18 things I learnt in 18 months at a Climate Finance NGO

Here’s what I learnt about the sustainable financial ecosystem

·       Climate Finance is nowhere without relentless collaboration and innovation. Science, academia, industry, markets and governments must continue to operate in concert. Every expertise and skillset is needed to solve the challenge we are facing. The more diverse the set of minds, the greatest the chances we harness all perspectives required and minimise blind spots. It is at the intersection of these spheres that edge effect abundance emerges.

·       Emission-reducing projects, assets and activities exist in abundance and demand for green, social and sustainable bonds and loans is showing no sign of waning, with new investment vehicles being launched at pace. Moving capital from project to investment is where the challenge lies. The bottleneck is at the top of the investment value chain where identification of projects, due diligence, activation and permitting represent the biggest hurdle to capital deployment.

·       Financial stakeholders are overwhelmingly demanding harmonisation of standards and frameworks. For a global perspective, the interoperability of country-level taxonomies, i.e., the classification of activities by industry sector and for the purpose of setting criteria, is a condition to enabling ambitious and credible sustainable trade on an international scale.

·       The redistributive powers of fiscal policy and subsidies must continue to support the transition globally. Policy and regulations are the linchpin of sustainable finance. Can’t live with them, can’t live without them. The most dexterous we become at adapting our financial ecosystem to new rules of engagement, the highest chance we have to thrive in a new world order. Policy has lately fallen behind and continues to be susceptible to changing political cycles. We must create policy frameworks that can stand the test of time.

·       Market participants willing to embrace the challenge must also be rewarded and see their commitment to sustainable investing deliver growth and outperformance. One example of this includes performance linked instruments that feature a step-down coupon mechanism through which issuers can access a lower cost of capital upon meeting a target. More advantageous finance for sovereign Debt Management Offices, stronger balance sheet for corporate issuers. All may need to leave something in the trade in the short term. Investors may have to grit their teeth and take the long view (as they traditionally should) and will see lower embedded risk in the long run. There are trade-offs but everyone can win from this.

·       Investment banks can play a pivotal role in advising corporates on how to balance their growth and sustainability agendas and guide the financing of ambitious and credible transition plans where needed. Debt capital markets (DCMs) and corporate advisory expertise in the structuring and pricing of all labelled debt is essential to ensuring credit spreads fully reflect the financial and non-financial risks and opportunities of the projects, assets and activities that proceeds are allocated to. Banks and lenders who align will attract more business, see higher issuance volumes flowing through their DCM desks and will enable the depth of liquidity investors are after.

·       There are data challenges to standardised metrics, integrated reporting and risk assessments. Independently verified market data is critical to the credibility of sustainable capital markets. The science-based, 1.5°C-aligned screening of the use-of-proceeds, and indeed transition plans, is the only assurance investors can safely rely upon to ensure the sustainability fundamentals of a bond are anchored in authentically well-informed and trustworthy expertise. ISO certification and accreditation deliver an even higher degree of assurance for greyer types of investments. Retroactive and programmatic certification of bonds, assets and entities is available to support and minimise efforts for issuers.

·       Index providers have risen to the occasion by delivering powerful reference indices that define (pre-screened) investible opportunity sets for the investor community. Whether it is use of proceeds labelled debt or thematic transition finance, index providers have designed ready for use indices for actively managed, benchmarked mutual fund products and segregated mandates as well as for the passive replication of exposures in ETPs (Electronically Traded Products). Sustainable investments are now widely accessible by retail and institutional investors alike.

·       Stock exchanges provide ideal venues for the launch and marketing of sustainable new issuance. Fierce competition to attract sustainable debt listings has led them to step up their game by broadening the scope of their capabilities and have a huge role to play in advancing the issuer-investor engagement agenda on a case-by-case basis.

·       Asset owners have it in their power to unleash major improvements in sustainable finance market technicals. The greening of large institutional mandates held by public and corporate pension funds, insurance companies, endowments and foundations is probably the greatest incentive we can give other market stakeholders – including but not limited to asset managers - to execute on their sustainable strategy. The greening of institutional investment portfolios could be the fastest lever to introducing a meaningful greenium. Perhaps most importantly, scheme members are owed to be invested in the transition of their economy and society.

·       Environmental and social issues are deeply intertwined, and we must adopt community-based, place-based and resilience-inducing approaches for climate solutions to be fully effective. Indigenous community engagement for the issuance of social and sustainable (hybrid between green and social) debt is critical to the resilience agenda, ensuring that, should disaster strike, economies and societies can recover promptly. Investors, demand a Just Transition.

·       Along similar line, driving capital to and within Emerging and Frontier Markets through sustainable investments in private assets must be performed whilst ensuring expertise is local and community-based. Sustainable EM debt carries the same country level risk as its conventional EM debt equivalent. Do not expect a price benefit or a risk markdown to avoid disappointment. Yet the Global South cradles myriad green and sustainable investment opportunities that will eventually lead to a reduction in the debt burden of EM sovereign and EM corporate issuers, ultimately prompting an improvement in fundamentals and the stabilisation - perhaps even the narrowing - of EM credit spreads over the long run.

·       Concessionary funding from Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) has a critical role to play in the aggregation of project finance, especially in the highly fragmented, opaque loans markets. Their expertise in rolling out climate and social development programmes is critical to successfully transitioning our global economy. Inspiring institutional investors to invest in those programmes will, here as well, make all the difference. Supranationals are expert investors in infrastructure and while, once an investment backwater, infrastructure has increased six-fold since 2008 and is seen by pension funds as a source of yield and protection against market volatility.

·       The use of Artificial Intelligence (AI) already is a huge contributor to the fight against climate change and the instilling of climate resilience into our ecosystem. Existing AI systems offer tools that predict the weather, track icebergs, identify oil dumping, methane leaks and other pollution. In the insurance sector, AI already assists the risk assessment framework refining the calibration of natural hazards impact in the real economy. Private capital is particularly suited to seeding these early-stage technological climate solutions as many sectors in transition require money with grit and patience.

·       Count on the markets to come up with a new financial instrument for every problem we face. Despite initial scrutiny over Sustainability-Linked-Bonds, it is now abundantly clear that forward-looking performance-linked structured products not only constitute a powerful tool to enabling the transition of hard-to-abate, high-emitting sectors of our global economy but they also aid the monitoring of issuers’ progress on the trajectory to net zero. KPI selection, the setting of scientifically tested thresholds and the calibration of targets and coupons is entirely sector-dependent and therefore requires sectoral, scientific expertise.

·       Corporates and sovereigns showing leadership by undertaking the phasing-out of fossil fuels and phasing-in of emission-reducing activities and projects will see their borrowing costs impacted by their ability to communicate and execute strategic transition plans skilfully to investors.

·       Whether you are a fan or not, carbon markets are unfolding, and banks and exchanges are arming themselves with some of the brightest minds in the field. On the Voluntary Carbon Market (VCM) front, safely structured and vetted, biodiversity impact credit (in the form of Verified Carbon Units or VCUs) could play a significant role so long as any offset is genuinely in support of biodiversity conservation or nature-based solutions. On the regulated carbon market side, while the EU CBAM regulation's status was once tipped as change leader of international ETS mechanisms, the regulation will have to overcome the criticism stemming from the threat it could pose to small farmers in some of the worst climate impacted regions of the world.

·       Filled to the brim with mission-driven experts, NGOs have a critical role to play in influencing markets and policy-makers with ambitious objectivity. Climate NGOs ensure we set the highest standards, protect the credibility of our global climate transition and foster economic resiliency for the future. This otherwise neglected work is only made possible thanks to funding through grants, partnerships or sponsorships of a wide range of stakeholder groups. It’s going to take a village.

I am Constance de Wavrin, Founder of In|Flow, and these are my personal views.