Sustainable Finance: Trends for 2020

Till recently, investors were interested in only one thing – profits and return on investment. Things are changing, albeit gradually, with investors becoming concerned about environmental and ethical investing. At the same time, civil society has campaigned actively on the urgency to act on climate change. Policymakers, too, have started guiding sustainable finance. For instance, the Reserve Bank of India has said that a policy action is needed to set up an enabling framework to promote green financing in India. Governments are pushing the agenda on delivering net-zero carbon. India has been at the forefront and delivered on its solar power targets four years ahead of schedule. 2020 holds a lot of expectations with COP 26 coming up in Glasgow, and we note four key trends that the finance industry and policymakers need to mindful.

Transition finance to lead the way: Transition finance enables companies and economies to move from brown to green. Or, at least become lesser brown. Transparency in the use of capital will determine how quickly low carbon transition will take place. With governments and corporations making pledges on climate goals, transition finance will pave the way for the realisation of these goals. Investors have looked at environmental, social and governance factors in looking at investments. In 2020, we see a significant chunk of financing that supports decarbonisation. We see substantial transition finance to take place in industries like extractive mining, heavy industry, coal, steel, chemicals, iron etc. 

Industry to champion sustainability: Companies are gradually shifting their attention to sustainability. We note that more and more companies are adopting sustainable development goals. In 2020 we see industry collaboration providing a more significant voice to support climate and sustainability solutions collectively. Companies will create a culture that enables the creation of highly ambitious targets. Sustainable finance will come in to provide the impetus.

Creating net-zero carbon roadmaps: Creating goals that enable offset of sources of emissions by carbon sinks is an increasingly important climate goal. Although a majority of countries have signed up for the reduction of carbon emissions, many are still on the sidelines. The preparation for the UN biodiversity conference in China will see more comprehensive country-by-country approaches human-made and natural carbon sinks being made available.

Scale-up of investment in infrastructure: Clean power is the foundation of a low-carbon economy. Renewables represent more than a third of the world’s installed capacity and, more than 26 per cent of global electricity produced. Significant investment will take place in building infrastructure for production, transmission, distribution and storage networks for a fully integrated sustainable economy. We believe there will also be continued demand for renewables by companies for their operations. All this will boost up the need for sustainable finance.

Increased scrutiny of corporate actions: There is an acute urgency to address the gap between business as usual emissions and emissions consistent with a 1.5°C world. This gap will invite greater scrutiny from the civil society and investors on corporations and governments as to whether they are meeting climate goals. Also, financial regulators are exploring how to stress test for climate risks. Technology will provide toolkits for monitoring ecosystems, biodiversity, and sources of greenhouse gases. These actions will give an impetus to corporations and governments to use more sustainable finance.

For the Responsible Future blog