Executive Summary Green Finance A Bottom-up Approach to Track Existing Flows IN PARTNERSHIP WITH Executive Summary I f we are to transition to a sustainable global economy, we need to scale up the financing of investments that provide environmental benefits, known as “green finance.” Various financial institutions, international initiatives, approaches to measuring green finance. This will allow standard setters, and regulatory bodies have developed for analysis on a broader scale, which could result in their own approaches to green finance. The diversity of better policies to mobilize additional green finance. approaches and definitions across the financial sector makes it difficult to assess overall progress. This is This bottom-up methodology first defines what is “green” further constrained by data availability, which limits at a project level, based on the intended use of the the rigor of the analysis of existing green finance flows. investment in the real economy, through the application of estimates for the respective green share per project. It A comparison of the current supply of private sector then aggregates the numbers at an industry and country green finance and the global demand by country would level. These results can be compared to green finance allow for the development of clear action points to close needs to identify gaps and action points. any gaps. Building on the work of the Group of 20 (G20) Green Finance Study Group, the IFC Climate There are many challenges to implementing this approach, Policy team has developed a new approach to assess including the lack of consistency in the definition of and track green finance, focusing on the banking sector, green and other relevant data points, such as sector to understand the current status of green lending and classifications across available datasets. provide recommendations on how to better align different DEFINE ESTIMATE AGGREGATE COMPARE Project level: = Via Use of Proceed classifi- ? cation (intended use of Project level finace) (financed activity): Industry level: Country level 100% green Via industry of operating Supply Demand company 0% green $ amount of total green $ of total green finance finance and % share needed per country, Industry level: Industry level compared to all financial estimated via: XX% green Via industry estimate (e.g. flows per country: —Country NDCs % of certified sustainable —Via industry —Pledges by companies, agriculture, energy e cient Project level —Via financial instrument investors construction) —Academic research Company level: Via green revenue share of Financier Company each operating company CHALLENGE 2: AGGREGATING THE DATA • Borrower’s location: As each project’s location is not available in a consistent format, the operating company’s location is used. This introduces inaccuracies given the cross-border activities of many companies. For example, the location listed in datasets refers to the place of legal incorporation of the borrower or head offices and not the physical location where the proceeds of the loan will be applied. • Financier’s location: If data is aggregated per financing institution, there is often limited information on how much of the project was financed by a particular financier and their location. This lack of information CHALLENGE 1: DEFINING GREEN leads to limitations in the analysis. AND FINDING SUITABLE ESTIMATES • Combining datasets: For a meaningful analysis • Project-level data: The share of green finance can of green finance per financial instrument, project best be identified by examining the actual project location (countries), project operator (companies), activity, classified as “use of proceed”a in financial and project financier (lending banks, bond issuers, datasets. However, this classification can identify investors), different datasets need to be combined. green only in some cases, and its definition is often This means that connecting factors must be found imprecisely applied. For example, “project finance” across datasets. This can be a unique identifier per may be chosen instead of “clean energy.” These unclear financed project (a project ID), operating company, definitions lead to information gaps. or financing institution. However, many different identifiers are used across datasets and geographies. • Sector-level data: If the use-of-proceed classification The lack of consistency complicates the linking of does not provide useful information, the industry of different sources to aggregate the data at different each operating company can serve as an estimate for levels. the green share of every project. Publicly available studies indicate each industry’s share that yields CHALLENGE 3: COMPARING SUPPLY environmental benefits, such as certified green WITH DEMAND buildings in the real estate sector. But, the industry • Supply: Findings remain limited to rough estimates classifications used vary across different datasets. given the challenges described above. This lack of consistency complicates the approach when combining data sources. • Demand: Existing policy targets still need to be translated into indicators for how different sectors • Company-level data: The share of green revenues per in the real economy have to change in each country to operating company can provide a more sophisticated achieve the Paris Agreement targets and the Sustainable estimate than sector-level data. However, this Development Goals. For such sector indicators, a information exists in a consistent format only for a breakdown of the need for finance per financial few listed companies. instrument is needed to conduct a rigorous analysis. a The “use of proceed” is a classification for an investment that indicates the intended use of that investment. iii | Green Finance A Bottom-up Approach to Track Existing Flows Banking: Application of the methodology to the loan market reveals some initial estimates Define The methodology is applied to a dataset on syndicated loans by Thomson Reuters. Green project finance is defined based on the industry of the borrower. The green percentage of projects is applied to industry classifications using existing research figures: Estimate 100 percent green: Clean energy 17 percent green: Real estate 0 percent green: Oil and gas, 13 percent green: Food and beverages, paper petrochemicals, pipelines, coal power and forest products, agriculture 10 percent green: Infrastructure and transport Aggregate The results are aggregated per industry and the country of the borrower. Supply has not been compared with demand yet, due to the topic’s complexity. Results: 82 percent of all Considering the dollar Of all lending to projects The United States has syndicated loans in 2014 value of all loans in 2014, with some green share, the largest share, with Compare financed projects in almost 15 percent was 41 percent of loans 35 percent of the total sectors with some green green financing. were for green real amount, followed by the activities. estate and 21 percent United Kingdom with 8 for infrastructure and percent. China and India transport (potentially have the biggest share because other industries among emerging markets, use less project finance both with 4 percent. through loans). Bonds: Institutional investors: Green bond labels allow for consistent While awareness seems to be widespread, tracking, but improvements are needed implementation is weak • The Green Bond Principlesb allow for consistent • Despite many investor initiatives, a lack of clear tracking across markets, datasets, and geographies definitions limits the actual application and tracking • The size of the global bond market has been of environmental, social, and governance investing estimated as a total of $90 trillion, with $694 billion criteria (ESG) climate-aligned bonds, of which $118 billion are • 1,072 investors currently report on their ESG labeled as green bonds (17 percent) investment activities to the Principles for Responsible Investment (PRI) • Very few integrate ESG criteria into fundamental b decision making b The Green Bond Principles are voluntary guidelines that recommend transparency and disclosure in the green bond market, and promote integrity by clarifying the approach for issuance of a green bond. http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds/green-bond-principles/ Executive Summary | iv CONCLUSIONS AND RECOMMENDATIONS areas. For banking, loan tracking processes need to be improved and institutional investors need to implement The development and tracking of green finance activities clear decision-making criteria. To get a full picture of is gaining momentum. However, current data availability green finance, we need to track “green” at the level of limits the rigor of the analysis of existing green finance each project. Cooperation between market players on flows. Definitions and tracking are most advanced in the the following action points is crucial: bond market and could serve as an example for other Multinational National Private financial Data providers and organizations regulators sector standard setters • Analyze clients’ • Understand market • Improve application • Increase awareness of demand for green players’ current of use-of-proceed the need to integrate finance practice of green classifications, where green finance into • Convene efforts finance tracking already used, for existing datasets Short term at national and • Understand and better identification of • Engage with peers to international levels articulate national project purpose set a consistent green to establish green needs for green • Integrate existing ESG finance typology, finance typologies and finance criteria into investing and harmonize standards consistent decisions unique company • Promote transparency with policy targets identifiers and industry and consistency in financial datasets classifications • Pilot analysis • Develop new • Build on the green • Advocate for better comparing supply and regulations for bonds experience: data on green demand for selected banking, bonds, and Develop clear activities at company countries with clear institutional investors definitions/tracking level, by building policy plans mechanisms per green revenue share • Build on lessons • Implement learned from peers, financial instrument data into corporate Medium term recommendations such as China’s green • Integrate data on reporting procedures, emerging from banking regulations green revenue share for example international groups and Nigeria’s per company into • Develop new services to put in place green sustainable banking decision making for clients supplying finance typologies and principles or demanding green standards finance data • Link bottom-up approach on green finance with top- down research v | Green Finance A Bottom-up Approach to Track Existing Flows