In recent weeks, green bonds and other sustainability-linked finance products of interest to water executives made the news:
Green finance is $31 trillion and growing – Bloomberg reported in June that “Money is gushing into any kind of asset labeled green or sustainable. The frenzy now has investors and firms alike grappling with what counts as ‘green finance’ and with funds that are no longer seen as green enough.” At least $30.7 trillion of funds is held in sustainable or green investments, up 34 percent from 2016, according to a report by the Global Sustainable Investment Alliance, a group of organizations tracking those moves in five regions from the U.S. to Australia. Overall, these money flows account for one-third of the tracked assets under management, and in some places have reached more than half.
Sustainability-linked loans are the next big thing – Writing in the Bloomberg Environment and Energy Report in May, attorneys from Gibson, Dunn & Crutcher, LLP described how sustainability-linked loans, an offshoot of traditional green finance, are expected to continue growing rapidly as both issuers and investors become more familiar with their advantages. Rather than obliging a borrower to use the proceeds of such loans for a specific, predetermined green purpose or project, sustainability-linked loans are typically made available for a company’s general use.
The key element is that the underlying credit agreement’s terms — generally, the interest rate — are linked to improvements in the company’s sustainability, which can be a general environmental, social and corporate governance (ESG) rating or a more narrowly defined measure, such as reducing a company’s level of greenhouse gas emissions. The better the sustainability performance demonstrated by a company, the lower the interest rate it is able to secure. In March of this year, three financial services trade groups published Sustainability Linked Loan Principles as a voluntary framework representing “the next step in collaboratively developing global standards for sustainable lending.”
Green bonds may need tax breaks like munis – In a June report, a panel of experts on sustainable financing appointed by the Canadian government said green bonds need a set of tax incentives to foster a well-functioning market. Their report, Mobilizing Finance for Sustainable Growth, contained 15 recommendations for the government, regulators and industry participants to consider. “Achieving Canada’s sustainable growth potential will require a sea change in the interaction between innovation, policy, regulation, consumer behaviors, risk management, and investment patterns,” the panel said in the report. “In each of these areas, the financial system plays a critical role.”