All financing is expected to be sustainable over the next five to 10 years, following on from the massive growth in sustainable financing in the first quarter of 2021 to $287 billion, Leon Saunders Calvert, head of research and portfolio management at the London Stock Exchange Group (LSEG) told Anadolu Agency in an exclusive interview.
According to Refinitiv, an LSEG business providing financial markets data and infrastructure, sustainable bonds raised in the first quarter of 2021 hit an all-time quarterly record to more than double the issuance levels in the same period of last year.
Sustainable finance, with the growth seen in the first quarter, now accounts for 11.5% of debt capital market activity relative to 9.5% in the last quarter of 2020.
A total of 460 sustainable finance bonds were issued during the same period, out of which 314 were green bonds. The value of green bonds and instruments for climate and environmental-related projects reached an all-time quarterly record of $131.3 billion, marking a more than 400% increase year-on-year.
A recent Moody's report showed the combined green, social and sustainability bond market is on pace to surpass Moody's forecast of $650 billion for all of 2021.
"The rapidly evolving policy and regulatory landscape is placing sustainable finance top of mind and will further support sustainable bond growth. Governments globally are increasingly pursuing policies that will lead to more rapid decarbonization and green infrastructure investment, gradual clarity around the criteria for activities to be considered sustainable, and greater international collaboration around sustainable finance initiatives," Moody's said.
- Mature markets lead in sustainable financing
Calvert also echoed this sentiment and said the surge in sustainable financing is been driven by policy shifts towards a more sustainable future with a decarbonized economy, banks' willingness to demonstrate that they contribute to a sustainable future and through the first major regulation through the EU taxonomy, an action plan on financing sustainable growth.
Globally, there is no standard defining green finance, however, the EU's taxonomy is expected to define it as anything provided to projects with 100 grams per kilowatt-hour of CO2 emissions, or equivalent to 100 grams.
Calvert explained that as banks require companies to report on their investments and revenues, these companies want to be part of the low carbon economy and not get left behind.
"They do not want to be stranded assets in the economy of 5-10 years," he said.
Refinitiv data showed that most developed and mature markets are making sustainability considerations a major part of their mandate both at the financial and investment levels with Europe leading with 62% of sustainable financing in the first quarter of this year followed by 18% in the US and 15% in Asia.
According to Calvert, emerging markets, however, are still relatively immature in sustainable financing but he said this could change in time.
"I think that green bonds in the emerging markets in the developing countries in Asia and Africa have been underutilized so far and there is lots of opportunity for growth," he said.
- Cost of capital to increase rapidly for companies with no transition plan
He stressed the need to have a genuine transition policy away from fossil fuels and towards greater renewables deployment amid the global transition to a low carbon economy.
"Strong dependency on fossil fuel economy as in various parts of the world is a risk," he said, warning of the increased costs of financing.
"As renewables become cheaper and innovation around renewables makes them more appealing, an economy highly dependent on fossil fuels is only one way and becomes more and more expensive particularly considering more mature carbon pricing, carbon tax on those industries that are going to find themselves under a very significant pressure financially in the next few years," he explained.
He argued that all countries regardless of their specific nuances and challenges associated with their ability to decarbonize based on their current reliance on fossil fuels need to do so to create an economy of the future.
According to a World Bank report, Iraq, Libya, Venezuela, Equatorial Guinea, Nigeria, Iran, Guyana, Algeria, Azerbaijan and Kazakhstan are the least prepared countries for a low carbon transition given their high dependency on fossil fuels, particularly oil.
The Gulf Cooperation Council countries and Russia are considered borderline cases that are often equally exposed, but which benefit from greater resilience thanks to their more complex economies.
Small oil and gas producers in sub-Saharan Africa, North Africa, Latin America and the Middle East have not yet diversified their economies for low-carbon growth and are among the most vulnerable to the impacts of climate change.
Similar risks are valid for companies that have no credible and solid low carbon transition plan.
"Over 5 to 10 years, all financing will be in some way sustainable financing. I do imply that in 10 years' time, if you still are a fossil fuel company and have no credible transition plan, you will have no access to financing," Calvert noted. "The cost of the capital will increase very rapidly over the course of the next years for companies which have no credible transition plan to a low carbon economy."
By Nuran Erkul Kaya