A growing market for green finance

Climate change is no longer a future threat. The associated risks have already had a devastating impact on the financial sector.

Financial institutions are financially exposed to the physical risks associated with more frequent severe weather events, as well as the transition risks associated with the changes necessary to achieve a low-carbon economy. Mortgage, commercial real estate, business and agricultural loans, as well as derivative instruments tied to these markets, are susceptible to losses related to severe weather events and other environmental changes. For example, the increase in the brutality and frequency of droughts, floods, fires and other natural disasters have damaged borrower assets and collateral and decreased their value, thus putting a strain on borrowers’ ability to repay lenders – leading to increased levels of default and losses on credit portfolios.

The 2019 bankruptcy of PG&E due to wildfires in California is a harsh demonstration of the credit risks that banks face due to climate change. This is why some banks have started taking active steps towards providing sustainable financing, treating climate risk not only as a reputational risk but also as a financial risk.

Climate change presents corresponding financial opportunities in the form of green bonds, impact investing, microfinance and credit for sustainable projects and development; and because some nations have considered  reducing their dependence on fossil fuels and are instead leveraging new renewable energy sources. At the end of 2018, the market for green and sustainable finance was already worth $30.7 trillion. In the first half of 2020, more than $275 billion of new sustainable financing had been raised on capital markets.

In the last year, despite the coronavirus pandemic, we’ve seen various forms of green and sustainable financing transactions and initiatives including the following highlights:

• Nedbank’s listing of an innovative bond linked to the UN’s Sustainable Development Goals, on the Green Bonds segment of the JSE.
• HSBC’s launch of a “green deposit” product with a commitment to on-lend the accrued inflows to finance sustainable projects and initiatives. 
• IFC and FMO’s $225 million loan to FirstRand Bank to finance green projects and to support climate-friendly initiatives.
• Barclays PLC announcing a new climate policy with the aim of being a net zero bank by 2050 and committing to align its entire financing portfolio to the goals of the Paris Agreement on climate change.
• Standard Bank’s sale of Africa’s largest green bond, raising $200 million from the IFC to finance climate-related projects. 
• Energize Venture’s $70 million injection into Aurora Solar, a software firm which has designed panels for more than 4 million solar projects.
• JP Morgan Chase’s announcement that it would facilitate $200 billion by 2025 for sustainability finance.
• The launch of the Green Assets Wallet, a blockchain database for issuers and investors of green bonds.
• Investec launched its Environmental World Index Autocall, providing exposure to the Euronext CDP Environment World EW Index, which selects the highest-ranked 20 North American and 20 European companies, on the basis of their environmental performance.

In Africa, as the number of solar and wind renewable energy projects multiplies, the continent is expected to attract significant green financing in the coming years. According to the World Bank’s International Finance Corporation (IFC), South Africa’s climate-smart investment potential between now and 2030 is $588 billion. 

This article is the first of a short series of articles to be published by the firm on green financing.