Sustainable Finance Wrap-up Q2 2022: What’s New in the Finance Sector?

Tom
Tom June 2022 Content Creator 9 min

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New committees for sustainable finance, European standards against greenwashing, US carbon tax discussions, and more. 2022 has already been a big year for sustainable developments and putting environmental issues front and centre and second half promises to be even bigger. 

Sustainable finance refers to the financing of and financial requirements of these sustainable developments. Ideas need financial backing to make change and investors want to see the monetary value in investing in a green future. As a fintech company committed to carbon neutrality and greening the finance sector, this is a future we at Penta are banking on.

Continuing our series of quarterly reports on sustainable developments in finance, read on for Q2’s most exciting green and sustainable finance news stories, both in Europe and from around the globe. 

German government forms new sustainable finance committee

The German government has renewed their efforts for a sustainable strategy in the financial sector. The committee is called the Sustainable-Finance Beirat and will concentrate efforts on topics like: 

  • Transforming finance flows
  • EU regulation
  • Aligning the financial system to the goals of the Paris Agreement and SDGs

This comes as part of the new government after the most recent elections. Silke Stremlau, who is on the managing board at the occupational pensions provider for the non-profit sector Hannoversche Kassen, said that ‘not much concrete happened’ under the old government. She has stated she wants to change that. 

As a result, a new strategy has been outlined with five goals and 26 measures designed to transform the economy. These measures include: 

  • Making progress on EU taxonomy
  • Strengthening non-financial corporate reporting
  • Reinforcing supervisory activities through BaFin
  • Developing progress indicators for sustainable finance in the medium-term

Pension funds are front and centre in the new committee’s plans, with regulation of investments into pension funds being implemented to achieve climate goals. 

The Beirat is made up of 34 members and includes the managing director of Allianz Investment, the chief economist of Munich Re, and the CFO of corporate bank at Deutsche Bank.1

Austria: first green bond on the Vienna stock exchange

Austria has entered the green bond market by selling its first ever green bond. The sale was made in May and amounted to €4 billion. It will mature on May 23, 2049, and is priced for a yield of 1.876%. 

Green bonds explained

Bonds are what governments use to finance the building of roads, schools, and other essential infrastructure. Individual investors assume the role of lenders and lend a portion of the capital needed by the governmental institution trying to raise money for their project. Green bonds are simply fixed-income loans specifically marked to raise money for environmental or sustainable projects.

The bond attracted investor demand of up to €25 billion and investor demand across Europe has dramatically increased for environmentally-concerned projects in recent years. 

With short-term instruments like treasury bills and commercial paper in its green debt program, Austria is predicted to attract central banks, money market funds, and other short-term oriented investors.

Austria has plans to raise another €1 billion and has identified €5 billion in expenditure to fund its green bond programme from 2021 through 2022. Almost three quarters of the spending is specified for clean transportation. 

Other countries, including Germany, the Netherlands, and Britain, are planning to top up their green bonds soon, with Greece expected to enter the green bond market this year.2

European Green Bond Standard (EUGBS) sets new measures to avoid greenwashing

Representatives in the Economic and Monetary Affairs are seeking to better regulate the green bond market by tackling greenwashing and increasing transparency in spending on energies. 

‘Greenwashing’ refers to superficial commitments to environmental concerns, made by governments or companies who wish to appear sustainable without backing up their claims. One way in which MEPs plan to combat this is with a proposal to regulate the entire European green bond market. This is instead of merely labelling certain bonds ‘green bonds’ with the European Green Bond label (EuGB). 

The proposal will require transparency for all bonds marked as green. Bonds must therefore align with the European taxonomy legislation classification system, allowing EuGBs to be compared with other green bonds. Official green bonds must also include safeguards to make sure they do not harm people or the planet. 

To help make sure that ‘brown’ companies (high polluting companies) don’t use the EuGB label to feign alignment with green concerns, the proposal requires verified transition plans on all EuGBs. Issuers of green bonds must also have processes in place identifying and limiting the negative impacts of their activity. Lastly, all countries on the EU’s black and grey lists of tax havens are prohibited from issuing green bonds. 

The proposal makes it possible to ban companies from issuing EuGBs if they fail to follow the rules. Stronger market-pressure to follow the rules are enforced by ensuring legal recourse if the issuer’s failure leads to depreciation of the bond.3

European Parliament: Committees vote against labelling of gas and nuclear power as environmentally sustainable investments

To help with the EU’s plan to be climate neutral by 2050, a system has been put in place to ‘facilitate sustainable investment’. Investors will be given guidance on economic activities they plan to undertake that will be considered environmentally sustainable.   

One thorny issue within the EU over sustainable development is whether or not natural gas and nuclear power can be considered sustainable. Nuclear power was initially left out of the delegated act on sustainable energies, but further assessment from the EU Joint Research Centre concluded nuclear technology is sustainable. 

Those arguing for nuclear power’s sustainability, which includes 12 EU states, point to its low-carbon power source as a necessary inclusion in the energy mix needed to replace fossil fuels and oil. Opponents of the technology claim that the inevitable accumulation of radioactive waste renders it unsustainable by definition. France backs nuclear, in opposition to Germany who has voted not to include it. 

The EU states that any sustainable economic activity must meet the following criteria: 

  • Climate change mitigation
  • Climate change adaptation
  • Sustainable use and protection of water and marine resources
  • Pollution prevention and control
  • Protection of healthy ecosystems
  • The transition to a circular economy

The ECC considers nuclear power and natural gas in the ‘transitional’ category of activities. This states that they cannot yet be replaced by feasible low-carbon alternatives, but do contribute to climate change mitigation and will contribute to the transition to a zero emissions future. 

Sama Bilbao y León, director general of the world nuclear association, has urged the European Parliamentary to ‘act pragmatically’: ‘Denying affordable finance to nuclear would result in higher energy bills for all Europeans.’4

PwC report: Almost half of bonds in Europe to be green, social, or sustainable by 2026

A report from the PwC forecasts that European Green, Social, and Sustainability (GSS) bond issuance will reach between €1.4 and €1.6 trillion by 2026. This will account for close to half of Europe’s total bond issuance.

The report is titled ESG – Transformation of the Fixed Income Market and provides an overview of the evolution of sustainability in Europe. Insights are gleaned via a detailed survey of 100 investors and 100 issuers.

Key findings from the report include the aforementioned growth in the GSS market, expansion of GSS bond offerings, and an increase in value of the public sector. The report is a clear demonstration of the increase in value in green and sustainable developments as financial investments.5

Global news in sustainable finance

USA: Carbon tax for oil industry in discussions

The American Petroleum Institute (API) is in talks over a possible carbon tax in the US. In what may seem like a suicidal move for the industry, given that the group includes almost all leading gas and oil companies in the country, this could lead to a national carbon price. 

The API has adopted a national climate framework and is in talks over how best to include a carbon tax. Senior VP of the API Megan Bloomgren said: ‘We are focused on analysing solutions for the most transparent and impactful way to reduce emissions at the lowest cost to American families, and this proposal is part of that process.’6

Bangkok: Centre for Finance for Sustainability launched

A region highly vulnerable to climate change, South East Asia has most of its economic activity and population along coastlines. To address this concern, Bangkok’s Centre for Finance for Sustainability (CFSB) has formed to—as per the website—‘raise awareness, exchange and manage knowledge and drive the policy agenda and policy actions on finance for sustainability.’

In a session that launched the institution on the 31st of May, key goals for the centre were outlined:

  • Understanding better the role of the CFSB in South East Asian Society
  • Identifying challenges on the way to sustainable transition and accessible finance
  • Connecting stakeholders and broadening the network of the CFSB7

Taiwan: Banks will have to face climate stress tests in 2023

In a bid to measure the impact of possible environmental catastrophes on lenders’ assets, Taiwan banks will undergo mandatory climate-change stress tests in 2023. 

The content of the tests is still being discussed and will be finalised at the end of 2022, and the tests will be conducted in the first half of the next year, with the intent of publishing the results in June. 

Taiwan’s banking association has been authorised by the FSC to run the tests, and they will be submitted for approval in September. 

Certain financial institutions in Taiwan have begun preparing, examining financial risks of rising sea levels on real estate, and what might happen to loan portfolios of industries particularly vulnerable to climate change. 

Already prone to typhoons and severe droughts, typical consequences of climate change, including higher temperatures, stand to have potentially devastating consequences on Taiwan. Research has also shown that as much as 20% of the rice harvest could be damaged. This could also encourage breeding of disease-spreading yellow fever mosquitoes.8

Conclusion

Sustainability and finance are showing themselves to be a good match when it comes to progress in both areas. Financial investment drives technological development and supports new ideas, while sustainable tech presents new areas for investors to profit. 

Keep watching this space as we continue to follow the sustainable finance trends here and discover new ones to track.

sustainability penta
sustainability penta

Did you know…

Penta aims to make its processes more climate-friendly step by step through internal reduction measures.

Sources:
1 www.ipe.com
2 www.reuters.com
3 www.europarl.europa.eu
4 world-nuclear-news.org
5 www.pwc.lu
6 www.woodmac.com
7 www.sei.org
8 www.bloomberg.com

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