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The climate change crisis and topic of sustainability went mainstream globally in 2019 and are set to drive the agendas of governments, regulators and society in general as we move through a new decade writes Karen Conboy, Financial Services partner, KPMG in Cork.
Much of the general media coverage to date has focused on the public’s demand for action to reduce the impact of how we live and what we consume on the environment. In the financial sector, initial investor focus has been on reducing or removing funding and investment given to companies whose output harms the environment.
Replacing traditional industries such as fossil fuel production that have driven the global economy for the last 150 years is not a short-term project but accelerating the development and deployment of new sustainable technologies is a realistic target for governments, regulators and investors.
Karen observes that all of these new technologies and the infrastructure to support them requires investment and that is where capital markets and the financial services sector comes in.
Karen says that “the financial system has a pivotal role to play in bringing sustainability ambitions to fruition. The figures involved are significant, Sustainable Nation Ireland estimates that to fund Ireland’s clean energy transition alone will cost €40 billion”.
The 2020s will be a decade of massive expansion in sustainable finance across the developed world. KPMG has a dedicated sustainability team assisting clients in assessing environmental risks and responding to the need for decarbonisation and environmentally sustainable business models, which is led by KPMG Ireland partner and Cork man, Mike Hayes.
He commented recently that investors have decided that climate change and decarbonisation impacts on the future of their investments; regulation is going to make it increasingly difficult for non-sustainable businesses to raise funds and employees and stakeholders are demanding action to address climate change concerns.
Karen notes “investment managers innovate to meet market demands and there is significant impetus behind the growth of sustainable finance globally. From the largest sovereign funds to individuals starting to build their own personal pension portfolios, investors are driving demand for responsible and sustainable investments”.
Just this week, Larry Fink, CEO of BlackRock, the world’s largest asset manager stated that “we are on the edge of a fundamental reshaping of finance” because of a warming planet.
KPMG’s recent report on the growing appetite for responsible investing – The Numbers That Are Changing The World – puts figures around the scale of the opportunity that sustainability presents to the financial markets:
Green bonds, green loans and other forms of new sustainable finance will be required to finance business expansion. These types of investments raise funding that is used exclusively to fund green projects, assets or activities with an environmental benefit such as renewable energy, forestry or low carbon transport projects.
The Munster region is already home to globally focused companies such as Amarenco, DP Energy, Solar 21 and Brookfield Renewables and others that are investing in renewable energy solutions such as wind farms and solar energy.
The Irish government has identified sustainable finance as one of its priorities within its “Ireland for Finance 2025: the new strategy for the further development of the international financial services (IFS) sector in Ireland to 2025”.
It noted that EU developments on sustainable finance represent “a significant opportunity for Ireland to be in the vanguard of this growing area”. Ireland issued its first sovereign green bond in late 2018 and the ESB issued the first Irish corporate green bond in June of last year. There is massive potential growth in this area as green bonds currently only represent 1% of the $53 trillion global bond market.
As a relatively new area of finance, sustainable finance will come under increased scrutiny from regulators both here and internationally. The Central Bank of Ireland recently joined the Network for Greening the Financial System with other Central Banks and Supervisors.
The European Commission’s technical expert group on sustainable finance has an agenda that will drive regulation to ensure policy makers, companies and investors have a reliable measure of how “sustainable” an investment will be and the United Nations recently appointed the outgoing Governor of Bank of England, Mark Carney, as its Special Envoy for Climate Action and Finance.
Karen observes that “the global financial sector has constantly evolved since the industrial revolution to meet the requirements of every new age of industry - meeting the challenge to create green funding and promote behaviours through finance that tackle the climate crisis will be no different. The question for Ireland is how can we best position ourselves to maximise our contribution and expertise in sustainable finance which is a megatrend for capital markets that will dominate the 2020s”.