While ‘green finance’ has been on the horizon for over a decade, the momentum has dramatically increased in the last couple of years. According to Climate Bonds Intelligence, year 2021 has shown 60% growth of green bonds issuance over the previous year to surpass the half trillion mark of $517 billion.
The Nov 2021 U.N. COP26 Summit that was held in Glasgow, about 137 countries across the globe committed to decreasing carbon emissions to help limit the crucial target of 1.5°C global warming by 2030 and 2.7°C (NetZero) by 2050. The summit has made investors play a larger role in the near-term outlook and structurally shift focus into Green Finance instruments. To achieve 45% reduction by 2030 means 7.6% reduction in global emissions is needed every year from now till 2030. As per McKinsey, a capital allocation of $275 trillion of cumulative spending on physical assets would be needed over the next three decades to achieve the Net Zero 2050 scenario.
Launched in 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) forum includes more than 450 leading financial institutions. These institutions represent more than $130 trillion in assets under management that mobilizes finance at scale and accelerates the transition to a net-zero global economy. Additionally, sovereign green bonds to provide liquidity and benchmark pricing, will help unlock and mobilize capital in private sectors.
As per survey by Climate Bonds Initiative, the green bond investment this year is set to double and reach the $1trillion milestone for the first time by the end of 2022. Based on this sharp rise, the next milestone for Green Finance aims for $5trillion in annual green investment by 2025.
Treasury functions to align to the structural shift
Key changes that would impact the treasury functions for which the banks must quickly align towards this evolving shift include the following:
- Incline to the rapid market changes
Treasury teams must be deeply entrenched on regular basis into rapidly evolving Green and ESG linked financial instruments, take early advantage of demand and differential pricing associated within market opportunities which offer new avenues of finance
- Engage with market participants
Treasury teams must proactively initiate discussions with the best available market participants and rating agencies for new financing activities. They must re-negotiate existing contracts through re-financing, build process to leverage low cost of capital, and risk management
- Informed financing decisions
Treasury teams must incorporate sustainability in all the fund-raising activities. They must enable innovative ways in financing products, transform credit decision processes, have readiness in capital allocation during volatile market conditions, forecast trading and hedging accuracy and take informed decisions, and make it routine part of investment decisions.
- Build sustainability across business
Treasury teams must internally build sustainability-related knowledge. They must:
- Pro-actively think about opportunities in ESG-related capital expenditure
- Drive sustainability across businesses
- Prioritize informed growth patterns over usual investments
- Pursue lenders and investors into re-allocation of funds for a better cause, and unlock the hidden potential to realize tangible value.
- Transform to green economy
Treasury teams must plan and build green transition strategy of the firm with defined milestones. They must lead the role of achieving ESG credentials and goals, spread consistent awareness, embrace the positive change, and transform towards more sustainable economy
Treasurers avail benefits by being ahead of the curve
There are three broad potential benefits to your company as a result of implementing a green finance solution framework
- Improved risk management
It essentially helps the financial institutions on reallocation of capital from negative to positive direction by means of thorough evaluation and improved understanding of risks associated with investments and lending decisions. It helps to achieve transparency in metrics and better disclosure processes enabling stronger oversight and upfront reduces risk concerns.
- Access to low-capital
It helps banks to have access to low cost of capital thereby maintaining stronger cash flow and balance sheet position. It broadens the investor base to deliver better returns with higher credit rating and mobilize new avenues of capital to innovate and unlock the hidden potential.
- Future proofing with green credentials
ESG and Green credentials endorse credibility of the company and shows preparedness of transitioning from brown to Green-Bank thereby demonstrating sustainability-related achievements in company websites and annual reports reinforcing commitment, seriousness, and brand value globally. It helps enhance visibility into capital markets with transparency and disclosures in credible public domains and stock exchanges to give platform to attract larger pool of investors and lenders even for traditional investments
As tenfold growth forecast projected in five years which could be the fastest growing asset class in today’s world, there are certainly quick changes required for Treasury functions to align to this structural shift. In five years, metrics will not just be on how much green projects are being funded but the impact of those projects and the role of green banks in such transformation hence demonstrating transparency and reporting will be critical in short to medium term in transitioning from Brown to Green banks.