential framework; the speaker commented that they do not believe that it is the role of the prudential framework to encourage money into sustainable investments. If carbon pricing is going to be more prevalent than other incentives, sustainable investments should become less risky than others, and the prudential frameworks in insurance solvency, Basel and the CRR should be able to reflect this risk differentiation.
3.5. Further harnessing markets by creating contractual and design standards, or specific asset classes, etc, is essential
An industry representative stated that their institution has identified three pillars in the area of green finance. These are disclosure, which is the most important piece of work; incentives to drive forward the investability or bankability of issues, such as carbon pricing or other fiscal incentives; and increasing the scale of financing. Regarding the latter, this is partly an issue of harnessing markets, because this cannot be done with bank balance sheets given the scale of the infrastructure gap.
There are also issues about how the public and the private sectors can most effectively work together. At the present time, a lot of work is taking place in both the private and public sectors to create infrastructures and market classes, including within the European institutions. Standardising contractual and design terms to allow green investments to be securitised, moved off bank balance sheets and into the markets to attract a much wider pool of investors, is very important.
The Chair commented that the green bond principles under the auspices of the ICMA should also be mentioned in the context of standardisation.
3.6. By focusing on certain risks, multilateral development banks can further catalyse the involvement of the private sector, rather than crowding it out
An industry representative noted that another significant barrier to the growth of green finance is insufficient supply, and this is a recognised phenomenon in Western Europe. Interaction between the public and private sectors can be significantly improved. Support from the public sector for a first loss principle would make it much easier for entities like the speaker’s institution to be involved with investments in project finance than currently, and the situation of climate-related activities, in particular adaptation risk, can be improved. The project activities and initiatives that have been described by public sector representatives appear promising.
Regarding the role of the multilateral development banks (MDBs), there is a growing recognition that the public sector needs to contribute more to equity, and more to first loss tranches provision and guarantees, in order to catalyse the private sector to come in to projects and ‘crowd in’ rather than ‘crowd out’. This will partly involve being clear about the products, and creating the right incentives to use these products within organisations, but it is also partly an issue of the risk that is being focused on. Certain parts of the risk in, for example, a large infrastructure project are risks that the private sector is not good at picking up, and this is proving to be an impediment. Examples of these risks are the local currency risk or political and policy risk in developing countries; a focus on these areas, employing the right instruments, could make a significant difference to the amount of money that is put into these sustainable investments.
Responding to this, the Chair stated that they do not agree with the statement that public banks ‘crowd out’, but accepts that there are good arguments for developing instruments to facilitate ‘crowding in’; EFSI could be considered as an example of this. They added that the European Investment Bank (EIB) is the largest of the multilaterals in its climate financing; a minimum of 25% of its business is to do with climate action, and it expects to do a total of $100 billion in climate action over the five years to 2020. Public banks such as the EIB play a critical role in providing the products and instruments that can encourage and maintain private capital flows to climate friendly projects, but there is widespread agreement that the majority of green finance will need to come from the private sector.
The industry representative noted that they had been very disappointed not to see a reference to climate related disclosure work in the G20’s Baden Baden statement, but there had been a very helpful reference to the collaboration with the MDBs on these issues. The Global Infrastructure Hub, set up under the Australian G20 presidency, has brought forward practical and useful proposals on how incentives can be aligned within the MDBs to make this change happen.
3.7. Private sector contribution
An industry representative stated that encouraging climate friendly finance is not only a responsibility of the MDBs. Banks also need to reflect this move towards a low carbon growth path, identifying what this means for the business and the clients that they are exposed to, and the clients they wish to engage with in the future.
Another representative of the industry stated that their institution launched an initiative in 2014, aiming to highlight the need to mobilise funding more quickly for some of the emerging clean energy opportunities. Their initial target was $10 billion, and focused on going beyond ‘green business as usual’, experimenting with new structures, products and partners. In turn, this led to the speaker’s institution bringing in partners formally: other commercial banks, investors, and the MDB.
Over the past couple of years, this institution has closed around 17 deals, using around $600 million of balance sheet among the various partners, with a total mobilisation of around $6 billion; it is ahead of schedule. A couple of innovative products have been created in Europe, including the Meerwind bond, which is Europe’s largest ever renewable energy bond, totalling just under €1 billion for one offshore windfarm. The Vela energy solar ABS is another example, linked to already existent Solar PV assets across Spain; this was previously considered a very risky environment from a policy perspective, but investors have now been brought back in.
4. The CMU is essential for improving the financing of the transition to a low carbon, climate resilient, resource efficient and circular economy
An industry representative stated that securitisation is another very important issue that needs to be considered. It will enable much quicker recycling of capital from the balance sheets of those entities who have taken on early risk in Europe – i.e. private equity – and also some pension funds, which have taken on operating and construction risk with renewable energy infrastructure. This risk needs to be transferred to long term institutional investors, and securitisation is a very important mechanism for making this happen; the CMU needs to provide a supportive framework for this.
In 2016, green orientated securitisation was only €5 billion out of around €90 billion placed to investors. The OECD released a paper following the most recent COP meeting, stating that by 2030, around €77 billion could be invested in securitisation. The potential in this space is huge, and there is a need to ensure – including via the CMU – that there is a functioning securitisation market.
5. Financial private sector’s adaptation challenges
5.1. Scale of the challenge
An industry representative stated that climate related risk is an integral part of their institution’s investment philosophy, and is given the same importance as any other aspect that it covers. This is reflected in their Environmental, Social and Governance (ESG) approach, and in its impact investment activities. Over the course of the last few years, the representative’s institution has moved roughly 1% of its total assets, totalling €2 billion, into ESG and impact investments, most of which is related to climate related activities and initiatives. There is no differentiation between this institution’s mitigation and adaptation strategies: global warming is a real phenomenon and is progressing, and meeting the ‘two degree world’ goal is going to be a challenge. Even an increase in global temperatures of one degree will have a physical impact on most enterprises and on a lot of countries, and this is something that can be addressed via adaptation strategies.
5.2. All investments now encompass mitigation strategies
An industry representative stated that most of their institution’s financing activities are related to mitigation strategies; they cannot recall any bond having been issued that clearly related to adaptation strategies. There are multiple ways to achieve this, and companies should consider the risks that they face from global warning over the long term and what initiatives can be undertaken to protect their business. The speaker’s institution’s own business set up is not focused in isolation on ESG and impact investments, but is part of the company’s overall business strategy.
Insurance is a different topic: the key problem, from a corporate perspective, is financing for insurance is not cash flow relevant. The representative’s institution engaged in a transaction with the World Bank a couple of years ago, purchasing a 30-year bond, and this was funded from their balance sheet in Germany, which was one of the few investments dedicated to adaptation strategies. There are a couple of ways to improve this, the first of which is risk disclosure and information, i.e. standardisation of information and transparency of information. This would be of benefit to issuers, but would also be important from an investment perspective, because it is organisations such as the speaker’s that have to work with the data. They need to improve their ESG approach on a permanent basis, going beyond the carbon footprint to an integrated approach, and the FSB initiatives represent a step in the right direction. Additionally, more can be done through regulation, such as zone planning and building permits and standards.
5.3. Financial performance of European companies, as compared to the rest of the world
A member of the audience asked panel members to give their views on the medium term performance of European companies, compared to the rest of the world, as the green finance market develops. An industry representative replied that Europe is already leading the world in the area of sustainability; it was Europe that was most responsive in giving feedback on the work of the task force. Attitudes on the task force itself were also somewhat differentiated by region; there has been a healthy debate, and the result has been a very good compromise that will help the world, rather than just Europe, to develop.
The United States appears to be retreating from taking a leadership role in relation to sustainability and confronting climate change, and it will therefore be interesting to see the extent to which Europe can build a strong relationship with China in this area, because it appears China wants to move into this space more meaningfully. Although the industry representative is confident that Europe and European companies will remain in the vanguard of this process, there is an opportunity for Europe to build alliances with other regions of the world that also want to make progress. The Chair commented that, when they had been in China a couple of weeks ago, the Chinese authorities had been very clear that they wanted to participate in moves towards increased sustainability and green finance.