Climate Finance Week 2019

Tuesday, November 5, 2019

With Climate Finance week 2019 taking place this week in Ireland, the Irish government continues to position Ireland as a hub for green finance as part of its “Ireland for Finance” strategy.  This is building on the success of the issuance of an Irish €5 billion sovereign green bond among 27 other green bonds listed on Dublin’s Euronext exchange in 2019.

What is Green Finance?

Green finance refers to the process of taking due account of environmental and social considerations when making investment decisions. Green loans are any type of loan made available to finance or refinance in whole or part new or existing green projects, such as

• renewable energy;
• energy efficiency;
• pollution prevention and control;
• environmentally sustainable agriculture;
• biodiversity conservation;
• clean transportation (electric, hybrid, public, rail etc);
• sustainable water and waste water management;
• climate change adaption;
• environmentally sustainable products; and
• green buildings

Guidance as to what constitutes a green loan is continuing to develop from:

• the Green Bond Principles developed by the International Capital Market Association (ICMA)
• the sustainable finance taxonomy being developed by the European Commission
• High Level Expert Group (HLEG) on Sustainable Finance
• the work of the FSB (Financial Stability Board) on the recommendations of the task force on climate related disclosures (TCFD).

Why Green Finance?

In order to meet commitments made under the Paris Climate Agreement (40% reduction of CO² emission by 2030), and to address the UN sustainable development goals (SDGs), over the next 15 years it is estimated that the world will need to invest around US$90 trillion in sustainable infrastructure assets. Nationally it is estimated that our transition to a low carbon economy will be in excess of €40 billion in investment.

The market for sustainable or green investments is currently worth $30.7 trillion according to the Global Sustainable Investment Alliance with the market for green loans and green bonds having grown exponentially since 2012 as shown by the below graph.

Source: Bloomberg

How?

Lenders that advance loans for “green” projects can support the achievement of these targets by facilitating the transition to a low carbon economy. Part of the work being undertaken by the likes of the EU HLEG to develop a taxonomy for sustainable finance, and the FSB in respect of the TCFD is to develop frameworks against which green loans, institutions and the green loan market can be benchmarked. These measures are also intended to address “greenwashing”, ie the badging of loans as green which would not otherwise satisfy certain minimum or appropriate criteria. In addition the Loan Market Association (LMA) have developed the Green Loan Principles and Sustainability Linked Loan Principles as a guide for market participants, lenders, lawyers, rating agencies etc, in this area in documenting green or sustainably linked loans. In contrast to other loans, lenders are faced with different considerations in advancing a green loan, in particular they need to consider:

• the evaluation and selection of suitable green projects;
• the use of the loan proceeds to ensure they are applied to green projects or implementing the agreed sustainability strategy;
• management of the loan proceeds to ensure the project delivers the relevant savings or targeted investment;
• annual reporting requirements on the part of the borrower on the projects financed and verification (whether on an independent audit or self certification basis) of the project.

With further announcements made today by:

• Euronext on the establishment of their centre of excellence for green bonds in Dublin;
• by Irish Life on their commitment to incorporating ESG across their €15bn portfolio; and
• Michael D’Arcy Minister of State at the Department of Finance committing to growing the green finance sector from €100m to €1trillion as soon as possible as part of the sustainable finance agenda at Climate Finance Week, the week has certainly kicked off on an ambitious note.

Follow us to keep posted on developments in the green and sustainable finance sector.