Speech given by Jeremy Browne, Special Representative for the City of London, to the Investment in a Low Carbon Context conference, Berlin, March 2016 –
Twenty-first century capital markets might be defined by their response to climate change. Politicians and NGOs have and will continue to play a key role in the transition to a low-carbon economy by raising awareness, setting the agenda and building international consensus. But the success or failure of these efforts will lie with investors; with those institutions and individuals willing to back new technologies and infrastructure projects, and with the creation of sufficiently deep, liquid and resilient markets for them to access green products and services.
The gathering of political and industry attendees in Berlin for this week’s dialogue demonstrates the significant risks and opportunities associated with this transition, and it’s certainly a fitting venue. Quite apart from its remarkable energiewende, Germany has established itself as a lead authority on financing the transition to a low-carbon economy, from capitalising the C40’s Green Cities Finance Facility to KfW’s consistent and at one point record breaking green bond issuances.
The success of Germany’s transition, however, has been in tapping the desire of local communities to improve their immediate environs; in reducing the scale of a monolithic challenge such as climate change to sculpting a neighbourhood heile welte. This transition is gradually spreading. In the UK, for instance, green crowdfunding platforms have raised more than GBP 2 billion for investment in small-scale, low-carbon infrastructure projects over the past two years; and there’s a fantastic story regarding the pensioners and students that unexpectedly jammed the phone line of the City of Gothenburg’s treasurer on the day the city issued its landmark green bond.
As a former Liberal Democrat you probably anticipated my championing the grassroots, but there’s an important point to make – green products can help meet the increasingly ethical demands placed upon modern finance, and if the sector retains its integrity through enhanced transparency and accreditation procedures, it might facilitate a revolution in the public understanding of what financial markets are capable of. This demand is also rapidly crystallising – London’s global asset managers have already noted a remarkable shift in client sentiment away from the exclusion of high-carbon assets from their portfolios toward the inclusion of low-carbon products.
Green bonds are very much at the forefront of this process. For the uninitiated, the products themselves are structured no differently to any vanilla issuance; their proceeds must simply invest in eligible green projects, and their environmental impact be assessed and approved by a credible third party – that’s it. But they stand out for their integrity; for the transparency and accreditation standards their investors demand – and also for being one of the few areas of reliable growth in recent years. The green bond market stands at USD 100 billion and, year-to-date, issuance has already outstripped 2013’s total. Policy banks and municipal authorities very much drove the market’s development, but corporates accounted for 47% of global issuance last year and Apple – the world’s largest company, remember – issued a headline USD 1.5 billion green bond just last month, the biggest in the US so far.
Green bonds increasingly represent business as usual, with China and India have developed national green bond guidelines and the London Stock Exchange launching its green bond segments last year. The green finance sector we’re here to discuss extends far beyond fixed-income though, and by raising capital for green projects, investing savings in low-carbon infrastructure and facilitating implementing of the national carbon reduction plans (or INDCs) agreed in Paris, global capital markets represent a key tool in the race to significantly reduce emissions and raise resource efficiency. The dealflow this might capture is also enormous, and is clearly complementary with the European Commission’s focus on growth, prosperity and long-term investment. A carbon-conscious Capital Markets Union or private financing for what is effectively the world’s most ambitious energy efficiency scheme – the Energy Union – could vindicate the long years of diplomacy undertaken by the EU in getting climate change on to the global agenda.
Indeed, the timing could hardly be better: environmental concerns are at the top of political and regulatory agenda worldwide, from the G20’s Green Finance Study Group to the FSB’s carbon disclosure task force. In the past twelve months, both President Xi and Prime Minister Modi have heralded landmark green deals during their visits to London, and Ban Ki-moon has challenged investors to double their investment in the low-carbon economy. Apple cited the political momentum achieved in Paris as a key motivation for their bond issuance, and the City of London is determined to support national and European authorities in their efforts to better channel and incentive funding toward the low-carbon transition. Privatisation of the UK’s Green Investment Bank – which has already mobilised total capital in excess of GBP 10 billion, and will greatly strengthen its lending capacity as a standalone institution – represents an excellent start to this process, but more can be done to generate green project pipelines and empower investors at all levels to build carbon-conscious portfolios.
As many of you will be aware, the City of London has built a reputation in recent years for its championing of emerging sectors, from legal services and Islamic finance to renminbi internationalisation. All have been a success, and this is a record we hope to continue with our recently announced Green Finance Initiative. Developed in partnership with HM Treasury and the Department for Energy and Climate Change, the initiative seeks to pool international expertise in this area in order to promote the market’s development; to advocate for specific regulatory and policy changes; and to provide public and market leadership on issues relating to green impediments and opportunities.
Convening policymakers and market practitioners is what the City of London does best, and that’s precisely why I’m here today. Our initiative is by no means confined to the UK – it comprises leading financial institutions from around the world – and we’re determined to encourage development of a truly global green finance sector, beginning in Europe. To paraphrase Chancellor Merkel, the continent accounts for 7% of the world’s population, 25% of global GDP – and 64% of responsible investment assets, the vast majority of them green-focused. If the two-degree target is to be taken seriously, global capital markets will be tasked with the heavy lifting, and Europe will inevitably be at its centre.
In recent weeks, certain London authorities have revealed themselves to be sceptical of the benefits of UK-continental collaboration. Speaking on behalf of the City of London, however, I would like to reiterate my sincere belief that cross-border cooperation offers the best means of scaling the green finance sector and the broader transition toward a low-carbon context. Speaking as a former coalition minister, I know from experience that collaboration can be painful – but that in exceptional circumstances it can also be the only means of achieving urgent outcomes. In that spirit I look forward to today’s discussions and would like to welcome the panellists to the stage.
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