Author: Emma Harvey, director, Green Finance Institute
Following a recent trip to the supermarket, I walked out with a bright green notebook that proclaimed “Green is the new Black” on its front cover. This simple idiom brought a frequently debated question to mind: does ‘being green’ lead to ‘being profitable’?
Physical Risks, Financial Risks
Since the 12th Century, the phrase “in the black” has been synonymous with positive performance and profitability. However, a growing weight of evidence predicts that profits – in fact, our economy and global financial system – is at risk from the impacts of climate change. From Mark Carney’s ‘Breaking the tragedy of the horizon’ speech to the IPCC’s special report on the severe impacts of a +1.5C global warming scenario, the widespread physical and financial risks are looming and could leave everyone in the red.
Adapting business models
To avoid this environmental – and by extension economic – collapse, an estimated $90 trillion of investment is required to achieve the Paris Agreement targets by 2050. Any economist will know that capital flows of this magnitude are far beyond the public purse; and as a banker, I know the private sector will only mobilise at scale when the commercial opportunities of the low-carbon transition are fully recognised. However, we have already seen early-adopters of sustainable business models capitalise on the technological advances, cross-industry collaboration and consumer trends towards environmentally-friendly products; just think about the recent announcements by Iceland, Unilever and IKEA.
Emergence of a new financial market
Accelerating and mainstreaming sustainable practices will require a critical factor: finance. Specifically ‘Green Finance’. This relates to ordinary lending, bond issuances and investments – in short, any financial activity – with a specific, tracked purpose to reduce greenhouse gases and/or improve the environment. Within a decade the first tentative shoots have started budding into a new, rapidly growing green financial system; one example is the Green Bond market, where annual issuance has grown at 38% CAGR and forecast to reach $250 billion in 2019 according to the Climate Bonds Initiative. That said, the Green Finance market will struggle to blossom unless the business case – that sustainability and financial returns are positively correlated – is acknowledged across the finance community.
Embracing the profit opportunities
I am encouraged by the growing demands from consumers and voters to protect our planet. And I am encouraged by the early, yet pioneering steps taken by many businesses and financial institutions. Now let’s encourage the market to embrace the profit opportunities of the low-carbon transition and prove, once and for all, that green really is the new black.
Watch this space for further posts exploring how finance can deliver real-world solutions to tackle the climate crisis.