Why 2018 could be the year when green finance realises its full potential

Next year could be when climate decisively enters the board room

This year has been a landmark year for green finance. Despite the overhaul of US climate policy in June, green bond issuances passed the $100bn milestone and CDP’s ambitions to make all companies disclose climate-related risks were bolstered by the recommendations of the FSB’s Task Force on Climate-Related Financial Disclosure  (TCFD), led by finance heavyweights Michael Bloomberg and Mark Carney.

There is much still to do. Funding the transition to a low carbon economy in line with the Paris accord will need the mobilisation of significant private capital, $90trn to be exact. The good news is that 2018 looks set to be the year when green finance takes a definitive step towards that goal.
Here we highlight three of the key themes set to dominate green finance in the year to come:

1. Better management of climate risk

The TCFD recommendations have provided a universal framework for all companies and investors to publicly disclose the way they manage the risks that climate change pose to their business model.
Important global fund houses like Aviva and BlackRock have already thrown their weight behind the recommendations and CDP has absorbed the framework into its environmental disclosure platform for 2018. Financial sectors will be receiving sector-specific CDP questionnaires in the 2019 disclosure cycle. Aviva recently warned its 1000+ portfolio companies that it plans to vote against any board which fails to disclose climate risks in its annual filings. Meanwhile, national governments in key markets like France and the UK have publicly endorsed the recommendations with France and Sweden’s joint commitment to implement.

Companies are responding too. More than 6,300 companies already disclose data on climate, water and forestry impacts to CDP and our recent analysis showed that 89% of the world’s biggest, most environmentally-impactful companies have targets in place to reduce carbon emissions.
As momentum gathers, we believe 2018 is set to be the year when climate decisively enters the board room, providing the capacity for more green finance to flow.

2. Powerful climate initiatives and partnerships

Initiatives such as the European High-level Expert Group on Sustainable Finance, set up to mobilise private capital in support of sustainable development, are also set to shape the development of green finance next year. The Group is scheduled to deliver its final report in January, and is likely to further stimulate inflows into investments that tackle greenhouse gas emissions, pollution and waste across the EU.

Very much aligned is the City of London Green FinanceInitiative, launched in 2017 in partnership with the UK Government, which brings together international expertise from across the financial and professional services sector, and promotes London and the UK as a leading centre for green finance and professional services. This Taskforce brings together senior leaders from the financial sector to accelerate the growth in green finance, and help the UK to deliver the investment required to meet the UK’s carbon reduction targets.

Recently we’ve also seen the Sustainable Stock Exchanges Green Finance Group publish its report ‘How stock exchanges can grow green finance’ clearly showing the value proposition that could catalyse more stock exchanges to embrace green and sustainable finance. Similarly, the UNEP’s Finance Initiative will hold its Green Finance Roundtables across the world in the coming months, further helping to mainstream green finance across the globe.

In the absence of tangible US government action on climate, a burgeoning partnership between China and the UK is set to accelerate the development of green finance in 2018. The two countries have joined forces to provide leadership with the China-UK Green Taskforce, which published the interim report ‘Turning Green Momentum into Actions’ in September. Bringing together a group of leading industry and policy experts, the Green Taskforce seeks to develop market-led solutions to help scale up green finance both locally and globally.

3. Growing green bonds

At present, green bonds, those that use debt capital markets to fund climate solutions, only represent a small proportion of the total global bond market, but they are growing at break-neck speed, with $100bn issued in 2017. China recently became the world’s leading green bond issuer and India and Mexico are beginning to tap into the market. Growth in 2018 looks set to continue at a similar pace.

One of the features of 2017 was the widespread devastation following hurricanes and floods in both the Americas and Asia, while wildfires ravaged Europe and the US. It was a year where the economic consequences of global temperature rises became clearer than ever and private investors, business leaders and national governments across the globe are stepping up to the challenge to call time on fossil fuel investments and support the transition to the low carbon economy. Corporate climate disclosure, global initiatives and green bonds are just three of the themes that will dominate green finance next year. The potential for scaling up the green finance market remains enormous and 2018 could be the year it realises its full potential.

Jane Stevensen is CDP’s Engagement Director to the TCFD.