Keeping an eye on the horizon

Despite the shadow cast on the global economy by the Covid-19 pandemic, a silver lining is starting to emerge. Following a year in which human consumption of natural resources exceeded 100bn tonnes for the first time, 2020 saw a sharp decline in the rate of consumption, by a remarkable 9.3%.

However, scientists have made it clear that this is an opportunity to change, rather than the beginning of a solution, as many positive changes – like declining rates of consumption – are likely the result of pandemic-related restrictions that may not persist once they are eased.

The recent G7 meeting of the world's seven largest 'advanced' economies sought to build on this opportunity for change, resulting in the US-led B3W ("Build Back Better World") partnership, a $40+ trillion multilateral initiative to provide low- and-middle-income countries with infrastructure built on sustainable principles.

Despite this, there is widespread scepticism that the G7 leaders, along with businesses and consumers, have truly begun to see past the focus on short-term interests that has, to date, robbed green initiatives of the necessary urgency.

The need for dramatic change in the way in which the global economy functions is growing with each passing year, regardless of disease-driven falls in emissions. Clearly, an approach that is simultaneously more united and more farsighted is needed to ensure a sustainable global future.

Dr Roland Mees, director of Sustainable Finance at ING, describes a necessary expansion of outlook as a consideration of the "phenomenological horizon" – a field of view that addresses both short-term and long-term demands through present-day action. "Sustainability is still something remote – outside our phenomenological horizon," he explains. "These sustainability policies we talk about have to be so complete and tangible that they enter into this horizon."

ING research reveals that progress towards tomorrow's goals feels challenging for some corporates who see their targets as being distant: more than a third (35%) of businesses say their sustainability targets are too far in the future to ensure any meaningful accountability today. At a global level, this is still too high a number of companies given the urgent nature of the climate crisis. The challenge facing decision makers now is how to define a pathway that mobilizes future ambitions to drive short-term action, accelerating the development of the green economy.

"In order to change the real world, you need people who are intrinsically motivated. They hold on, whatever happens." Roland Mees, ING

A behavioural fix is needed

Mark Carney, former Governor of the Bank of England, describes risks arising from a lack of preparedness as "tragedies of the horizon." Despite several countries having set net-zero targets, Carney believes that, unless more responsibility is taken by today's actors, "The catastrophic impacts of climate change will fall largely on future generations."

According to Mees, among the first things required to accelerate the green economy is a behavioural change. As Covid-19 vaccination programs pick up pace, allowing the world to lift restrictions and return to some degree of normalcy, there is little guarantee that organizations will maintain their focus on issues such as climate change and social inequality.

The danger, Mees suggests, is that, when the crisis situation that is driving change eases, the motivation to keep up new behaviours also declines. "In order to change society, to change the real world, you need people who are intrinsically motivated. They hold on, whatever happens."

When it comes to building a green economy, there are a number of external pressures that businesses must take heed of: investor pressure to reduce carbon emissions; activist demands for greater transparency; regulatory pressure; and, of course, consumer opinion and sentiment. These are clear motivators for change but organizations must search for their own intrinsic, ever-present motivations and embed them in their working cultures.

Research from EY finds that 55% of firms in emerging markets, for example, say that management frequently communicates the importance of operating with integrity, but almost half believe there are managers in their organizations who are willing to sacrifice integrity for short-term financial gain. So, what can be done to make the transition to an ethically and environmentally sustainable infrastructure easier and more effective for all?

"Sustainability needs mass coordination", Marieke Blom, ING

For Marieke Blom, Chief Economist at ING Netherlands, it is little wonder that this disconnect between intention and action persists, as, she suggests, the market is currently shaped by forces that produce unsustainable outcomes.

What is required, she says, is coordination. "You need a lot of coordination to counter those market forces, which, in themselves, are not sustainable. You have to think about not just your own needs, but the common good."

International cooperation can come in many forms. The Paris Agreement, which the US re-joined in February 2021, or the recent agreement reached by 130 countries to establish a global minimum corporate-tax rate of 15%, are just a few examples of the cooperation that Blom sees as supporting a more practical transition to a greener and fairer economy.

For economists like Blom, this kind of coordination is exemplary of the greater role governments can play in addressing existential challenges such as climate change. But, if real change is to be brought about, they may need to consider even more drastic measures, such as those taken to address the Covid-19 crisis.

"It was evident that governments needed to regulate human behaviour in order to overcome this big health crisis. We needed mass interventions," says Blom. "The revival of the idea that government is important to organize behaviour has probably gained more support [...] You need a counterforce – and government is the most important counterforce."

Much of this can take place through more effective implementation of regulatory policy. Take, for example, the EU Taxonomy introduced last year as a key part of the European Green Deal.

EU Taxonomy has been designed to help companies understand which activities are considered environmentally sustainable, while acting as a transparency tool for banks looking to assess the sustainability of companies to which they are considering lending. When the legislation comes into force in January 2022, European companies will be required formally to disclose activities related to climate-change mitigation and adaptation.

Initiatives such as the EU Taxonomy will be particularly important to investing in a greener, more sustainable future as changes in macro conditions make it tougher to act. For example, concerns over a rise in interest rates threaten to dampen confidence in the ability of sustainability-linked projects to provide strong returns on investments.

However, if frameworks such as the EU Taxonomy can bring greater transparency to the market, then confidence in investment may remain buoyant.

Green finance for a green economy

At a corporate level, clearer guidelines from regulatory frameworks mean that companies can begin to set themselves clear, achievable goals. Sustainable finance can play a significant role in facilitating the transition.

In a survey conducted by ING, more than half (53%) of companies said the economic turbulence they had experienced in recent months had led to reduced capital-expenditure budgets. At the same time, 57% said they are accelerating their green transformation plans. Fortunately for businesses, lenders have looked to improve access to finance through a range of fixed-income products and loans.

Recent figures suggest that more corporate debt (bonds) with environmental, social, and governance (ESG) matters embedded was issued in the first half of 2021 than in the whole of 2020. Moreover, Bank of America's forecast for green- and social-bond issuance has risen by $150bn, to $900bn for the year.

Sean Kidney, CEO of the Climate Bonds Initiative, takes confidence from the market's uptake of instruments such as green bonds in a period of such upheaval. The fundamental reason for this, he says, is that transparency and reporting principles enshrined in both voluntary guidelines like the Green Bond Principles and the Climate Bonds Standard, and now in regulation in many regions, ensure that issuers report on the use of proceeds from instruments such as green bonds, bringing a "step change in transparency" in the tracking of funds linked to environmental projects. Both during periods of calm and crisis, this kind of transparency offers welcome clarity to concerned investors.

"In the last year, green bonds performed better than conventional bonds in secondary markets, in terms of trading volumes," he says. "I've had investors tell me that, in March [2020], when they couldn't trade conventional bonds, they could continue to trade green bonds – they remained liquid when the rest of the market froze."

Another instrument companies can look to is green loans. Here, the use of proceeds is tied directly to green projects or green product development. These loans are typically provided at lower interest rates, with borrowers obliged to communicate environmental objectives to lenders.

On the ground: How green finance is put to use

There is clear pressure on automotive firms to act: road vehicles account for almost three-quarters of the transportation sector's carbon emissions, which in turn contributes to 24% of carbon emissions from fuel combustion globally.

Despite this, an ING survey found that 43% of automotive companies – a significantly higher percentage than that seen in companies overall – feel that sustainability targets are too far off in the future for them to have a meaningful effect on current production methods.

Green bonds have been important for automotive firms looking to finance their transition from fossil fuels to electrification. Automotive giant Volkswagen, for example, which aims to reach full carbon neutrality by 2050, made its green bond debut in September 2020 with the issuance of two bonds totalling a volume of €2 billion. The proceeds are being used to fund its development of new electric vehicle models and the technology underpinning them.

Another sector that has demonstrated an ability to accelerate its transition to a more sustainable future through green finance is telecoms. In 2020, Turkcell, a mobile network operator in Turkey with 34.4m mobile subscribers, took out a green loan for the first time to refinance a share of its debt repayments and finance its capital-expenditure requirements.

By taking out a €50m, five-year bilateral green loan, the company was able to support its sustainability endeavours, including investments in renewable energy and energy-efficiency projects. To ensure accountability, Turkcell has committed to sharing an annual allocation report detailing exactly how the loan is being used. The opening of Turkey's first solar-powered data centre last year is just one example of the work it is doing.

Despite the size of the task ahead, there is plenty of optimism: 41% of companies say their planning in the next one to two years will be shaped by an ambition to align sustainability goals with long-term business strategy and purpose.

Governments evidently need to step in with a firmer and more time-sensitive regulatory hand, making businesses aware of the need to prepare for horizon events today, rather than expecting businesses to respond to vague targets in the distance. Through the uptake of instruments such as green bonds, businesses can at least begin to take meaningful steps towards achieving their future emissions goals.

As with the politicians, however, businesses will need to keep a steady gaze on the horizon to ensure that the risks lurking there are provided against by action today. The greater the variety of financial instruments available, the more likely it is that companies will be able to play their part in ushering in the green economy. Now, having recognized the opportunity to rebuild for a better, greener future, they must be sure to grasp it.