The Radical Old Idea with Keith Skeoch | The ESG Enlightenment | Event Summary
Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.
In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.
At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.
Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”
Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.
This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.
The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.
In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.
While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:
- Economic models which reflect the relationship between finance and other parts of the economy
- A responsible and sustainable corporate sector
- A view of regulation as something which helps markets by aligning them to the public interest
- A recognition that good behaviour minimises the cost of regulation by building trust
- A finance sector committed to putting substance into the mantra of “build back better”
Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.
Global action on climate adaptation
This article originally appeared on the CharteredBanker.com blog at https://www.charteredbanker.com/resource_listing/cpd-resources/global-action-on-climate-adaptation.html
Road surfaces that don’t melt during hot summers and drought-resistant seeds are the kind of solutions needed as the world adapts to climate change, according to the Global Commission on Adaptation.
The Commission, which is backed by more than 20 countries, including the UK, Germany and China, is running a Year of Action ahead of its Climate Adaption Summit in the Netherlands in October 2020.
Patrick Verkooijen, CEO, the Global Center on Adaptation, and Co-managing Partner of the Global Commission on Adaptation, said the initiative was about “implementing real solutions around the world which show that adaptation is not just the right thing to do but the smart thing to do.”
“Adaptation not only has economic benefits, but it is also essential if we are to avoid climate apartheid — a world in which the wealthy pay to escape from the worst impacts of climate change, while the poor are left to suffer,” Verkooijen added
International support
More than 75 governments, institutions, civil society organisations, and private sector players are helping to advance eight ‘Action Tracks’. These are focused on: finance and investment, food security and agriculture, nature-based solutions, water, cities, locally-led action, infrastructure, and preventing disasters.
As part of the finance and investment stream, the private-sector led Coalition for Climate Resilient Investment has been launched by London-based insurance broker and advisory business Willis Towers Watson in partnership with the governments of the UK and Jamaica, the Global Commission on Adaptation and the World Economic Forum.
It will focus on developing data and analytical tools to better understand the risks posed by climate change and to align investment flows towards infrastructure capable of withstanding a changing climate.
Resilient infrastructure
John Haley, CEO of Willis Towers Watson, said: “Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructure in high, medium and low-income countries, enabling us to better prevent future human and financial disasters.”
A report on climate resilient infrastructure from the OECD lists a range of impacts to infrastructure from temperature changes, rising sea levels, changing rainfall patterns and storms. These include melting road surfaces and buckling railway lines; damage to bridges; port and airport disruption and disruption of energy supply due to flooding.
The Global Commission on Adaptation is based in the Netherlands and led by Ban Ki-moon, 8th Secretary-General of the United Nations, Bill Gates, co-chair of the Bill & Melinda Gates Foundation, and Kristalina Georgieva, CEO of the World Bank. It is guided by 33 commissioners and 19 convening countries, representing all regions of the globe, and co-managed by the Global Center on Adaptation and World Resources Institute.
The Chartered Banker Institute’s Green Finance Certificate™ is the first global, benchmark qualification for the growing Green Finance sector.
A new dawn for green bonds
This article originally appeared on the CharteredBanker.com blog at https://www.charteredbanker.com/resource_listing/cpd-resources/a-new-dawn-for-green-bonds.html
The green bonds market is expected to reach new highs this year after more than $200bn in green bonds and loans were issued in 2019 – a new global record.
Green bonds – also known as climate bonds – are fixed-income investments issued by governments and corporations as debt capital to fund climate and environmental projects.
“Green bonds are those where the proceeds raised are allocated to environmental projects or uses,” explained Simon Thompson, Chief Executive, Chartered Banker Institute. “They might be used to raise capital for a wide variety of purposes, including renewable energy projects, clean transport infrastructure, sustainable buildings, flood defences, or sustainable forestry and agriculture.”
The Climate Bonds Initiative – which promotes and tracks the green bond market internationally – reported in October that $202.2bn in green bonds and loans had been issued in 2019 – an all-time high for the green market.
The US issued the most bonds, followed by France, China, Germany, Netherlands and Sweden. Energy dominates overall use of proceeds at 33%, followed by low carbon buildings on 29%, low carbon transport 20%, water 9%, with waste and land use each at 3%.
Green trillions
In 2020, the initiative forecasts global annual green bond issuances to hit between $350-400bn. But to make a real impact, ‘green trillions’ is the goal.
“New sovereigns are entering the market and pioneers like France, Poland and Nigeria are now repeat green issuers,” said Sean Kidney, CEO and co-founder of the Climate Bonds Initiative.
“Bond size and diversity of issuers is increasing, and noteworthy is the presence of leading European and Chinese banks amongst the largest issuers.
“But $200bn or $400bn a year is not enough to address the climate emergency and provide the capital at the scale urgently required for large scale transition, adaptation and resilience.
“Generating that first $1tn in annual green investment by 2021/22 is now critical. It’s the benchmark from which to measure year on year growth in climate-based investment towards 2030.”
Critical role
In the UK, there are more than 100 green bonds from 16 countries listed on the London Stock Exchange, with the amount raised more than doubling since 2017 from $10.5bn to $26bn.
Globally, green bond issuance has climbed from $45bn in 2015 and $168bn in 2018.
The Institute’s Simon Thompson predicts that debt capital through green bonds will play an increasingly important role in financing the world’s shift to a low carbon economy.
“The scale of investment needed to finance the transition to a sustainable, low-carbon world – $6tn per year – will exceed both the capabilities of the post- financial crisis banking sector and the constrained balance sheets of utility companies,” Thompson said. “This is why the debt capital markets will be significant in facilitating the continued operation of existing projects via refinancing, and the development and construction of a wide range of new projects supporting climate change mitigation and adaptation.”
Round Table: Ethical Finance Market Update - Keynote Interviews
Baillie Gifford – EFH Roundtable
16 December 2019, 16:00 – 18:00
Ethical Finance Market Update, Market Trends
Interviewer: Gail Hurley
Panel Participants: Andrew Cave, Thom Kenrick
Summary:
In a change to the usual format this session, once again hosted by Baillie Gifford, comprised of two keynote interviews which provided reflections (from the investment and banking sector) on the evolution of the ethical finance market and how the market will adapt to on-going political, economic, social and environmental uncertainty.
The interviews were conducted by GEFI Senior Consultant Gail Hurley who has recently completed 10 years with the UN in New York as a Senior Advisor.
Gail framed the session within the context of growing interest in driving a fairer, more sustainable financial system and the fact that 2020 will be a significant year for climate issues in Scotland as it welcomes the world to Glasgow for COP26, the UN climate conference.
Andrew Cave, Head of Governance and Sustainability at Baillie Gifford, was first up and he argued that ethical investing has moved from niche to mainstream. While in the past companies would not put their best people and resources into it, today the situation is changing. According to Andrew the overall direction is positive and there is a lot of interest from institutional investors. Continuing challenges include: the complications in defining a positive impact (as the market is still in its early days) and the intractable debate over what constitutes positive social impact.
Andrew offered some fairly candid views on confusion around terminology highlighting the fundamental difference between ESG, which factors issues such as climate risk, data privacy issues and regulation into existing investment paradigms, and responsible investing, which is more directive and it aims to reach a particular outcome. It was suggested that clear rules need to be designed to avoid a risk of diverting money away from those who can make a positive contribution. Another challenge mentioned by Andrew was the lack of quality data on complex value chains. A full view of impact requires improvements in disclosure and standardisation of data, which enables more sophisticated discussions about potential transformations in transportation and production systems.
Thom Kenrick, from the RBS Sustainable Banking team, was next in line to be interviewed by Gail. Unsurprisingly, Thom began by highlighting the major changes that have taken place in the banking sector in recent years and how this has driven RBS’s journey of reform and restructure. The financial crisis fundamentally changed regulation as banks were placed under greater scrutiny by both regulators and wider stakeholders. Thom described the growing interest in ethical finance from RBS customers but pointed out that many still struggle with the lack of consistency in terminology and approaches. In relation to social finance Thom suggested that this means financial inclusion to one, diversity to another and divesting from a power station to someone else. Unlike environmental impact, there is not a right or wrong answer as so many different aspects of social life have no scientific base.
Thom felt that while international standards may help in providing consistency, he pointed out that while PRI (2005) and TCFD (2015) have been around for a number of years few signatories are genuinely delivering to the required standard. That said, according to Thom, the situation is changing as customers, investors and the public are increasingly scrutinising firms so whilst such standards are voluntary, the consequences of not following them risks deterring prospective / existing customers and investors.
Despite the challenges outlined throughout the session the discussion ended on a positive note. Younger generations are more conscious, and their demand is expected to drive ethical finance in the long term. Change takes time and previous developments in ethical finance, whether successful or not, will have played a part in shifting mind-sets and practices. Although nothing is yet set in stone leading market players, such as big Baillie Gifford and RBS, have established dedicated teams, products and services to raise awareness and drive finance for positive change.
COP26 – Role of Finance in Tackling the Climate Crisis
COP26 – Role of Finance in Tackling the Climate Crisis
This year’s UN Climate Change Conference in Madrid has wrapped up, and all eyes will now focus on Scotland as next year’s host of what is arguably the world’s most important international conference. Also known (somewhat confusingly) as COP 26, Glasgow will be centre stage between 9 and 20 November 2020 as it welcomes an estimated 30,000 delegates from around the world.
Next year’s climate change conference will be particularly important since it will mark five years since the historic Paris Climate Agreement, which committed countries to strengthening actions to combat climate change and limit the global temperature rise this century to below 2 degrees Celsius. We know however that the world is not on-track to cut carbon emissions which must be halved on today’s levels to restrain temperature increases to just 1.5 degrees Celsius, the upper limit advised by climate scientists. Progress will need to be ratcheted up by next year.
Over 500,000 people marched through the centre of Madrid this month, joined by young climate activist Greta Thunberg, to demand quicker action to tackle climate change, yet many have been left frustrated by the lack of urgency that has characterised this year’s climate conference. Madrid has been dominated by disagreements over carbon emissions trading (where more polluting countries can purchase the right to pollute from countries that have not yet reached their emission limits – seen by many as deeply unfair and a false solution to the climate crisis) and an international push to have rich countries pay poorer countries for “loss and damage” associated with irreversible climate change impacts.
Next year, the spotlight is expected to shine on the thorny issue of how to pay for climate damage, and how to mobilise the trillions needed for international climate financing programmes.
Financing needs to tackle the climate crisis are estimated in the trillions worldwide, and are especially high in the poorest countries and those particularly vulnerable to climate change, such as small island states. The UN estimates a US$ 3 trillion annual shortfall in investments needed to meet internationally-agreed climate and sustainable development goals.
A decade ago, industrialised countries pledged to jointly mobilise US$ 100 billion annually in climate finance by 2020 to address their needs. Yet only US$ 71 billion was raised in 2017, mostly from public sector aid budgets (and with most provided as loans). There is a consensus that more resources need to be mobilised from private markets for climate-friendly investments and to support a “just transition” to net-zero.
This is where our work to promote Scotland as a leading international centre for ethical and responsible finance comes in. The climate emergency has underscored the importance – indeed urgency – of building a financial system that has better outcomes for people and planet at its heart. Our work at the Global Ethical Finance Initiative (GEFI) headquartered in Edinburgh, builds on Scotland’s proud heritage in ethical finance and financial services, to convene the world’s foremost political, business and civic leaders to define and shape the transition to a sustainable financial system.
Within the financial services sector, interest has increased significantly over recent years in the ways it can – and should – look beyond short-term profit and shareholder value towards how it can drive positive social, economic and environmental impact. Increasingly, investors and consumers want to be more thoughtful about the impact their money can make on the world. This has led to a plethora of new initiatives and financial products, such as ethical investment funds, sustainability bonds (where the proceeds are exclusively applied to finance green or social projects), and the development of UN-led Principles for Responsible Investment. Globally, the impact investment market is increasingly popular and is now estimated at over US$502 billion (impact investments are those that seek a positive social and environmental impact in addition to a financial return).
At this year’s climate conference, the European Union unveiled its “Green New Deal” intended to transform Europe’s economy and eliminate its contributions to climate change by 2050. Scotland is even more ambitious: this year it adopted landmark legislation to become a net zero society by 2045, and to reduce emissions by 75% by 2030. Delivering a green transformation that will support employment creation, build skills, boost wages and trigger technological advances will require building a new generation of infrastructure and industries. In addition to well-planned public expenditure that can crowd-in private investment, banks will need to ensure they are able to provide the kinds of financing needed to support this transformation. Aligning their business strategies with society’s goals will in turn will help them leverage new business opportunities and remain competitive with the emergence of the sustainable development economy.
Our view is that finance can be a positive force for change. As we enter a “decade of action” on climate and sustainable development, COP26 in Glasgow in 2020 provides an opportunity for Scotland to showcase the important work it is doing to accelerate the transformation towards a more socially responsible and inclusive financial system – one that serves both people and planet.
By Gail Hurley: Senior Consultant, Global Ethical Finance Initiative (GEFI)
Gail was formerly a Senior Advisor to the UN
Follow on Twitter: @gailmlhurley
Follow GEFI on Twitter: @Finance4Change
2020 GLOBAL ETHICAL FINANCE SUMMIT ANNOUNCED
PRESS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE
EMBARGO: IMMEDIATE
2020 GLOBAL ETHICAL FINANCE SUMMIT ANNOUNCED
The 2020 global ethical finance summit has been announced, bringing hundreds of major investors, asset owners and finance leaders to Scotland.
Supported by the Scottish Government and the United Nations Development Programme, the flagship event will focus on building a more sustainable financial system.
With the COP26 UN climate change conference taking place in Glasgow next year, the summit’s theme will be protecting our future.
There will be a focus on how financial services can support inclusive economic growth without depleting natural resources, and how the sector can help deliver the Paris Agreement and the UN’s Sustainable Development Goals.
It comes after the COP25 climate talks in Madrid ended with a compromise deal on the global response to curbing carbon.
The ethical finance conference, to be held at the Edinburgh headquarters of RBS on October 6 and 7, 2020, is organised by the Global Ethical Finance Initiative (GEFI), which oversees, organises and coordinates a series of programmes to promote finance for positive change.
It follows a hugely successful conference in 2019, which included a keynote speech from First Minister Nicola Sturgeon and video addresses from former Prime Minister Gordon Brown and the Archbishop of Canterbury Justin Welby, and attracted over 350 participants from around the world.
The announcement of the 2020 summit was made today (MON) at GEFI’s latest ethical finance round table event in Edinburgh, hosted by Baillie Gifford, which addressed responsible investment and more sustainable models for the banking sector.
Omar Shaikh, managing director of the Global Ethical Finance Initiative, said:
“The 2019 ethical finance summit attracted major international attention, bringing global leaders together to discuss key challenges including products, culture, system change, regulation and maintaining returns in financial services.
“A new way requires holistic thinking which is why the summit uniquely convenes the banking and investment ecosystem, addresses the big challenges we face that rethink capitalism, and connects people to enable partnerships to produce ethical financial solutions.
“To build on this desire for positive change, we’re bringing the finance world back to Scotland in 2020 for our next global summit in October.
“With COP26 taking place in Glasgow just a few weeks later, it significantly enhances the global prominence of this year’s summit and provides an excellent opportunity to focus on climate finance.
“Moving from talk to action, our theme will be protecting the future for everyone.”
Kirsty Britz, director of sustainable banking at RBS, said:
“We are looking forward to once again hosting the Global Ethical Finance Summit next year.
“The conference will be an important milestone in an exciting year for Scotland, with world leaders set to come to Glasgow for the UN’s COP26 climate talks in November.
“As a founding signatory to the UN Principles for Responsible Banking, RBS has committed to further align our strategy with the Paris Climate Agreement and Sustainable Development Goals.
“The global ethical finance summit provides an excellent opportunity for us to work collaboratively with stakeholders, peers and partners who are leading the agenda.”
Andrew Cave, head of governance and sustainability with Baillie Gifford, said:
“Following the success of this year’s event we are delighted to be supporting Ethical Finance 2020 in Edinburgh next year.
“The global summit is an important platform for facilitating collaborative and insightful discussions that challenge and inspire asset owners and financial institutions to invest responsibly and take practical actions to deliver positive impact for people and the planet.”
ENDS
NOTES TO EDITORS
More details on Ethical Finance 2020 can be found here: https://www.globalethicalfinance.org/ethical-finance-2020/
A 2019 event summary can be found here:
https://www.globalethicalfinance.org/wp-content/uploads/2019/11/EF19-Summary.pdf
A photo of Omar Shaikh can be downloaded here
Round Table Explores Innovations in Social and Blended Finance
The 19th Round Table discussion continued the series of topics on the social impact sector and focused on recent developments in social impact investment and philanthropy. The underlying theme of the discussion was to understand how these can form part of blended finance supporting partnerships between investors and the public and third sectors addressing specific social needs.
Jonathan Flory (Director, Social Finance) started off by discussing the concept of social investment in the wider context of impact investing. Founded in 2007, Social Finance is a non-profit organisation working in the social impact arena, famously known for developing the first Social Impact Bond (SIB) in the UK. While the market for social investment is fluid, it forms part of a growing market of nearly USD 228 billion in impact assets and a larger movement in which governments, corporations, fund managers, investors and individuals are increasingly focusing their attention on achieving positive social outcomes by means of their investments. While social investment means different things to different people, unlike other investment approaches it focuses on addressing pressing social issues. As a UK term, it describes investments that intentionally target specific social objectives along with a financial return and measure the achievement of both.
While the Public Services (Social Value) Act 2012 clearly signalled the importance of social value in public procurement, a range of motivations continue to exist on the investor side. While international investment giants such as UBS support the “doing well by doing good” theory of impact investing, suggesting that financial returns do not have to be traded off against social objectives, they also recognise the need for softer, philanthropic capital. Given the spectrum of investors’ expectations, it is essential to align the interests of organisations with expectations of investors, but in many cases for a partnership to work there is a need for some element of soft capital in the overall funding structure.
Partnerships can play an important role in scaling up impact. A good example of this is the Positive Families Partnership, a London-based programme seeking to divert adolescents from entering the care system. The partnership brings together central government, local authorities, funders, and programme delivery partners. It applies the blended finance model and mixes grant and investment funding. Following a successful pilot by Essex County Council, the partnership model has been adopted by 5 other boroughs in London and now looks likely to be expanded to include all London boroughs.
The key challenge is putting the partnership together. For partnerships and blended finance to work, there must be a place where funders feel safe to partner. Potential solutions include building a new brand for the partnership, forming a joint venture or an innovative funding structure. The latter is particularly effective in bringing together investors with different financial needs and social objectives as the funding is often structured in tiers. An example is the Arts Impact Fund blending public, private and charitable funding in which the junior tier with first loss is provided by the Arts Council.
Social Finance is optimistic about future developments in social investment. It sees a lot of potential in improving financial inclusion by expanding affordable credit and social housing. In terms of partnership structures, more cross-developmental cooperation is on the way with funds pooled from separate budgets. There is a clear trend in themed funding, in which partners group around themes, which gives the partnership a clear focus.
Jonathan’s presentation was followed by a talk by Kenneth Ferguson, the Director of the Robertson Trust, and Christine Walker, their Head of Social Impact, who presented their innovative model of a public-third sector partnership. The Robertson Trust is a well-established organisation in Scotland with a 6o-year history of improving social outcomes for individuals and communities. It operates by means of providing grants to other charitable bodies and over the course of its history has awarded £250m to 467 organisations.
Back in 2012, the Robertson trust wrestled with the issues of sustainability and scalability of the impactful work charities were delivering. There were very few innovative financing models in Scotland. The Scottish government’s attempt to set up public-private partnerships (PPP) contained no obligation on the public sector to sustain a project while the Robertson Trust believed in the need for systemic change and moving away from high cost reactive services towards lower cost preventative models. They were eager to develop models that would expand impact to the national scale, achieving systems change on the one hand, and providing charities with much needed long-term funding on the other.
Their Social Bridging Finance concept aims to support this through the development of a contract with the public sector. The model has elements of both SIBs and PPPs, but is grant-funded. It is used to sustain projects that have already proved their effectiveness. The strength of its programme is its simplicity. The standard contract is only 10 pages long and contains a maximum of 3 success criteria. The crucial part of the process is defining the success criteria and making sure they are clear, measurable and meaningful. The success criteria are assessed at the outset by a third sector organisation in consultation with the public sector body, which creates a dynamic discussion between the two sides. TSDGe contract is signed, the Robertson Trust then fund the demonstration period, which usually lasts around 2 years. If the success criteria are met, the public body ensures the continuity of funding thereafter. This gives the charity the certainty of stable funding and for the public body it de-risks change. If the project is not successful, there is no obligation on anyone to pay back the funds. This way the Robertson Trust assumes the financial risk by providing the bridging finance to facilitate the switch to a low cost preventative model.
An example of the model is MCR Pathways, one of Scotland's biggest PPP agreements, which aims to widen opportunities for Glasgow’s most disadvantaged young people by offering a school-based mentoring and employability programme. The Robertson Trust initially supported the project by funding the demonstration period, but the premature success of the programme allowed it to expand quickly to include 200 schools across Scotland. Importantly, the model has brought in systemic change. “This model has allowed us to create a new approach which is now business as usual”, said Maureen McKenna, Executive Director of Education Services, Glasgow City Council.
A lively question and answer session followed, in which participants shared their impressions of the results achieved by the Robertson Trust. It is important to have an organisation which takes the initiative and brokers the connection between the third sector and public bodies. There was a shared concern that some investors in the impact investment landscape have high expectations in terms of the financial return, which was thought to be inappropriate in the context of funding public services. It is believed to be of the reasons why the SIB model was not fully embraced in Scotland due to some of the ethical considerations involved. Jonathan stressed that social impact requires thinking about how to support vulnerable groups of people. Impact investing is about creating value as opposed to extracting value, and it does not always imply cashable savings; rather is about spending money better and in a more productive way.
However, given the genuine interest among mainstream banks increasingly seeking to put money where it is most impactful, how can we capitalise on institutional capital in attaining compliance with the SDGs? Kenneth believes that achieving scale is not possible for any one organisation and there is a spectrum, in which every organisation involved can contribute in its unique way. The Robertson Trust currently assumes the “risk bit” and their role is to participate in the early stages of a project to demonstrate its effectiveness while capital markets can bring the project to scale. For the model to work, though, there should be more discussion about making sure philanthropic funds are available.
While both organisations attempt to scale impact, there are some differences in their approaches. While the Robertson Trust suggests that scale should be achieved in cooperation with the public sector, Social Finance aims to do so by bringing in new capital and new players. However, both organisations continue to share common aspirations to achieve social change and there are already some early examples of their models converging.
EFRT on Social and Blended Finance Slides - June 2019
UN PRB Insights: UN PRIs Pass the Baton
UN PRIs Pass the Baton
On 26th November 2018 28 banks from 20 countries came together as the founding members of the UN Principles for Responsible Banking (UN PRBs). In this historic move, despite a diversity in culture, beliefs and systems, these financial institutions, representing $17 trillion in total assets, showed a common interest to align business with society’s goals.
The UN PRBs, launched in draft format by UN Environment Finance Initiative (UNEP FI) at its global round table in Paris, offers the first comprehensive framework on the integration of sustainability through every function of a bank. It comes twelve years after the UN Principles for Responsible Investment was launched with 20 signatories representing $2 trillion in 2006, which has now grown to 1750 signatories with $70trillion in AUM. The global banking industry is at least twice that much in size ($134 trillion, 2016, MarketLine). It is very interesting to see this sector dislodge from its inertia and pave the way to far greater positive change than defined in the UN PRIs.
The six principles are presented below alongside the UN PRIs for comparison.
Perhaps the UN PRIs need to be updated to reflect the SDGs now. Currently, it is limited to ESG issues prime to the period when it was launched but which represent a minor area covered by the SDGs. It’s marginally effective if one part of the industry is dancing to a different tune.
Having said that, the responsible investor movement is more mature than the responsible banking movement in a greater sense. It took inspiration from the lives lost in the 2008 financial crisis, the rise of the environmental and socially conscious newer generations with growing affluence and the track record of faith-based investors since as far back as the 1600s.
It is the less mature responsible banking movement that needs a push. The UN PRBs tackle the industry’s consciousness. If implemented well, we could see greater alignment between banks and investors whether the UN PRIs are updated or not. This could unlock significantly more capital towards SDG-linked investment opportunities and the four Ps: people; planet; prosperity; peace.
During their consultation period open until May 2019, we will post insights on the UN PRBs regularly.
Overview of Ethical Debt Instruments
Introduction
Debt instruments that provide a coupon as well as a social or environmental return are broadly dubbed as ethical debt instruments. They come in a variety of forms, and innovative new structures are increasingly coming to market.
The major driver of this is investor demand (such as pension funds, insurers and millennials) and issuers keen to tap into this rich pool of investment capital at equal to lower cost than purely financial return focused bonds. Investors increasingly believe that these forms of debt financing better capture long term and existential risks as well as seek to provide non-financial returns.
The most important factors to focus on when evaluating such instruments is whether the issue meets a common set of Social Bond Principles, namely use of proceeds, project or investment selection process, management of funds in accordance with a pre agreed framework that has been evaluated by a third party (e.g. Sustainalytics or CECERO) and aligns with a recognized global or national set of principles (such as the Green Bond Principles, the Social Bond Principles and/or the Sustainability Bond Guidelines) and impact metrics monitoring and reporting.
Green Bonds
By far the largest ethical debt market place at the moment, with USD11.9bn issued to date in 2019 alone. Last year there was USD167.3bn in issuances. This year is forecasted to mobilise USD250bn in issues. The majority of these bond issuances are aligned with the Climate Bonds Initiative to provide environmental integrity. A few are certified by the climate bond standard which is backed by a board of investors that represent USD34tr in AUM.
Essentially the proceeds of the bond must be used in areas that are consistent with the 2-degree Celsius warming limit specified in the Paris Agreement. BNP Paribas is consistently in the top five underwriting league tables for green bonds. Several stock exchanges have a dedicated section allocated to green bonds, such as Oslo, London, Mexico, Luxembourg, Italy, Shanghai, Taipei, Johannesburg and Japan. Interestingly the US, China and France are the largest sources of labelled green bonds.
Issuers range mostly from multi sector to energy or building related. Structures are sophisticated and diverse ranging from covered bonds and asset backed securities to green Schuldschein, green sukuks, mortgage backed securities and medium-term notes. Apart from issuing its first green bond (USD500mn) as early as 2015, HSBC has also issued an equity linked green bond for EUR34mn (2017) that pegs returns to the performance of a basket of ESG compliant listed companies that are measured against 134 KPIs (STOXX Europe ESG Leaders 30 Index). The proceeds are dedicated to projects that improve energy efficiency.
SDG Bonds
SDG bonds are a type of sustainability bond that aligns the projects it finances or refinances with social and / or environmental impact linked to specific SDGs. These may include all the SDGs or only some of them, such as in the case of the ANZ SDG Bond that seeks to contribute to the achievement of nine of the seventeen goals including health, education, sustainable cities and climate action or the HSBC UN SDG Bond that uses proceeds towards projects that achieve one or more of seven specified SDGs including clean water, energy, education and infrastructure.
In both cases the proceeds can also be used on its own operating or capital expenditures as long as it contributes to the achievement of one or more of the nine SDGs identified.
In HSBCs case the bond is majority invested in two of its LEED Gold certified headquarters in the Midlands and in Dubai. The HSBC bond which was launched in 2017 was USD1bn, 3x oversubscribed and matures in 2023. The more recent SDG bond issued by the World Bank links return on investment to the stock performance of thirty listed companies that make up the Solactive Sustainable Development Goals World MV Index. Proceeds will be used to finance their development projects. BNP Paribas arranged the bond while Banque SYZ placed it.
ESG Bonds
ESG is now a mainstream topic steering investment towards it, and this will continue at a steady pace given that Millennials, who put greater emphasis on adopting these values, will become 75% of the work force by 2025. One of the challenges the industry faces however is a lack of standardization making it difficult for investment funds to set a fixed ESG criteria. In addition, the size of ESG bond issues are generally small relative to their conventional peers and are issued by those with no track record thereby making it difficult for large institutional investors to participate. In fact 50% of European investors in a recent report said they did not think there were enough ESG products in the fixed income space. Another influencing factor in the debt capital markets is that whether labelled as a type of sustainability bond or not, 85% of European investors apply ESG criteria to at least investment grade bonds. (RBC Global Asset Management & Cerulli Associates)
Blue Bonds
These are bonds that raise financing for projects that support the sustainable use of ocean resources, inspired by the green bond movement but at a naisant stage. Only one issuer has raised a blue bond so far and that is the Seychelles, an island highly dependent on the ocean for its livelihood. The issue size was a modest USD15m and the coupon is part guaranteed by the World Bank and the Global Environment Facility. Considering the size of the issue only three investors participated: Calvert Impact Capital, Nuveen and Prudential.
Vaccine Bonds
Vaccine bonds were in fact pioneered in 2006 by the International Finance Facility for Immunisation (IFFIm) launched by GAVI (The Vaccine Alliance) and began the movement by the financial sector towards developing a set of principles to hold the socially responsible bonds universe together. Vaccine bonds are directly aligned to SDG 3, which aims to end the preventable death of children under 5 years of age by 2030. GAVI has been able to raise USD5.7bn so far as effective bridge financing until grant providers can step in.
Other Bonds
Other kinds of social & development impact bonds include Tobacco Social Impact Bonds (TSIB), a rhinoceros conservation impact bond, a cocoa and coffee production bond in Peru and a youth unemployment program bond in Serbia. Sometimes referred to as a pay for success model or a social benefit bond, these innovative financial instruments tend to be driven by private investors with an interest to offer upfront capital for a particular and specific social or environmental goal. These investors work with governments, philanthropists and/or aid donors to come up with mutually beneficial structures that reward them if outcomes are met.
Conclusion
Although the green bond marketplace has taken off well over the last few years, it is not enough to fill the USD3 to USD5 trillion annual gap that is required to meet the SDGs. Banks are in a perfect situation to align just part of their broad loan books towards SDGs that are material to them to drive more capital towards the achievement of the SDGs. Certain sectors can be identified as most closely aligned and a framework for tracking and reviewing annually can be put in place based on industry learnings from the green bond issuance space. As a result, banks will not only be able to expand their product offering and client base but also support their clients who wish to similarly begin engaging with and reporting on their contributions to the UN SDGs.
References: ICMA, UN, Dealogic, MSCI, European Commission, Climate Bonds Initiative and HSBC
Ethical Finance Round Table
HSBC is an active lender in the sustainable finance industry globally and a member of The ICMA Green Bond Principles Executive Committee, The Catalytic Finance Initiative, The Equator Principles Association, The WEF Climate Leaders CEO Group, The Climate Bonds Initiative, The Social Bond Guidance Steering Committee, China’s Green Finance Committee, and the Adopted Taskforce on Climate Related Financial Disclosure. It is the founder of the HSBC Centre of Sustainable Finance and the award-winning Climate Change Centre of Excellence and the first sovereign Green Bond arranger (EUR750mn Polish Bond 2016). HSBC will be speaking at the Ethical Finance Roundtable in Edinburgh hosted by GEFI on Feb 27th 2019. To be considered for an invitation, please click here.