Save and invest: a new way of protecting the environment
Thanks to sustainable finance – also known as green finance – we can now protect the environment by choosing where our savings go and which projects they go towards funding
Time is running out for us to change our production system and our way of life. We need to take action urgently. This warning came from a recent announcement by the UN's Intergovernmental Panel on Climate Change (IPCC).
Leading experts in the field stress that changes to prevent global warming from increasing temperatures by more than 1.5% –predicted to happen at some point between 2030 and 2052 – must be made immediately. What's more, they warn that though it may be difficult it is not impossible: and that not taking action could cause, among other things, the total destruction of coral reefs, fundamental to marine ecosystems; or a 10cm increase in sea levels.
In addition to policies put in place by all countries to control emissions and raise public awareness, it is crucial that markets participate in the fight against climate change. This is what has led to the conception of a new type of finance, which designates funds to projects that contribute to the successful achievement of environmental goals.
These initiatives include giving access to electricity to more than 100,000 people, schools, and hospitals in rural parts of Peru thanks to the installation of solar energy systems; creating eco-homes in a metropolitan centre south of Medellín (Colombia); and using geo-thermal energy to improve access to clean energy in Indonesia. These are just some of the projects that the World Bank has fundedthrough so-called green bonds.
Sustainable finance, green finance, or green loans – called green bonds in Spanish – are products which are designated solely and exclusively to funding or refinancing projects that protect the environment, fight against climate change, and are socially responsible.
These categories include initiatives related to energy efficiency, sustainable agriculture, the protection of land and marine ecosystems, and the prevention of pollution.
"The world has committed to creating a better future for people and the planet. But unless the world financial system uses its capital to drive change, we will be unable to achieve our sustainable vision" said the Director of UN Environment Programme, Erik Solheim, in his presentation of the Green Finance Progress Report in 2017.
Over 750 billion in green finance in 2020
Development banks, such as the World Bank as previously mentioned, were the first to issue green bonds in 2007. Since then the market has continued to grow. According to United Nations data issuing bonds of this type accounted for just under 11 billion dollars in 2013. In 2016 that figure had already exceeded 51 billion dollars. But whilst these figures may be encouraging, the UN reminds us that they represent just 0.15% of the global market. Last year they exceeded 150 billion dollars, and according to experts there could be a fivefold increase in the volume of green bonds issued by 2020.
Green finance in Spain is concentrated among larger corporations and government agencies. Investors are attracted by the profitability of these bonds, but also by what their money may go towards. And the trend also shows how investment in green bonds is attracting individuals who would not otherwise be interested in the world of finance.
For example, in the state of Massachusetts (United States) more than 1000 members of the public – small investors – decided to support their government by investing in a local environmental initiative. As the World Bank points out, these investments are a way of "voting with your money".
Millennials, the promise of green bond investment
Millennials are one of the sector’s most important assets. Although they may not currently have the financial means to invest, they are acutely aware of environmental issues and look far beyond issues of economic profitability. In this sense, experts in the financial sector expect that in years to come, as their employment status improves and their parents' wealth transfers to them, they will become small investors.
Unlike sponsorship, investing in green bonds involves buying debt issued by a company or government agency without directly choosing which specific initiative it will go towards. This is not about "à la carte projects" but about giving financial resources to the organisations whose environmental initiatives we believe in. For those who don’t know of any specific proposals offered by private companies, Spanish financial institutions have sustainable development products available to their customers.
One such option is to invest in sustainable investment funds, a way of investing centred on seeking assets that benefit the planet, or at least those that don’t pose any risk or further damage. According to experts, this trend, as well as having ethical considerations as a key focus, guarantees a return on investment in the medium and long term as it offers more guarantees in preventing any issues that could put the investment at risk.
In this context, at the start of 2018 Banco Santander launched two sustainable investment funds: one with fixed rate, and another variable rate fund created for higher risk profiles.
Thanks to these sustainable finance solutions the bank has put 17,000 low emissions electric vehicles into circulation. It has also launched Project Finance for the construction and operation of wind farms, solar photovoltaic plants, and thermo-solar plants in countries such as Italy, Portugal, and the United States, among others. And in Brazil, 32 million euros have been allocated to companies and individuals to start up environmental projects for energy efficiency in the agricultural sector.
Along with autonomous communities such as the Basque Country and the Community of Madrid, some national companies have issued green bonds to finance their projects, such as:
- ADIF, which issued more than 600 million euros of debt in the summer of 2017 to commence works on new high-speed lines and improve the energy efficiency of pre-existing lines.
- Repsol, which issued 500 million euros to develop energy efficiency projects at its refineries and chemical plants in Spain and Portugal.
- Iberdrola, which has already issued more than 1.4 billion to fund East Anglia ONE: the world's largest marine wind farm measuring 30,000 hectares, situated on the south-east coast of England, which will provide electricity to more than half a million homes.
An ever-growing market
This dizzying growth means it is essential to establish measures to control and regulate the market, to avoid confusion and ensure that the ‘green’ label is used responsibly.
As such, the European Commission has set to work. In May the Commission announced that, among other measures, bonds using the 'green' appellation must meet certain criteria, such as mitigating the effects of climate change, helping the climate change adjustment process, making sustainable use of marine resources, encouraging the circular economy, recycling, avoiding pollution, and protecting sustainable ecosystems. And above all, not going against any of these principles.
"The challenge now is to rapidly increase flows of capital towards investments that support our sustainable development objectives and create green and commercially viable businesses in the coming decades", said the Director of the UN Environment Programme, Erik Solheim, adding: "The G20 and others have put the wheels in motion. Now it's time for us to really put our foot on the accelerator".
By Belén Belmonte