Other parts of this series:
Clear progress has been made on the UN Global Compact’s Sustainable Development Goals (SDG), however, companies must do more. Only 21 percent of the CEOs in our 2019 UNGC Study said they felt business was making a critical contribution to the global goals.
While the goals embody an enormous challenge that requires transformation of business models, the magnitude of the opportunity sustainability presents is even greater.
In the study, CEOs called for action in defining corporate leadership. This includes building a strong internal culture of sustainability and responsibility, but also extending responsibility to ecosystems.
Financial innovation fosters the creation of green products
Green bonds have been created as debt instruments designed to raise funds for projects and businesses that have a positive environmental or social impact. Environmental, Social and Governance (ESG) investing is ‘going mainstream’. Since the category’s inception just 10 years ago, the green bond market has grown rapidly to about $500 billion in value.
HSBC was the world-leading green bond manager in 2019, overseeing more than $14.8 billion in assets. While consistent with the Green Bond Principles, the HSBC Green Bond Framework goes further and is certified as ‘Dark Green’. In 2017, the bank launched the first sustainable bond based on the UN Sustainable Development Goals.
“The goals need to be fully embedded in strategy, in business operations, in all stakeholder engagement to really flow through the entire organization.”
—Lise Kingo, CEO & Executive Director, UN Global Compact
Owing to the environment-focused nature of sustainable debt issuance, green bonds are somewhat insulated from the industries worst affected by the oil supply war that caused benchmark US crude prices to fall below zero for the first time. Therefore, green bonds, which are highly concentrated in the utilities (39 percent) and banking (33 percent) sectors, present themselves as a defensive opportunity.
Corporate instruments also include green loans, which are used for environmental projects ranging from sustainable food, green transport and renewable energy. BBVA granted a five-year €16.5 million loan to a hydroelectric project in Colombia, certified as green by the Loan Market Association in terms of its Green Loan Principles.
We have also recently seen the emergence of the Sustainability Linked Loan (SLL). Unlike green loans, SLLs are not restricted in their purpose; however, the interest paid by the borrower is linked to selected sustainability key performance indicators. KPIs can include specific targets on carbon emissions but also general ESG criteria. ING Group issued a €1 billion loan to Philips in 2017, in which the cost of borrowing was determined by the ESG rating given by Sustainalytics to Philips. SLLs align financing and sustainability objectives.
Those products also benefit investors:
HSBC’s Green and SDG asset register consists of loans and project finance that offer broad social, economic and environmental benefits specifically aligned to meet UN Sustainable Development Goals and sub-goals. For instance, the construction of an offshore wind farm aims to meet SDG 7: Provide affordable and clean energy. This is broken down further into SDG sub-goal 7.2: Increase substantially the share of renewable energy in the global energy mix by 2030.
UBS Global Wealth’s head of credit, Thomas Wacker, recommends that credit investors should favor green bonds over non-green, investment-grade corporate notes.
Banks are now targeting retail clients with sustainable solutions
Our 2019 Global Financial Services Consumer Study identified four consumer personas. Pioneers are young (half are 18-34) and in a high-income bracket (43 percent). Members of this group are open to risk and ethically minded—65 percent say corporate social responsibility will influence their choice of providers. Given that 88 percent trust banks to look after their financial wellbeing, this group is ideal for financial institutions to target with sustainable and innovative retail banking products.
Such retail products include green mortgages. In the UK, residential properties are responsible for 15 percent of carbon emissions, so homeowners are offered preferential interest rates if their home is energy efficient. One scheme, the Barclays Green Home Mortgage, is available for customers buying energy-efficient, new-build properties from Barclays’ house-builder partners (which include Berkeley Group and Taylor Wimpey).
Leveraging technologies across a whole ecosystem
The use of digital technologies will enable innovative, sustainable finance instruments. Big data, machine learning, artificial intelligence and blockchain are reducing asymmetric information, allowing participants of an ecosystem to identify, assess and price risk.
Halotrade is an example of a fintech using blockchain to improve transparency—showing any corruption, human rights abuses or modern-day slavery—across the supply chain. Walmart is also using a blockchain platform (Hyperledger Fabric) to reduce the time taken to track mangoes in the US from seven days to two seconds. In case of food-borne disease, the retailer can identify the source quickly and any misconduct to people or the environment along the way is more obvious.
Blockchain is being utilized to reduce human-rights abuses, illegal activity and fraud in the mining industry. Diamond industry leader De Beers is working alongside distributed traceability platform Tracr to create transparency across the value chain. By establishing the provenance, traceability and authenticity of diamonds, Tracr allows De Beers to “objectively and confidently demonstrate that diamonds are sustainably sourced”.
By leveraging maturing digital technologies, scientific advancements and emerging DARQ technologies (distributed ledger technologies, artificial intelligence, extended reality and quantum computing), businesses have an unprecedented range of innovation opportunities before them. Utilizing these technologies and creating new, innovative and personalized green financial solutions is crucial in ensuring the UN Sustainability Goals are met.
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