Assessing the 'Green Finance' Boom: a Green Gold Rush or just Greenwashing?

Indeed, nations throughout the world are now explicitly recognizing 'green finance' as a fundamental pillar in their climate change policies and action plans. France, for example, has passed a law requiring institutional investors to offer comprehensive reporting on the environmental impacts of their investment portfolios. The European Commission has also just unveiled its Action Plan on sustainable finance, a comprehensive strategy intended to enhance the presence and impact of green and sustainable finance in combatting GHG emissions, among other social and environmental goals. 

However, the prospect of a truly 'green' finance industry is subject to considerable skepticism, as well as a number of questions ranging from the technical, such as our ability to inhibit 'greenwashing' - wherein parties take advantage of the popularity generated by environmental commitments without genuinely contributing to environmental goals - to the philosophical, such as whether an economic system premised on continuous growth and expansion is inherently at odds with environmental sustainability. With these concerns in mind, the GGI, in collaboration with the Official Monetary and Financial Institutions Forum (OMFIF), hosted a panel of industry leaders and policy experts to assess the promises and potential pit-falls of green finance. 

Pooma Kimis: Managing Director, OMFIF 

As the managing director of OMFIF, an organization that works with institutional investors such as sovereign wealth funds and central banks in creating their investment portfolios, Pooma Kimis was well situated to provide a comprehensive tour of the expansive range of green financial assets and products that have been brought to the market, which run the gamut from debt assets such as green bonds (issued by parties intending to employ those funds in the service of green initiatives and investments), to more general equity assets, including stocks traded on a number of exchanges. 

In addition, she provided an overview of the parties driving the growth of the green financial market, including notable elected leaders such as Michael Bloomberg, former Mayor of New York City, and French President Emmanuel Macron. Kimis also pointed to a somewhat less visible body, the G20-affiliated Financial Stability Board, which has generated substantial interest in combatting climate change in the financial sphere by undertaking an initiative to evaluate the financial risk for capital markets associated with projected climate change impacts. 

Importantly, Kimis touched on factors that she believes to have hindered the growth of green finance to date, including the absence of a unified taxonomy for what constitutes a truly 'green' asset. Without such a system, she argued, there exists a substantial risk for greenwashing from investors and bond issuers alike. However, she also suggested that this sort of 'teething' issue is an inherent feature of new markets, and argued that an incremental and iterative relationship between market growth and regulation will gradually generate the regulatory consensus that 'green finance' currently lacks. 

Kari Eik: Co-chair of United for Smart Sustainable Cities (U4SSC)

As a seasoned UN expert and chair of U4SSC, Kari Eik represents the link between the world of finance and the tangible projects that are ultimately funded by assets like green bonds. In response to Kimis' well-founded concerns surrounding greenwashing, Eik's work offers a compelling example of an established mechanism for ensuring that projects comply with socially responsible and environmentally sustainable goals. 

Since its inception, the U4SSC has endeavored to create a comprehensive set of measurable criteria for clearly qualifying 'smart' and 'sustainable' cities. Premised on the more broadly framed Sustainable Development Goals, the program has generated a UN official index for smart cities, providing investors with measurable criteria for evaluating the sustainability of their investments, as well as providing a framework for appropriately channeling investment funds to local private sector groups whose work adheres to the guidelines for sustainability. As of 2018, the project has recruited over 600 cities throughout the world to rebuild local infrastructure and empower locally situated actors by funding smaller-scale sustainable initiatives. 

Eik argued that the work of organizations like the U4SSC will be increasingly invaluable to the success of 'green finance' by effectively bridging the gap between the private sector and traditional agencies and large programs like the UN Environment Programme (UNEP), which were not designed to effectively coordinate small-scale, private sector involvement. 

Isabelle Laurent: Deputy Treasurer and Head of Funding, European Bank for Reconstruction and Development (EBRD)

As the head of funding for the EBRD, Isabelle Laurent approached the green bond market from a slightly different perspective than her fellow panelists, namely with respect to the practical implications of regulation. While acknowledging, like Kimis, that creating a coherent taxonomy of green assets is a legitimate aim, she also expressed hesitation regarding the desirability of any more stringent regulation of the green finance market. 

While acknowledging the substantial risks of greenwashing, Laurent argued that comprehensive, top-down international regulation -  rather than inhibiting greenwashing efforts - would do little to ensure that funding is truly allocated to projects that have a net positive impact, while simultaneously deterring investors from coming to the market. She contended that the current Green Bond Principles - a set of voluntary guidelines that include recommendations for external review as well as thorough impact reporting- are already quite demanding and, indeed, already represent a deterrent for investors, who see no marked financial benefit in green bonds over 'normal' bonds, and who are also wary of the additional work and public scrutiny that inevitably stems from reporting the details of a bond's usage and impact. Accordingly, Laurent expressed concerns that the recent French legislation mandating environmental impact reporting from institutional investors may, in fact, prove counter-productive. 

Laurent also expressed wariness regarding any one body's authority to determine strict regulatory requirements for what constitutes a truly 'green' bond, noting that in any given project, some beneficial outcomes, such as a reduction in GHG emissions, may not be reflected in other areas such as employment or social welfare. However, it remained unclear precisely what, or who, would then ensure protection from greenwashing, save from the tenuous hope that investors, bond issuers, and projects seeking funding will all consistently, honestly, and voluntarily bear the costs of certifying the 'greenness' of investments, while also committing to transparency and accountability in the absence of any internationally recognized regulatory body or framework.

Green finance, then, despite its substantial promise and an incredible surge in investment in recent years, has yet to escape certain ethical and practical concerns. That said, there appears to be considerable reason for optimism, and recent developments such as the European Commission's Action Plan on green finance, which lists among its core tenets the development of a unified and rigorous EU taxonomy for green assets and a commitment to improving mechanisms to ensure corporate transparency, suggest that the immense interest in green finance throughout the world might foster regulatory mechanisms that protect against greenwashing and manipulation while encouraging environmentally responsible investment.

This event was co-hosted by the UCL Global Governance Institute and the Official Monetary and Financial Institutions Forum (OMFIF) on 23 January 2018. The panel was chaired by Karina Luchinkina, GGI Advisory Board Member and Co-Founder of BioEnergy Connect.