Green Finance A Bottom-up Approach to Track Existing Flows IN PARTNERSHIP WITH About IFC IFC, a member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets. Working with 2,000 businesses worldwide, we use our six decades of experience to create opportunity where it’s needed most. In FY16, our long-term investments in developing countries rose to nearly $19 billion, leveraging our capital, expertise and influence to help the private sector end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. © International Finance Corporation (2017). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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All names, logos and trademarks are the property of IFC and you may not use any of such materials for any purpose without the express written consent of IFC. Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Green Finance A Bottom-up Approach to Track Existing Flows IN PARTNERSHIP WITH Acknowledgments This report was prepared by the Climate Business Department (Alzbeta Klein, Director), Climate Finance and Policy team (Vikram Widge, Head), in partnership with Germany’s Gesellschaft für Internationale Zussamenarbeit (GIZ). The lead authors were Laura Bergedieck, Aditi Maheshwari, and Francisco Avendano Ugaz. The authors are grateful for insightful peer review and expert input from IFC and World Bank colleagues, including Ahmed Aliyu Ahmad, Liane Asta Lohde, Samuel Maimbo, Marc Schrijver, Peer Stein, Wei Yuan, and Nina Zegger. Esther Rojas-Garcia provided layout support. In addition, the authors greatly appreciate comments and insights from Chris Webber (2 Degree Investing Initiative), Jessica Stallings (Institute of International Finance), Thalia Vounaki (Principles for Responsible Investment), and Lauren Compere (Boston Common Asset Management). Greg Wlosinski, from the World Bank’s in-house multimedia team, led the creative design and formatting of the report. Table of Contents Executive Summary vii Introduction xi Section 1: Context and Objectives 1 Background and Rationale 1 Approximating Green Finance Flows through Private Financial Institutions 2 Definitions of Green Finance 2 Section 2: Tracking Green Finance in the Banking Sector 11 Methodology for Tracking Green Finance Flows 11 The Demand for Green Finance 12 The Supply of Green Finance by Banks 12 Define: Stocktaking of Available Data and Definitions of Green 13 Estimate: Calculating Green Finance Shares 15 Aggregate: Project, Sector, and Country Data 19 Results: A First Estimate of Green Loans Supplied 19 Table of Contents | v Section 3: Bond Market and Institutional Investors 29 Green Finance in the Bond Market 29 Stocktaking of Definitions for the Green Bond Market 29 Available Data on Green Bonds 31 Green Finance among Institutional Investors 33 Stocktaking of Green Finance Initiatives among Institutional Investors 33 Available Data on Green Investments 37 Section 4: Conclusions and Recommendations 39 Short-term Steps: Raise Awareness, and Understand and Improve Current Practice 39 Medium-term Steps: Develop a Comprehensive System to Track Green Finance 40 Annex 43 Use-of-proceed Categories and Their Use in the Thomson Reuters Dataset 43 Total Green Syndicated Loan Amounts per Country 46 Endnotes 49 vi | Green Finance A Bottom-up Approach to Track Existing Flows 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 Executive Summary | vii 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. viii | 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 | ix 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 x | Green Finance A Bottom-up Approach to Track Existing Flows Introduction T he transition to a sustainable, carbon-neutral global economy requires change across the financial sector, based on two pillars: • Acknowledgment and transparency of finance flows per country would help identify gaps and what needs to that deliver environmental benefits be done to close them. However, there is no systematic approach to assessing progress on these challenges in • Empowerment of financial actors championing the global financial system. For example, while there investments in projects or companies that deliver are estimates for some countries on the proportion of environmental benefits and support sustainable banking assets that are green (10 percent in China), development. there is no clear global approximation available of Momentum around the role of the financial sector in stocks or flows. To be able to address gaps and sequence supporting sustainable development and addressing appropriate interventions, it is important to have a solid climate change has been generated by the G20, and understanding and dataset on practices, policies, and further strengthened by the Financial Stability Board monitoring approaches. and the Paris Agreement and the associated nationally determined contributions. Similarly, 479 global investors, The G20 Green Finance Study Group, established in alongside companies, cities, subnational authorities, early 2016 under the Chinese G20 presidency, focused on regions, and civil society organizations, have pledged identifying and addressing the institutional and market their commitment to climate action through the global barriers to scaling up green finance. Its findings, published platform NAZCA (Non-State Actor Zone for Climate in June 2016, revealed a lack of consistency in market Action).1 While some progress has been made in green terms and standards of green finance. While there is broad finance, only a small percentage of bank lending is consensus on the sectors that can provide opportunities explicitly classified as green according to countries’ for green finance, the tracking of such financial flows is own definitions. In the current landscape of limited inconsistent or nonexistent. Improving ways of measuring metrics and transparency, less than 1 percent of global progress across the financial system, and not just in bonds are labeled green and less than 1  percent of specific silos, is critical. A better understanding of the global institutional investors’ holdings are classified as current supply of green finance will provide policy makers, green infrastructure assets.2 These financial flows must regulators, international institutions, development banks, increase substantially to meet the massive investment and the private sector with insights into the location financing needs associated with global development and type of additional incentives needed to increase and climate targets. green finance. As countries begin to implement their green growth This report focuses on the Green Finance Study Group’s plans and nationally determined contributions on climate suggestion to improve the indicators for measuring change, the ability to compare the current supply of private green finance activities and their impact. Building on a sector green finance with investment needs globally and review of existing guidelines and definitions, it develops Introduction | xi a bottom-up methodology to estimate green finance flows. definitions of green finance, the actors involved, and their Based on available data, it then applies this approach to approaches. Section 2 focuses on the banking sector, using the banking sector. Its findings for the banking sector, a four-step methodology (define, estimate, aggregate, the bond market, and institutional investors provide and compare) to assess the supply of green finance. The insights into the most effective methods of tracking application of this approach to the syndicated loans green finance currently available. The report provides market yields some initial results and highlights challenges. recommendations for different stakeholders, including While the quantification of demand for green finance financial institutions, data providers, standard setters, is considered in this document, it is not the main focus international organizations, and governments, on how of the report’s analysis. The third section summarizes to improve green finance indicators. current knowledge of green finance in the context of the bond market and institutional investors, followed The first section of the report provides the rationale for by a conclusion and recommendations for next steps for tracking green finance, delving into the background and different stakeholder groups in the short and medium context for this work, and briefly reviewing existing term. The Annexes xii | Green Finance A Bottom-up Approach to Track Existing Flows Section 1: Context and Objectives BACKGROUND AND RATIONALE The G20 Green Finance Study Group aims to identify While there is huge potential for scaling up green institutional and market barriers to green finance, finance, there are also several challenges for financiers, and, based on the experiences of countries, develop ranging from difficulties in accounting for environmental ways to enhance the ability of the financial system to externalities in financial decision making, to maturity mobilize private capital for green investment. The group mismatches for long-term projects as many investors defines green finance as the financing of investments seek short-term returns, and information asymmetries that provide environmental benefitsc in the broader caused by a lack of consistency in market terms and context of sustainable development. It published its standards. Information asymmetries in particular lead initial findings in a synthesis report, which focused on to inadequate analysis as a result of inaccuracies in banking, the bond market, and institutional investors, measuring current green finance flows and their impact. as well as two crosscutting topics: risk analysis and measuring progress.3 The group made the following This report focuses on the final recommendation and recommendations: builds on the World Bank Group’s input paper to the G20 Green Finance Study Group on measuring progress • Provide strategic policy signals and frameworks on green finance.4 The paper suggests that the greening of the global financial system will rely strongly on • Promote voluntary principles for green finance indicators that track the connectivity and permeability • Expand learning networks for capacity building of the whole financial system. These indicators will • Support the development of local green bond markets enable the measurement of the transparency, efficacy, resilience, and efficiency of greening efforts, which in • Promote international collaboration to facilitate turn will help mobilize finance for green activities, as cross-border investment in green bonds well as mainstream financial risk management related • Develop a forum to facilitate knowledge sharing on to ESG issues. According to a survey conducted by the environmental and financial risk World Bank Group among public and private financial institutions, their definition of green finance is broadly • Improve the definitions for measuring green finance consistent, but the tracking of it is still sporadic and activities and their impact. diverse in approach. c These environmental benefits include, for example, reductions in air, water, This paper reviews a limited number of existing guidelines and land pollution; improved energy efficiency; and mitigation of and and definitions, and builds on that analysis to outline adaption to climate change. Green finance involves efforts to internalize externalities and adjust risk tolerance in order to boost environmentally an approach on how to measure green finance flows friendly investments and reduce environmentally damaging ones. with available data. Section 1: Context and Objectives | 1 APPROXIMATING GREEN FINANCE FLOWS THROUGH PRIVATE FINANCIAL INSTITUTIONS Financial markets have tremendous power to shift energy, clean technology, and smart solutions for waste developments in the real economy through their investment and water treatment, particularly in the transport and decisions. Given the global need for an urgent transition infrastructure sectors. Furthermore, several studies indicate to a low-carbon economy and sustainable economic that in most cases there is a positive correlation between development, financial markets play an integral role investments managed according to sustainability criteria in driving investments in climate-friendly and green and their financial performance.6 projects. Consistently and coherently measuring and tracking Greening the financial system goes beyond lending and green finance will improve our understanding of the investment standards—it considers the impact of both effectiveness of policies and incentives being developed environmental and social risks on the financial system, to drive green finance, and provide insights into where and the impact of the financial system on environmental additional incentives are needed. Many financial and social risks. As private financial institutions are institutions do not yet offer robust products promoting tied to all economic sectors through their lending green investments, and for those that do, labeled products and investment practices, they need to recognize their differ in their definition of green. relationship with sustainability. Investments are directly or indirectly affected by climate change and the negative Achieving the Sustainable Development Goals and environmental effects of industrial processing (such bringing Article 2.1c of the Paris Agreement to life— as air, water, and land pollution), and should account aligning financial flows with climate targets—requires for these in their risk assessments.5 At the same time, not only the efforts of financial institutions themselves, financial instruments can leverage sustainable growth, but also the engagement of standard setters, international enabling investments in energy efficiency, renewable organizations, and data providers. DEFINITIONS OF GREEN FINANCE The World Bank Group’s recent analysis on measuring • Green buildings green finance identifies current initiatives that include • Green products and materials green finance tracking, and reviews plans for defining and measuring green finance mobilization and ESG risk • Renewable energy (solar, wind, hydro) management integration.7 The analysis was informed • Sustainable land management, (sustainable agriculture, by a survey across financial institutions on the sectors/ forestry) activities they include in their definition of green finance. • Transport (urban rail/metro, electric, hybrid) The following broad categories were among those prioritized by the respondents: • Waste management (recycling, waste management) • Water (water efficiency, wastewater treatment). • Adaptation (conservation, biosystem adaptation) Based on that survey, the report concludes that green • Carbon capture and storage finance definitions feature many similarities, including • Energy efficiency (cogeneration, smart grid) obvious sectors such as renewable energy and green • Environmental protection (pollution control, buildings, as well as differences regarding specific sectors prevention, and treatment) such as nuclear power, noise abatement, and carbon capture and storage, reflecting the country-specific nature 2 | Green Finance A Bottom-up Approach to Track Existing Flows of definitions. Data is captured at various levels, mostly mandatory directives and requirements on nonfinancial through capital markets, financial sector associations, aspects of finance. The underlying criteria for a project’s and private banks in compliance with existing regulations eligibility for green finance are not always publicly and practices. The information being tracked is primarily available. the financial instrument used, the user itself, and any relevant impact indicators such as greenhouse gas emission While these different definitions focus on the underlying reductions, the number of jobs created, air and water financed activity, there is little evidence of how such data quality, energy savings in gigawatt hours, ESG indicators is then tracked on a broader scale. In many cases, the and their materiality, and so on. There appears to be institution either does not intend to track green finance little information on the actual amounts of the share flows or stocks in the first place, or the complexity of the of green investments being monitored and collected. topic hinders any measurement attempts. In addition, a broad assessment requires widely applied green finance Financial institutions, governments, and international definitions (for example, out of 1,553 PRI members, organizations tend to define green finance according only 342 report details on how they integrate ESG data to their underlying motivations (see Table 1). Financial in their investment approaches).8 As most definitions institutions established their own green criteria for are narrowly used by specific groups of companies, sustainability indices, banking associations defined investors, or other market players, they are usually not guidelines for green lending and bonds, and international available in existing datasets offered by financial data initiatives did so for sustainable investing. Standard providers for large-scale analysis. China is, to date, the setters and regulatory bodies established voluntary or only country to have introduced standardized mandatory Table 1: A selection of different actors and their approaches to definitions and measuring green finance Actor Example Approach Motivation Financial Index providers: FTSE4Good and Dow Jones Measure the financial institutions FTSE4Good Index Series,9 Sustainability Index: Companies performance of Dow Jones Sustainability demonstrating strong ESG practices ESG leaders and Index10 based on a best-in-class approach defined highlight companies Stock exchanges: internally (not publicly available) demonstrating strong Johannesburg Stock Johannesburg Stock Exchange: Socially ESG practices Exchange Socially Responsible Investment Index for South Responsible Investment African companies with green criteria Index 11 including climate change, air and water pollution, waste, and water consumption Banking Sustainable Banking Sustainable Banking Network: Encourage local banks associations Network, 12 Knowledge sharing and the development to adopt sustainable Institute of International of regulatory guidance banking practices Finance13 Institute of International Finance: The Green Finance Working Group has recently been established, and focuses on developing a common vocabulary for green finance (continued ) Section 1: Context and Objectives | 3 Table 1: Continued Actor Example Approach Motivation International PRI,14 Principles for PRI: Largest global reporting project on Better understand, initiatives/ Sustainable Insurance,15 responsible investment. Signatories sign prevent and reduce reporting Carbon Disclosure Project up to six principles, and annually report on ESG risks, and better frameworks (CDP)16 progress and receive feedback manage and leverage Principles for Sustainable Insurance: opportunities; Global framework for the insurance promote knowledge industry to address ESG risks and sharing and opportunities (no reporting) improvements through transparency CDP: Largest reporting framework for companies on climate, water, and forest-related activities and externalities, providing scores and data to institutional investors Standard Sustainable Accounting Sustainable Accounting Standards Mainstream setters Standards Board, 17 Board: Disclosure guidance and accounting for International Integrated accounting standards on sustainability environmental Reporting Council, 18 topics for use by the United States and externalities and Climate Disclosure foreign public companies in their annual provide a holistic view Standards Board, IFC 19 filings on businesses’ value Performance Standards,20 creation by improving International Integrated Reporting Equator Principles 21 the availability of such Council: Corporate reporting framework with a focus on conciseness, strategic data relevance, and future orientation, including ESG, into mainstream financial reports Climate Disclosure Standards Board: Framework and guidance for reporting environmental information and natural capital in mainstream financial reports IFC Performance Standards: Eight standards around environmental and social sustainability that the client is to meet throughout the life of an IFC investment Equator Principles: Risk management framework for projects, adopted by financial institutions, for determining, assessing, and managing environmental and social risk 4 | Green Finance A Bottom-up Approach to Track Existing Flows Actor Example Approach Motivation Regulatory Bangladesh,22 China Bangladesh: Enhance bodies Banking Regulatory understanding of • Environmental risk management Commission,23 EU green finance, improve guidelines, policy guidelines for green Directive, France, 24 25 data quality, and banking Nigeria26 increase green finance • Banks develop their own green banking investments policy that introduces green finance, and report on website and to supervision body (no defined format) China:27 • Clear performance indicators to strengthen and monitor green banking, with 12 concrete categories and guidelines to track green lending products and services • For the 21 largest banks, it is mandatory to regularly report on their green loans according to set categories • China Banking Regulatory Commission Green Credit Statistics: general numbers (seldom details) are published annually (~10 percent green loans) EU: • Large companies have to report on their environmental matters, company policies, risks, and their management thereof (Directive 2013/34/EU) • European organizations can apply to EU LIFE grants, supporting environmental, nature conservation, and climate action projects28 France: • Institutional investors have to disclose climate-related risks, climate risk management, and contributions to the energy transition (Article 173) (continued ) Section 1: Context and Objectives | 5 Table 1: Continued Actor Example Approach Motivation Nigeria: • Sustainable banking guidelines were adopted in 2012, covering nine principles, including the implementation of robust and transparent ESG practices. Banks report annually on the percentage of their total portfolio screened/assessed for environmental and social risk, and the number of client engagements on environmental and social issues that result in positive outcomes for the client and the bank29 • Sector guidelines already exist for agriculture, oil and gas, and power, and are under development for mining, and manufacturing International United Nations (UN) UN Framework Convention for Climate Develop approaches to organizations Framework Convention Change: The Green Climate Fund finances tracking green finance for Climate Change, 30 projects that contribute to low-emissions that can be replicated Organisation for sustainable development and increase by other actors Economic Co-operation climate-resilient sustainable development & Development OECD: Formalized its work on green (OECD),31 International finance by launching the OECD Centre for Development Finance Green Finance and Investments, focusing Club,32 multilateral its research on the rapid scaling up of development banks33 green investment and finance flows, and related policy needs International Development Finance Club: Members agreed on a list of categories for green finance covering climate mitigation and adaptation, and other environmental objectives Multilateral development banks: Jointly report on climate finance on an annual basis (no green finance tracking as yet) 6 | Green Finance A Bottom-up Approach to Track Existing Flows reporting on green loans for its largest banks. Lessons progress in integrating climate and green measures into learned from this regulation’s implementation could the assessment of financial products. Table 2 provides an serve as an example for other regulators. overview of such initiatives. They are grouped into those developing bottom-up tracking and reporting mechanisms A range of institutions and initiatives have started working for different actors (companies, asset owners, banks, on new bottom-up tracking approaches. While there are and portfolio and fund managers) and those that aim no designated higher authorities tracking the application to combine bottom-up data with top-down information of green finance criteria in actual financial decision on policy targets for different sectors. making, many institutions and initiatives are making Table 2: Current initiatives developing new bottom-up tracking approaches for climate or green finance New bottom-up tracking approaches Organization/initiative New tracking approaches FTSE LCE ICS green revenue Assigns each company a revenue share for: model34 • Goods, products, and services that enable society to adapt to, mitigate, or remediate the impact of climate change, resource depletion, and environmental erosion (according to 60 chosen subsectors) • Available for >13,000 companies Financial Stability The task force, established in 2015, consists of representatives from the private Board Task Force on sector. It focuses on company disclosure: Climate-related Financial • Aims to develop voluntary, consistent climate-related financial risk disclosures Disclosures35 for use by companies providing information to shareholders (climate risk typology) • Builds on existing corporate reporting frameworks mentioned in Table 1. • Plans to suggest which businesses will be required to report Portfolio Carbon Initiative Climate metrics for asset owners and banks to disclose: (World Resources • Carbon emissions of financed projects Institute, UN Environment • Green vs. brown (carbon intensive) indicators for investments/lending Programme Finance Initiative)36 • Carbon risk for asset owners and banks Portfolio Decarbonization Pledge by investors, including working groups, to: Coalition (CDP, UN • Commit to measures and disclose portfolio carbon footprint (according to the Environment Programme Montreal Pledge) Finance Initiative)37 • Take action to decarbonize portfolios Climpax (CDP, South Pole Ratings developed for fund managers: Group) 38 • Ranks portfolios according to their climate impact • Creates transparency about the climate impact across funds • Enables fund investors to take strong climate action (engage/divest) (continued ) Section 1: Context and Objectives | 7 Table 2: Continued New bottom-up tracking approaches Organization/initiative New tracking approaches UN Environment Green tagging for energy efficiency to scale up green finance: Programme39 • Tag each loan to the underlying asset’s energy performance, fuel efficiency, or existing environmental standards (for example, for buildings or white goods such as refrigerators and washing machines) • This would add transparency and allow the packaging of energy-efficient loans as asset-backed securities into green bonds • It could provide a basis for comparing financial performance of different loans World Energy Investment Detailed, comprehensive analysis of investment across the global energy system: Review by International • New annual report since 2015 Energy Agency40 • Current investment landscape across fuels, technologies, and countries Bloomberg New Energy Annual long-term view of how the world’s power markets will evolve in the Finance, New Energy future: Outlook41 • Focused on the electricity system • Combines the expertise of over 65 country and technology specialists in 11 countries New tracking approaches combining bottom-up data with top-down information Organization/initiative New tracking approaches 2 Degrees Investing Develop a portfolio optimization tool to measure the exposure to any energy Initiative (2DII): transition scenario for investors (assessing sustainability and policy-related risks Sustainable Energy in assets): Investment Metrics • For listed equity and corporate bonds Project42 • Per asset class, region, and technology 2DII: Transition Capital Aims to develop a global database to align policy targets with actual economic Monitor43 developments, including: • Metrics at the physical asset level to capture the exposure to green/brown finance per sector and financial instrument • Information on ownership of assets and securities, as well as policy targets 8 | Green Finance A Bottom-up Approach to Track Existing Flows Broadly speaking, these bottom-up tracking approaches for different sectors or countries, with none focusing are all led by industry participants themselves or by non- solely on green finance. Organizations such as the profit or research organizations, rather than by regulatory Food and Agriculture Organization, the World Health bodies. Many of them build on existing definitions and Organization, the International Energy Agency, G20, and corporate reporting initiatives (as shown in Table 1), the International Panel on Climate Change have published and interpret the available data in a meaningful way estimates on the total investment amounts required to for financial market participants. Once these tracking reach certain Sustainable Development Goals,44 and approaches have been developed further, regulators may other research exists for specific sectors (for example, choose to apply them to reporting requirements for a McKinsey study on sustainable infrastructure).45 Top- financial market participants themselves in order to down information can also be provided by regulators consistently measure green finance based on the underlying announcing specific country or sector targets, including assets. Where possible, new regulations should build an estimate on the status quo based on extrapolations on existing standards and approaches. For example, (using renewable energy targets and the current share in France, where institutional investors have had to of electricity supply, for example). report on the climate exposure of their portfolios since 2015, there are no requirements as yet on how investors There has been little progress in bridging the gap between should do that—potentially due to a lack of knowledge top-down and bottom-up approaches. However, there or agreement on an approach. are two initiatives listed in Table 2 that show promise in this regard: the Sustainable Energy Investment Metrics Top-down approaches usually attempt to measure Project, which is trying to factor policy targets into the the investment needed for sustainable development assessment of financial risk exposure of portfolios, and Section 1: Context and Objectives | 9 2DII, which is attempting to combine information on to overcome some of the challenges in applying existing physical assets held and their owners with current policy green finance definitions to larger financial datasets. It targets. These projects will shed light on the effect policy suggests how existing indicators in financial datasets can targets may have on financial markets’ behavior, and be combined with some of the definitions mentioned in clarify where the stocks of currently financed physical Table 1, and thereby contributes to the development of assets are still removed from green policy goals. a new model (see Table 2). It also proposes a practical approach to estimating the green finance share of an The following section develops an approach to tracking economic activity in a particular sector. The analysis green finance in the banking sector that uses both bottom- informs recommendations on how to better integrate up financial data and broader sectoral data to identify green measures into existing financial data. the existing shares of green lending. This approach aims 10 | Green Finance A Bottom-up Approach to Track Existing Flows Section 2: Tracking Green Finance in the Banking Sector METHODOLOGY FOR TRACKING GREEN FINANCE FLOWS The following bottom-up approach is an initial attempt Challenges lie in definitions, data aggregation, and to map green financial flows in the context of the existing interpretation. Depending on the financial instrument demand for green finance. under consideration, pure amounts invested need to be distinguished from the activities that are actually financed First, it defines what is “green” at a project level based in the real economy. In this context, “green activities” on the intended use of each investment, considering the need to be defined, often through finding suitable activity that is actually financed in the real economy. To proxies, because definitions are either not available or do this, the green share of a project is estimated based on inconsistently applied. The data needs to be aggregated available information about the company or the sector across sectors and financial instruments, connecting in which it operates. The numbers per industry and at different datasets. And finally, a valid benchmark needs a country level are then aggregated. These results can to be applied (the demand for green investment, in this be compared to green finance needs based on policy case) to derive a “sufficient” level of green finance. The targets to identify gaps and action points. 2DII has mapped these challenges in Figure 2.46 Figure 1: Steps to approximate the amount of green financial flows and put it into perspective DEFINE ESTIMATE AGGREGATE COMPARE ‘green finance’ depending green share of finance green share of all projects existing green finance on financed project where necessary financed via a certain supply to needed amounts financial instrument per to reach policy targets sector of country Figure 2: Challenges to measuring green finance Financial sector impact 4. Creating a ‘green’ finance benchmark 2. Defining green 3. Aggregating green 1. Distinguishing finance and investment Source: 2DII, Measuring progress for greening financial markets Section 2: Tracking Green Finance in the Banking Sector | 11 THE DEMAND FOR GREEN FINANCE Any figures on the existing supply of green finance need suggests that the more mature low-carbon technologies to be put into perspective in terms of the demand for this become, the more accessible bond markets get, which type of finance. This will enable better decision making. means they could contribute significantly to new built An estimated “sufficient amount of green finance” needs assets in future.50 to be established, ideally for each financial instrument, because linking green finance needs with the best suited A study by Bloomberg New Energy Finance and Ceres disbursement channel is important for its success.47 This published in 2016 concludes that to reach the goals of estimated demand can be backed by information from the Paris Agreement, $12.1 trillion will be needed over countries’ national regulations and development plans, the next 25 years. This is $5.2 trillion above current national research institutes, and business associations business-as-usual projections, or an extra $208 billion or companies’ strategy announcements. Many countries a year.51 IFC analysis published in 2016 estimated that have set general political targets for environmental action, the nationally determined contributions of 21 emerging including climate change, and businesses are following market countries present an investment opportunity with their own pledges, but only a few countries and of $23 trillion between 2016 and 2030.52 Considering companies have announced clear targets on how to the broader context of modeling future investment and involve the private sector in achieving the greening of finance needs, the Intergovernmental Panel on Climate the economy. Estimated green finance needs in the real Change’s 5th Assessment Report, published in 2014, economy still remain rather abstract, especially when it included a chapter on estimates for investment and comes to a breakdown of specific financial instruments. finance needs.53 The panel also published estimates on the total required amounts of money to achieve the The OECD published various papers related to the Sustainable Development Goals, as did the Food and demand for green finance. A 2011 paper summarizes Agriculture Organization, the World Health Organization, and analyzes some of the existing initiatives to encourage the International Energy Agency, and G20.54 and support pension funds to help finance green growth projects.48 Another publication from 2015 addresses Finally, the 2DII’s suggestion of a climate capital monitor publicly capitalized green investment banks, examining provides an interesting outline of how to analyze policy the reasons why they are being created and how they targets and the corresponding financing requirement mobilize investment.49 In its input paper to the G20 Green by linking physical asset-level data with information Finance Study Group in 2016, the OECD published a on ownership of securities (see Table 2). Such work quantitative framework for analyzing potential bond needs further development to achieve a supply-demand contributions to meet low-carbon financing needs on a comparison that can ultimately provide policy makers 2°C compatible emissions pathway.d Focusing on China, and private market participants with meaningful and the European Union, Japan, and the United States, it comparable information. THE SUPPLY OF GREEN FINANCE BY BANKS In alignment with the G20 Green Finance Study Group, this outlined above. The analysis prioritizes this sector report considers banking, bonds, and institutional investors because relatively little work has been done to in turn. This section provides an overview of green measure green banking flows to date. The focus is finance tracking for banks by applying the methodology further narrowed to the loan market because loans d represent the largest share of banks’ activities.55 The challenges identified in doing this analysis are d Based on the Paris Agreement target of limiting the increase in global average temperatures to below 2°C above preindustrial temperatures. contextualized and described on the following pages. 12 | Green Finance A Bottom-up Approach to Track Existing Flows DEFINE: STOCKTAKING OF AVAILABLE DATA financial amount, time frame, and sometimes explicit AND DEFINITIONS OF GREEN details on that activity (production of x tons of steel, for example), and selected impacts (carbon and water To date, a meaningful and comprehensive review of green footprint, jobs provided, and so on). finance for lending does not exist.56 Different datasets for the banking sector are accessible via international • Company-level information regarding the creditor data providers such as BIS, Bloomberg, Bureau van Dijk, and borrower for each loan, including their sector IFC, the International Monetary Fund, and Thomson and location. Reuters. At a country level, aggregated data is available Figure 3 shows the different levels of available datasets on total loans issued, the share of nonperforming loans, and their respective financial indicators, as well as data outstanding debt, returns on assets, and so on. At the providers offering such information. It maps out how the bank level, information on ownership structures of approximation of green finance needs to happen at project individual banks, mergers and acquisitions, and total levels, capturing what is effectively financed in the real loans is provided. The most relevant datasets for our economy. The categorization into green and conventional purpose contain the following data: finance per project can then be summarized according to the lender’s (or borrower’s) country of headquarter, • Project-level information, which refers to the use of and sector. This aggregated data can then be integrated proceed or physical activity being financed (a wind into datasets at country or financial institution level park, for example), including information about Figure 3: Data providers for the loan market, their data levels, and indicators Banking sector: Loans Data providers and details of available data FinStats: Financial General — Total syndicated loans issued volume per country Country level institutions financial involved indicators FinDebt: — Syndicated loans: total volume, maternity per borrower country (quarterly) BIS banking statistics: — Total loans & deposits, debt securities, derivatives per Financial Financial Indicators country (quarterly) institution level instruments for that (banks) (loans) instrument ORBIS: download in Stata possible — Total loans (long and short term) per bank, deposits, M&A Borrower Thomson Reuters: — Total amount per loan, financial closure, use of proceed, industry of borrower, borrower country, borrower’s parent’s country Indicators per project, Dealogic/BMI infrastructure projects: Project level Industry to be — Project data including name, amount, time frame, sector; aggregated but info on borrower and lenders only listed in narrative comment per borrower FTSE LCE ICS: — Green revenue share per companies’ products/services Lender (borrower side) Section 2: Tracking Green Finance in the Banking Sector | 13 Table 3: Available metrics defining green finance activities and related challenges Define green: What data are used and what are the criteria for a green project Data Metric Availability provider Challenges Dataset on loans containing Private via Thomson Various datasets exist on loans. However, project-level data partnership Reuters, few provide a global picture with detailed Bloomberg information at a project level Sectors included in the Public IFC approach Different institutions have developed their definition of green finance: own criteria to determine whether a project • Adaptation is green. Given the broad consensus on sectors that can be considered green as per • Carbon capture & storage the IFC survey, we used the listed sectors as • Energy & energy efficiency a preselection to then apply estimates per • Environment protection sector where needed • Green buildings The FTSE Russell green revenues model maps companies’ revenue against 60 green • Green products & materials industrial subsectors.57 However, this list is • Renewable energy not publicly available • Sustainable land management • Transport • Waste management • Water to, for example, analyze the performance of (partly) the available dataset is still considered as a valuable green loans compared to conventional loans issued by representation of the loan market. financial institutions in a specific country. In addition, we applied the sectors identified as green, As a starting point, this analysis uses the Thomson Reuters through the IFC survey of financial institutions for the data on syndicated loans. We narrow this down to all G20, to preselect sectors that can be included in the reported syndicated loans with a financial closure date definition of green finance. within the 2014 calendar year.e This dataset includes 4,412 loans in total, amounting to $1.1 trillion. Data on BankTrack published an analysis on syndicated loans of non-syndicated loans is not available in a comparable 75 selected financial institutions for selected companies format, including project-level information. Nevertheless, engaged in fossil fuels, renewable energy input equipment as bilateral loans are usually much smaller in size, manufacturers, renewable energy projects, and utility companies from 2004 to 2014. However, as we aim to analyze a broader dataset covering all sectors, we do e The financial closure date is defined as when the credit agreement/facility is funded and available for withdrawal. not directly use their data.58 14 | Green Finance A Bottom-up Approach to Track Existing Flows Table 4: Applied use-of-proceed categories in the Thomson Reuters dataset Category Sublevel Category Sublevel Acquisition related Acquisition financing Other Other Acquisition related Future acquisitions Other Restructuring Acquisition related Infrastructure leveraged buyout Other Working capital Acquisition related Leveraged buyout Project finance Aircraft financing Acquisition related Sponsored buyout Project finance Project finance General corporate General corporate purposes Project finance Ship financing purposes Green bonds Renewable energy Project finance Water infrastructure Investments Investment/loan Real estate Construction Other Capital expenditures Real estate Property acquisition Other Export/import finance Refinancing Refinance bank debt Other Finance-linked trade Refinancing Refinancing Other Operating fund/cash reserve Security related Standby/CP support ESTIMATE: CALCULATING GREEN be considered reliable. According to Bloomberg loan FINANCE SHARES data, 2.0 percent are green bonds/loans.f For each project, either the entire amount invested Unfortunately, out of the 127 use-of-proceed sublevel can be categorized as green or a certain share must be classifications available (amounting to 11 main categories), estimated, depending on the financed activity. There only 24 are actually applied (listed in Table 4).g Moreover, are three ways of estimating the green finance share most of them do not provide any indication of the of a project. environmental benefits associated with the project, but Project level instead use broad labels such as project finance. Whenever a project’s use of proceed clearly falls into the The UN Environment Programme’s suggestion (see green category (such as renewable energy), 100 percent Table 2) of tagging loans that finance energy-efficient of this loan is considered green. This approach takes projects to increase transparency on green finance could into account green projects that are being undertaken be combined with the application of use-of-proceed by companies whose underlying sectors of operation classifications. Where a product or service is delivered are not entirely green, such as energy, which can also that already complies with an established efficiency include fossil-fuel-related investments. standard (for example, buildings or white products such as air conditioning and refrigerators), this could About 2.4 percent of all loans under consideration are be classified accordingly. classified as financing for renewable energy projects and are identified as 100 percent green. Comparing this with f Retrieved from Bloomberg terminal on August 13, 2016. Bloomberg loan data indicates that the numbers can g A full list of all available use of proceeds can be found in the annex. Section 2: Tracking Green Finance in the Banking Sector | 15 Table 5: Challenges using project-level information (use of proceed) when estimating green loans Estimate green: Project-level information Data Metric Availability provider Challenges Use-of-proceed classification Allows for Thomson Only a fraction of the available use-of- per project to tag green loans most detailed Reuters, proceed classifications is used. Even obvious allocation Bloomberg classifications such as renewable energy are of green not always applied. With a more thorough investment and consistent classification of the intended per project, use of each investment, this data would be but only much more valuable some can be An ideal scenario would be the establishment attributed to of an additional sublevel, indicating or tagging green finance green (or not) per use of proceed A challenge remains for general purpose bonds and corporate loans. Not limited to green finance, lenders and bond buyers are often less interested in the use of proceeds as long as creditworthiness is ensured Table 5 summarizes the challenges with project-level certifying organizations, and international research and information when estimating green loans. analysis. As we cannot rely solely on the use-of-proceed Table 6 provides an overview of the different metrics classification to define what is green at a project level, available to classify borrowing companies into industries, we have to find estimates for the share of green projects and then define if and to what extent their activities can in the borrowing companies’ industries. be considered green. The more granular the classification, the better the definition for green will be. Sector level For projects in sectors that are considered only partly Company level green, approximations can be derived from existing If information on the project and sector is not insightful, research. These estimates can be applied to define the a more accurate green estimate could be derived from the green share per sector. For example, the share of green activities of the borrowing company itself. A company’s buildings in the real estate sector, the share of electric share of green investments, projects, products, and vehicles in the auto manufacturing sector, the share of services can be estimated using the different sources renewables in the power/electricity sector, and so on. Such outlined in Table 7. estimates can be found through industry associations, 16 | Green Finance A Bottom-up Approach to Track Existing Flows Table 6: Available metrics for borrower’s sector-level information and related challenges Estimate green: Sector-level information Metric Availability Data provider Challenges Global Industry Only for listed Bloomberg No industry classification Classification Standard,59 companies (used at is used consistently across Industry Classification stock markets) different datasets. The Benchmark60 International Standard Less granularity/number of subsectors (>100) Industrial Classification is referenced in every Securities International Standard Available for a broader Thomson Reuters and Exchange Commission Industrial Classification,61 range of companies. (International filing, but it is quite antiquated. North American Industry Sometimes a company Standard Industrial For example, PayPal falls Classification System,62 is classified into several Classification under the category of “other.” European classification,63 categories according and North The North American Industry Australian and New to revenue share American Industry Classification System is more up Zealand Standard Industrial (used by financial and Classification System to date (with e-commerce as Classification64 ESG data providers to of borrower and an industry) but its granularity segment companies into parent company, might be too detailed to apply industries or activities) Thomson Reuters’ to green estimates. Thomson More granularity own aggregation of Reuters offers financial macro (>1,000) those) and mid codes, which combine the International Standard Industrial Classification and the North American Industry Classification System Table 7: Available metrics for estimating the green share of loans using company-level information and related challenges Estimate green: Company-level information Metric Availability Data provider Challenges FTSE LCE ICS green Indicates the portion of FTSE Russell Only available for listed revenues model (green 65 corporate activities in green companies and data access revenue share per sectors according to their might be costly company) own methodology, covering 13,400 listed companies (continued ) Section 2: Tracking Green Finance in the Banking Sector | 17 Table 7: Continued Estimate green: Company-level information Metric Availability Data provider Challenges MSCI ESG research66 MSCI ESG carbon metrics MSCI Only available for listed (carbon and clean-tech and clean tech metrics companies, still relatively tools) provide investors with small coverage, data access data on carbon reserves might be costly and emissions, low-carbon indexes and clean-tech involvement, covering about 8,500 companies Individual announcements If not available from the Companies’ annual Information is not available in annual statements FTSE LCE data, a portion of financial statements, in a standardized way corporate activities in green websites and may require manual sectors can be estimated research. Its application is using publicly available data questionable on a larger scale Inclusion in sustainability Rankings usually look at CDP Climate A List, As rankings are mostly rankings indicators such as risk CDP Water A List, relative sector benchmarks, management practices, CDP Forest Leaders;68 they do not necessarily sustainability targets Oekom Research match the definition (reduction in carbon company rating69 of green projects, and emissions, deforestation, (not public); Global might not be useful in this water usage), an Reporting Initiative: context external verification of data on who reports 70 environmental data, and so on. It remains to be investigated if rankings estimate the share of green products/services as an underlying indicator Companies responding to CDP provide a data point on percentage of revenue from low-carbon products67 Inclusion in sustainability This poses the same FTSE4Good Index Even if underlying indices questions on selection Series,71 Dow Jones information exists, it criteria as with rankings Sustainability Index 72 is unlikely that index providers will share such granular information 18 | Green Finance A Bottom-up Approach to Track Existing Flows Figure 4: Options to estimate the green share of finance for loans Boundaries — Country of borrower — Financial closure: FY 2014 — Syndicated loans reported (no threshold) Financiers Financial flows: Loans Borrowers — Total amount of 100% green — Company names syndicated loan XX% green — Country of company 0% green — Names of banks — Identification involved numbers: Project level: Sector level: Sector level: Company level:* – Ticker Via use of proceed Via industry Via industry Via green revenue – SEDOL (indended use of classification (e.g. classification & public share of each – CUSIP finance), e.g. clean alternative energy research (e.g. food & borrowing company — Sector indicators: energy sources = 100%, oil & beverage = 13% – SIC gas = 0%) according to share of *Needs to be added – NAIC certified agriculture) from other dataset – TF macro/mid codes AGGREGATE: PROJECT, SECTOR, RESULTS: A FIRST ESTIMATE OF GREEN AND COUNTRY DATA LOANS SUPPLIED Depending on the data available and the compatibility Based on available information, the methodology outlined of datasets, the application of green shares per loan can above has been applied to the Thomson Reuters dataset be aggregated for each country of borrowing companies in the following way: and their respective sectors, or per financing institution. Table 8 outlines the two options for data aggregation Step 1: Stocktaking of available data and the corresponding challenges. and definitions This analysis uses Thomson Reuters loans data with Different datasets need to be combined for meaningful financial closure in calendar year 2014, and has pre- analysis of green finance per financial instrument, project selected green sectors in alignment with the IFC Survey location (countries), project operator (companies), and conducted for the G20 Green Finance Study Group project financier (lending banks, bond issuers, investors). (see Table 3). This means that connecting factors must be found across datasets. These factors could be the unique identifiers per Step 2: Identifying data and proxies financed project (the project ID), the operating company, to estimate green finance shares or the financing institution. In a forthcoming paper, 2DII Due to the inconsistent application of the use-of-proceed finds that less than half of climate-relevant asset-level classifications, we defined green based on the industry data providers provide financial IDs that are usable of the borrowing company. We took a proxy for each across different sources (in other words, classification industry (see Table 6) that can be considered green codes not specific to the data provider).73 based on available industry studies (see below). The Section 2: Tracking Green Finance in the Banking Sector | 19 Table 8: Options for aggregation of green finance data for banking and related challenges Aggregate data: Borrower or financier Aggregation approach Challenges Financing Due to the availability of data, it remains challenging to attribute loans to certain financial institution institutions and their locations. The amount contributed per bank is often not displayed—only the total amount per syndicated loan and the names of all banks that contribute Borrowing The database on borrowers includes data on their headquarter location. Some inaccuracies company remain, because it is unlikely that a company’s headquarter country is always the same as the project location Linking different • Many different identifiers are used across datasets and geographies, which complicates datasets the linking of different sources of information. For example, Ticker and International Security Identification Numbers are used only for public companies. Committee on Uniform Securities Identification Procedures numbers are mostly used for products issued in the United States and Canada, but cover private companies. Stock Exchange Daily Official List identifiers are assigned to securities by the London Stock Exchange • An upcoming paper by the 2DII finds that less than half of data providers with climate- relevant asset-level data provide usable financial IDs that are not specific to the data provider • Some promising developments are happening regarding open data: The Financial Instrument Global Identifier (Figi) is a 12 character, alphanumeric, randomly generated ID that clearly describes a financial instrument. It acts as a uniform resource identifier that is linked to a set of metadata. Figi, available through the OpenFigi website, also exists for asset classes that do not usually have a global identifier, including loans, futures, and options74 • Similarly, OpenCorporates provides a URL for every company in the world, covering 110 million companies75 identified industries were grouped using Thomson are not broken down by country or geographic region Reuters’ own industry classification—Thomson due to the limited availability of data. The derived green Financial (TF) descriptions—prior to applying our share is then applied to each loan issued in the respective proxies. These classifications have a broad category, industry, assuming that, on average, individual non- TF macro descriptions, and a more detailed level, TF green and green projects will even out to finally match mid descriptions. The TF macro and mid descriptions that proxy. both combine two widely used industry classification schemes, the broader International Standard Industrial 100 percent green: Clean energy Classification and the more granular North American • Applied to loans with industrial classifications Industry Classification System.h The proxies applied to of alternative energy sources, water and waste these groups for the share of green activity per industry management, power, and other energy and power. A manual check of the business description of each h For further clarification see Table 6. 20 | Green Finance A Bottom-up Approach to Track Existing Flows loan is conducted to make sure it captures green buildings account for 24 percent of the total share projects (for example, to rule out projects including of construction activities among all 1,026 survey coal-powered plants). participants in 69 countries.76 However, this estimate might be too high given a likely bias among the • Similarly, loans with a power industry classification can participants towards those that already focus on be further broken down using the business description. green buildings. Those containing hydro or wind are 100  percent green as well (this category does not contain solar). • In the United States, the share of new homes certified with an energy star yields a more realistic picture. 0 percent green: Oil and gas, petrochemicals, pipelines, Out of all homes completed in 2015, 9.7 percent coal power received an energy star.77 • Applied to loans with industrial classifications of oil • Other regional estimates could be derived, but have and gas, petrochemicals, and pipelines. not been included here due to limited data availability. • The business descriptions of these loans were also The following certification schemes need to be manually checked to see if hydro or wind are mentioned. investigated further: Europe’s energy performance certificate, China’s three-star rating, and the Indian 17 percent green: Real estate Green Building Council. • Applied to loans with the industrial classification • For now, the average of the World Green Building of real estate. Trends report and the energy star market share in the United States has been taken as a proxy, resulting • According to the most recent World Green Building in a share of 17 percent. Trends report by Dodge Data & Analytics, green Section 2: Tracking Green Finance in the Banking Sector | 21 13 percent green: Food and beverages, paper and forest (9.5 percent). However, the authors estimate a much products, agriculture higher value of $103 billion.81 • Fitch Group BMI Research provides general data • Applied to loans with industrial classifications of food about the infrastructure sector, but not specifically on and beverages, food and beverage retailing, paper green infrastructure investments.82 Similarly, IJ Global and forest products, and agriculture and livestock. (Infrastructure Journal) published league tables on • It is difficult to set a green share for these industries infrastructure investments per company, sector, and due to the wide variety of companies’ activities, ranging value, but did not identify green projects.83 from using certified raw materials such as sugarcane, • According to a 2016 McKinsey report, current palm oil, or coffee, to avoiding deforestation and infrastructure spending of between $2.5 trillion and pesticides, to improving working conditions, and $3 trillion a year is only half the amount needed to meet using new harvesting techniques to increase yields. the estimated $6 trillion of average annual demand from • While 83 percent of 24 global agriculture companies 2015 to 2030, if we aim for sustainable infrastructure.84 are involved in at least one sustainable agriculture The study looked at energy, transport, water and waste, stakeholder group, only 16 percent have corporate and telecommunications, with energy and transport procurement policies in place that refer to good making up two-thirds of the needs. Barriers identified agricultural practices for soil management, water included the lack of transparency of bankable project management, animal production, health and welfare, pipelines and viable funding models, inadequate risk- working conditions, health and safety, public health, adjusted returns and unfavorable policies. and biodiversity.78 In 2012, 40  percent of coffee • The Institute for Sustainable Infrastructure recently production complied with global standards, as did developed a sustainable infrastructure rating system 22 percent of cocoa production, 15 percent of palm using 60 different criteria, available for a project oil production, and 9 percent of forestland.79 Taking verification process (Envision). So far, 350 projects the average of these shares as a rough indicator, are using Envision as a guideline and only five projects the global green share of agriculture can roughly be completed the verification process. This development estimated at 13 percent. However, progress is slow. may lead to more sophisticated data in the future.85 For example, half of the companies with commitments The OECD publishes research on each transportation to source certified soy are yet to use any in their area,86 and various other organizations promote supply chains.80 sustainable infrastructure (such as the Sustainable 10 percent green: Infrastructure and transport Shipping Initiative), but data is rarely available. • Applied to loans with the industrial classification of • Another upcoming initiative is the Global Real Estate infrastructure and transportation. Sustainability Benchmark (GRESB), an industry- driven organization committed to assessing the ESG • Several studies exist on this industry, but no clear performance of real assets globally, including real estimate of a green share for loans could be found. A estate portfolios and infrastructure assets. The final share of 10 percent has been used as an estimate for scoring methodology was in its pilot phase in 2016.87 now, based on the 2016 Prequin Global Infrastructure Report for institutional investors. This report estimates • The Global Infrastructure Basel Foundation is a an aggregated deal value of $349  billion for 661 Swiss foundation working to promote sustainable infrastructure deals completed globally in 2015, out and resilient infrastructure. Several standards are being of which 295 have been reported in the renewable developed to assess the sustainability of infrastructure energy sector with an aggregate value of $33 billion projects around the world and to make the added value accessible for investors.88 22 | Green Finance A Bottom-up Approach to Track Existing Flows Step 3: Aggregating green finance activities in sectors that cannot be considered green at data—findings all (see Figure 5). The application of the sector estimates mentioned above Considering the total monetary value of all syndicated allows for an analysis of the total green share of loans loans in 2014, we estimate that almost 15 percent went (both as a share of the number of loans issued and into green finance. The green share of the volume of their dollar value), in terms of the country and sector all loans is $164.7 billion out of the total $1.1 trillion of operation of the borrowing companies. (see Figure 6). The total number of loans with financial closure in Figure 7 shows the distribution of partly green loans 2014 is 4,412, with a total amount of $1.1 trillion. By issued across sectors. The corresponding share of the applying the estimates for the green share per sector, monetary value of loans attributed to green activities quite a few of the syndicated loans go to sectors where shows that the majority of these finance flows go into some green activity is happening. However, the volume clean energy projects, $62.4 billion (38 percent) and of these loans is still very small. green real estate projects, $51 billion (31 percent). Of the syndicated loans that closed in 2014, 3,610, Looking at the distribution of the monetary value of or 82 percent, financed projects in sectors with some green loans per country (Figure 8), the largest share of green activities, while the remaining 18 percent financed Figure 5: Share of green loans per total loans, displayed per number of loans 82 percent of all syndicated loans issued in 2014 financed projects in sectors with green activities No. of loans 3,610 802 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Financing green activities Financing non-green activities Figure 6: Share of green loans per total loans, displayed per dollar value 15 percent of the value of all syndicated loans issued in 2014 went into green finance Loan amount, $ billions 165 937 0 100 200 300 400 500 600 700 800 900 1,000 1,100 Financing green activities Financing non-green activities Section 2: Tracking Green Finance in the Banking Sector | 23 Figure 7: Distribution of green loans across sectors 41 percent of the number of loans issued that are partly green are to the real estate sector Food & beverage, paper & forest, 20% agriculture Real estate 41% 24% Infrastructure & 15% transport Clean energy Figure 8: Distribution of green loans (as a monetary share of total loans) across countries of borrowers and across emerging markets Total green loans per country in 2014, $ billions (according to attributed green shares per project) United States 56.8 United Kingdom 13.0 Australia 10.2 France 9.2 Japan 8.3 China 6.9 India 6.5 Canada 5.9 Netherlands 4.7 Spain 4.5 Turkey 4.2 Hong Kong 3.7 Singapore 2.9 Germany 2.7 Switzerland 2.0 New Zealand 1.7 South Korea 1.7 Italy 1.4 United Arab Emirates 1.4 Ireland-Rep 1.3 Saudi Arabia 1.0 0 10 20 30 40 50 60 $ billions 24 | Green Finance A Bottom-up Approach to Track Existing Flows Figure 9: Distribution of green loans (as a monetary share of total loans) across selected World Bank Group clients Total green loans per country in 2014, for a section of World Bank Group clients, $ billions China India Turkey United Arab Emirates Ghana Chile Indonesia Mexico Brazil Thailand 0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 $ billions the global total goes to the United States, accounting • About 40 percent of the remaining emerging market for 35 percent, followed by the United Kingdom with countries received between $100  million and 8 percent, Australia and France with 6 percent, and $500 million, and the remaining 60 percent received Japan with 5 percent. Among emerging markets, China less than $100 million. and India have the largest green loan amounts, both Individual countries’ domestic share of green loans with about 4 percent of the total global loans value. as a proportion of total loans issued nationally varies These differences might be due to the large size of the significantly across nations. While the average across United States loan market; a potential bias in the dataset all countries is 15 percent, there are clear outliers, with containing more information about the United States the most striking being Turkey with a share of green and other developed markets than other areas where loans of 72  percent. This is due to the fact that, in data is less accessible; or the level of development of our dataset, all loans to borrowers in Turkey are for financial markets (lower self-financing and higher shares alternative energies or transportation systems. of securities/syndicated loans versus private loans in the United States). Considering emerging markets independently, borrowers in the following World Bank Group client countries received the most financing through green loans from private financial institutions in 2014:89 • Borrowers in China and India received more than $6 billion, in Turkey more than $4 billion, and in the United Arab Emirates more than $1 billion. • Borrowers in Ghana, Chile, Indonesia, Mexico, and Brazil received more than $600 million. Section 2: Tracking Green Finance in the Banking Sector | 25 Figure 10: Green loans in $ billion compared to the percent share of green loans out of total loans per country Green Loans in $ billions vs. the percentage share of green loans to total loans per country 60 80% 70% 50 60% 40 50% 30 40% 30% 20 20% 10 10% 0 0% es m lia e n a a da s n y g e y nd nd ea ly E. . a ep nd ke an nc or in di bi n pa ai Ita do at ra b r na Ko la la -R In ra Ch Sp Ko ap r rla a ra m Ja St Tu er a st ng Fr Ca iA nd Ze er .A g ng he Au itz h d on Ki ud G ut la te td Si ew et Sw H d Ire So ni Sa U N te N U ni U Amount of green finance in $ billion (according to attributed shars per project Share of green loans / total loans in each country The proportion of green loans to total loans in the majority providing renewable energy, energy efficiency, United States is 14 percent, in the United Kingdom it is waste and water-related financing. The average climate/ 20 percent, in Australia and France it is 19 percent, in green financing portfolio cited is 6 percent of the total Japan and China 12 percent, and in India 30 percent. outstanding loan portfolio—providing about $4.5 billion in finance issued primarily through commercial banks Plausibility check and limitations and specialized finance companies. The vast majority of of the analysis clients who provide climate/green finance do not have To put these results into perspective, we have identified two tools for impact measures such as carbon emissions or different sources that provide information for comparison. energy savings, making it difficult for them to track or account for green investments. As a result of the regulation on green bank lending in China, there is data available for the Chinese banking This report’s estimate of about 15 percent in green sector. According to the China Banking Regulatory loans out of the total value of syndicated loans with Commission, the share of green loans issued by Chinese financial closure in 2014 is significantly higher than banks was 10 percent in 2015. the two figures from Chinese bank lending and IFC clients’ portfolios, more than doubling the latter. This A survey of IFC’s financial institution clients in 2016 may be due to the shortcomings of the dataset used for revealed that 70 percent of the responding institutions this analysis and the proxies applied for green shares provided climate-related or green financing, with the per sector. 26 | Green Finance A Bottom-up Approach to Track Existing Flows The Thomson Reuters global dataset on syndicated loans vehicle sales that year.90 Hybrid cars held an estimated has a potential bias towards the United States, where 3 percent of the market share in 2015.91 most loans are reported. This could be due to easier data access and a higher share of syndicated loans versus The applied estimates for the shares of green activities per private loans resulting from a more developed financial sector reflect insights from current public research, and market. Additional datasets focusing on the emerging remain broad in many cases. Assuming that both Chinese markets should be considered for a more holistic view banks and IFC clients selected their green portfolios of the loan market, especially as the analyzed dataset based on detailed information per financed project, does not contain enough loans for some emerging- the methodology itself may be the main reason for the market countries to draw representative conclusions. differences in the numbers for the green share of loans. A In that context, it could be interesting to compare the global comparison of green finance tracking at the most distribution of green loans per sectors (Figure 7) across granular level is currently not possible given the lack of different countries. detailed data for each financed project. As a compromise, country-specific estimates should be developed and In addition, the dataset does not contain syndicated applied for more representative results, especially for loans in the automotive industry. While the share of a more detailed country analysis. Unfortunately, such electric or hybrid vehicles is still quite small and would estimates are rarely available. not alter the results much, this needs to be investigated for future analysis. According to Bloomberg New Energy The results of this analysis should be viewed critically. Finance, although some 1.3 million electric vehicles have However, they do provide indicative insights and now been sold worldwide and 2015 saw strong growth, suggestions for where and how to improve existing data on they still represent less than 1 percent of light-duty green loans (see Section 4 for specific recommendations). Section 2: Tracking Green Finance in the Banking Sector | 27 28 | Green Finance A Bottom-up Approach to Track Existing Flows Section 3: Bond Market and Institutional Investors GREEN FINANCE IN THE BOND MARKET STOCKTAKING OF DEFINITIONS credible green bond, ensure the availability of sufficient FOR THE GREEN BOND MARKET information to evaluate the environmental impact of a The green bond market is the most evolved financial green bond investment, and help underwriters facilitate instrument in terms of green finance definitions and transactions through standard disclosure processes.92 tracking. In 2014, the Green Bond Principles were issued Several guidelines and regulations issued since then have by a group of international banks, investors, and issuers, built on the framework of the Green Bond Principles. The in collaboration with the International Capital Market G20 Green Finance Study Group input paper 6 provides Association. They provide voluntary process guidelines an overview of green bond guidelines, challenges, and to issuers on the key components involved in launching a recommendations on how to grow the market further.93 Table 9: Green bond guidelines, standards, and regulations Guideline/standard/ Voluntary/ regulation mandatory Details International Capital Voluntary • Launched in 2014 under the International Capital Markets Markets Association: Association’s coordination Green Bond Principles94 • As of August 2016: 122 members, 75 observer organizations, 24 executive committee members • Green bond principles: 1. Use of proceed (exclusively green) 2. Process for project evaluation and selection 3. Management of proceeds 4. Reporting • Certification recommended through third parties • Eligible categories include renewable energy; energy efficiency; pollution; prevention and control; sustainable management of living natural resources; terrestrial and aquatic biodiversity conservation; clean transportation; sustainable water management; climate change adaptation; and eco-efficient products, production technologies and processes (continued ) Section 3: Bond Market and Institutional Investors | 29 Table 9: Continued Guideline/standard/ Voluntary/ regulation mandatory Details Climate Bonds Voluntary • Standard developed by the Climate Bonds Initiative on third- Initiative: Climate party verification, functions as a screening tool for investors and Bond Standard governments (including the Climate • Fully incorporates the Green Bond Principles, with more specific Bond Taxonomy) 95 criteria • Eligible projects: Wind; solar; geothermal; low-carbon buildings; bus rapid transit systems; low-carbon transport; bioenergy; water/ hydro; agriculture, forestry & other land use; and soon: industrial energy efficiency; fisheries and marine investments, cogeneration, infrastructure adaptation and resilience China: Green Financial Mandatory for • Published by People’s Bank of China and China Society of Banking Bond Guidelines; Green green bond and Finance Bond Endorsed Project issuers • Aligned with Green Bond Principles and Climate Bonds Initiative’s Catalogue96 standard • Quarterly reporting is mandatory, including details on use of proceed • Most issuers obtain third-party verification India: Green bond • Published by Securities and Exchange Board of India requirements97 • Follows Green Bond Principles, turning some recommendations into requirements, seen as a tool to meet India’s nationally determined contribution to the Paris Agreement • Definition of green is case-by-case evaluation • Management of proceeds needs to be verified • Use of proceed (projects) needs to be disclosed in annual report France: Transition Mandatory • The label was inspired mainly by Green Bond Principles and Climate Energetique Climat Bonds Initiative taxonomy label98 • Fixed income/credit funds that want to be labeled should be significantly invested in green bonds issued in accordance with the Green Bond Principles, for more than 83 percent of their net asset value Sweden: Aggregation Voluntary • The Swedish local government debt office combines single green of single green loans loans into an aggregated portfolio of green loans, empowering into a portfolio 99 smaller municipalities with green financing opportunities • Green bonds are issued with a commitment to allocate bond proceeds to the portfolio of eligible loans Stock exchanges100 Mandatory • Stock exchanges in London, Luxembourg, Mexico, Shanghai, and Shenzhen are developing minimum requirements for listing of green bonds 30 | Green Finance A Bottom-up Approach to Track Existing Flows Guideline/standard/ Voluntary/ regulation mandatory Details KfW: Minimum Mandatory • Public-law institution based in Germany, providing loans to mega requirements based on trends Green Bond Principles 101 • Defined minimum criteria based on Green Bond Principles Paris Green Bonds Voluntary • 27 global investors representing more than $11.2 trillion of total Statement102 assets under management issued the Paris Green Bonds Statement in December 2015 • Its signatories have committed to support policies that drive the development of long-term, sustainable global markets in green bonds as part of climate finance solutions AVAILABLE DATA ON GREEN BONDS Transport, energy, buildings and industry, water, waste and pollution control, and agriculture and forestry. For the past five years, the Climate Bonds Initiative and HSBC have published an annual report on the state of According to the G20 Green Finance Study Group input the green bond market.103 In their 2016 report, the size paper on bonds, the annual issuance of labeled green of the global bond market was an estimated $90 trillion, bonds rose from just $3 billion in 2012 to $47.8 billion with $694 billion in climate-aligned bonds, of which in 2015 (slightly higher than the Climate Bonds Initiative $118 billion were labeled as green bonds (17 percent). figure) with issuance occurring in 14 of the G20 markets.105 There are six main categories for climate-aligned bonds: Table 10: Key features of the climate-aligned and labeled green bonds, July 2016 Climate-aligned bonds ($694 billion) Subset: Labeled green bonds ($118 billion) • Transport (mostly rail) is the largest • Buildings and industry, and energy dominate with 68 percent, category, making up a third of the while transport is low (12 percent) as specific bonds for that universe (67 percent) sector are relatively new (see Figure 11) • The majority of issuance is from • Development banks are still among the most important issuers, government entities while corporate and commercial bank bond issuances continue • The majority of issuance has tenors (bond to grow time to maturity) longer than 10 years, • The average tenor is between five and 10 years and amounts larger than $100 million • The dominating currencies among labeled green bonds are • The dominating currency is Chinese dollars and euros (together 80 percent), followed by RMB renminbi (RMB) with 35 percent of bonds, • Similar to recent years, about 60 percent of the labeled green followed by dollars (23 percent) and euros bonds have received an external review, reconfirming the labels’ (16 percent) credibility • The Chinese government has announced it will issue $46 billion (RMB300 billion) of labeled green bonds in 2016 alone. Between January and July, China was already the largest issuing country in 2016104 Section 3: Bond Market and Institutional Investors | 31 Figure 11: Labeled green bonds and sector coverage The green bond market covers a wide range of sectors Buildings & Industry 9% Transport 6% Water 6% Waste & Pollution 0.75% Agriculture & Forestry 0.1% Energy 15% Buildings & Industry 15% Multi-sector 49% Energy Transport 29% 6% Water 5% Waste & Pollution 4% Agriculture & Forestry 2% Adaptation 2% Source: Climate Bonds Initiative and HSBC, Bonds and Climate Change State of the Market, 2016 Annual issuance of green bonds has quadrupled between potential for growth. According to Bloomberg data, the 2013 and 2015. As of October 31, total 2016 issuance labeled green bond market had about $130 billion in was already 50  percent higher than the 2015 total. outstanding debt as of July 2016, or just 0.15 percent Moody’s has estimated that total issuance of green bonds of the total global fixed-income market,107 consistent in 2016 will be $80 billion.106 with an estimate of below 0.2 percent by the Climate Bonds Initiative.108 Non-labeled climate-aligned bonds Of the largest 10 green bond issuers in 2016, three are captured if bond issuers derive 95 percent of their are banks (Shanghai Pudong Development Bank with revenue from climate-aligned assets. There are many more $7.6 billion, European Investment Bank with $4.1 billion, bonds that could be identified as green if the respective and Bank of China with $3 billion), and the remaining project details were known. However, information at seven are private corporations with issuances ranging project level is not consistently available to analyze between $1.4 billion and $2 billion each (Mexico City bonds more thoroughly than the revenue-share approach Airport Trust, Électricité de France, Iberdrola, TenneT taken here. Holdings, Toyota, Apple Inc, and New York MTA). Progress is visible. Standard & Poor’s sees environmental The fact that labeled green bonds represent only 17 percent disclosure platforms such as the Global Reporting of all identified climate-aligned bonds indicates the large Initiative or the CDP as significant drivers for large 32 | Green Finance A Bottom-up Approach to Track Existing Flows Figure 12: Labeled green bond issuance and market composition, 2012–2016 $80 bn Bank 2016 estimate = $80 bn $70 bn Corporate ABS $60 bn Muni/provincial/city Development Bank $50 bn $40 bn $30 bn $20 bn $10 bn $0 bn 2012 2013 2014 2015 2016 Source: Climate Bonds Initiative, Green Finance: Green Bond Directions, COP22, November 2016 corporations to tap the green bond market, because and investors are pushing for broader application and they enable companies to demonstrate the credibility of disclosure, green finance tracking on bonds is expected their activities through labeled green bonds.i 109 Given to develop quickly. that standards are available and both governments GREEN FINANCE AMONG INSTITUTIONAL INVESTORS This section provides an overview of green finance tracking in assets under management. The initiatives are classified for institutional investors and equity investments.i in four categories: Measure, engage, reallocate, and reinforce (Table 11). STOCKTAKING OF GREEN FINANCE INITIATIVES AMONG INSTITUTIONAL The initiative considered the most relevant for green INVESTORS finance tracking is the Portfolio Decarbonization Coalition, which focuses on finding ways to measure and disclose The Investor Platform for Climate Actions provides the carbon footprint of portfolios (according to the an overview of existing initiatives led by institutional Montreal Pledge), and taking action to decarbonize them. investors that promote low-carbon and green investments Another critical initiative to increase transparency around among investors, policy makers, and companies.110 It has green finance is the Climate Disclosure Standards Board identified 19 initiatives, with more than 400 investors Fiduciary Duty Statement. The statement encourages participating from 40 countries and a total of $25 trillion companies in all industries to publish information on climate-related corporate performance, risks, and i The percentage of companies reporting to CDP who have active emissions- opportunities alongside mainstream corporate reports, reduction initiatives increased from 47 percent in 2010 to 89 percent in 2015. stressing that the economic effects are tangible and Section 3: Bond Market and Institutional Investors | 33 Table 11: Investor initiatives and actions to promote a low-carbon green economy Measure • PRI Montreal Pledge • Aiming for A • Carbon asset risk • CDP carbon action • Ceres Shareholder Initiative on Climate & Sustainability Engage • Global Engagement Services carbon risk engagement • Institutional Investors Group on Climate Change Initiative on European Union company climate lobbying • Investor expectations on corporate climate risk management • PRI investor working group on corporate climate lobbying • Regnan climate change resilience engagement Reallocate • Portfolio Decarbonization Coalition • Low-carbon investment registry • Global Investor Statement on Climate Change • Climate Disclosure Standards Board Fiduciary Duty Statement • Climate Bonds Initiative Reinforce • European Union and G20 governments to enable more investment in energy efficiency • Investor expectations for oil and gas companies • Investor expectations on corporate climate lobbying • Statement of investor expectations for the green bond market • Other actions have implications for the relevant prospects of firms, Civil society organizations’ efforts have also gained industries, and investment portfolios.111 The Climate attention recently. The campaign Go-fossil-free113 calls Disclosure Standards Board framework for reporting on institutional leaders to “immediately freeze any new is designed to help organizations prepare and present investment in fossil fuel companies, and divest from environmental information in mainstream reports for direct ownership and any commingled funds that include the benefit of investors. fossil fuel public equities and corporate bonds within five years.” A global climate movement, 350.org,114 is The NAZCA platform, initiated by COP20 in 2014, lists petitioning for carbon emission regulations, holding individual commitments and actions taken by investors “our leaders accountable to the realities of science and around the world.112 the principles of justice.” DivestInvest Philanthropy115 34 | Green Finance A Bottom-up Approach to Track Existing Flows connects institutions that follow the lead of student • Seek appropriate disclosure on ESG issues by the and community-driven movements to call for fossil fuel entities in which they invest divestment and clean energy investment. The Guardian • Promote acceptance and implementation of the started the campaign Keep-it-in-the-ground116 in March principles within the investment industry 2015, informing people about climate change, the carbon bubble, divestments, and renewable energy. • Work together to enhance their effectiveness in implementing the principles Investors themselves report to the PRI if they are members. • Report on their activities and progress towards PRI is an investor initiative in partnership with the UN implementing the principles. Environment Programme Finance Initiative and the UN Global Compact, advocating for responsible investments. Since its founding in 2006, the number of signatories It works to understand the investment implications of has grown from 63 signatories representing $6.5 trillion ESG factors and to support its international network of in assets under management to 1,501 members in April investor signatories in incorporating these factors into 2016 with $62 trillion in assets under management. A their investment and ownership decisions.117 Signatories total of 1,072 signatories representing $56.4 trillion in agree to: assets under management have submitted their responses to the reporting framework in 2016 on their activities on • Incorporate ESG issues into investment analysis and ESG investing in 2015. Although individual responses decision-making processes are not public, member organizations can access some of the data. Of those that reported, the largest number • Be active owners and incorporate ESG issues into of signatories are in the European Union (696) and ownership policies and practices the United States (256), followed by Australia (118), Figure 13: PRI signatories and assets under management Assets under management (US$ trillion) N Signatories 70 1600 60 1400 1200 50 1000 40 800 30 600 20 400 10 200 0 0 April 06 April 07 April 08 April 09 April 10 April 11 April 12 April 13 April 14 April 15 April 16 Total Assets under management Number of Signatories Source: PRI website119 Section 3: Bond Market and Institutional Investors | 35 Canada (76), Brazil (57), South Africa (52), Japan (39), Figure 14: PRI managers’ ESG integration and China (17).118 methods in listed equity 350 Each member receives feedback on their reporting. PRI recently announced that it will be more vocal about Reporting in module (342) members’ performance in the future, naming leaders 300 and laggards, and more transparent regarding their scoring and data availability.120 250 Several challenges need to be addressed to increase 200 ESG Integration approach (84%) actual green investments. Broadly accepted definitions of green (the E in ESG criteria for asset allocation) at the company disclosure level will improve the assessment 150 of potential investments; clear policy frameworks will increase market predictability; and capacity building 100 E, S and G systematically included will improve investor expertise. A legal review recently in fundamental analysis (30%) undertaken in seven G20 countries found that, in all 50 cases, failure to consider material green issues is a breach (v) All of the above + record keeping (16%) of fiduciary duty.121 Consequently, due diligence material 0 such as green funds and credit ratings need to improve to decrease investment risk. Finally, investment opportunities Source: PRI Report on Progress 2015 36 | Green Finance A Bottom-up Approach to Track Existing Flows must become more accessible, both in terms of where investment managers ($46.3 trillion out of $74 trillion), and when green investments are needed and how small or 56 percent without double counting.123 Of the 1,072 amounts or short-term needs can be met, given that signatories that reported both publically and privately investors are usually interested in larger investments. on ESG, 455 (42 percent) held a total of $1.3 trillion in assets under management in ESG investments, or AVAILABLE DATA ON GREEN INVESTMENTS $1.2 trillion without double counting. This means that only 2.1 percent of total reported assets under management Although green investments are being mainstreamed held by PRI signatories are ESG investments. into the global investment industry, information on how institutional investors integrate environmental A joint study by PRI and Accenture found that 76 percent factors into their decision making and what share of of investors see sustainability as a differentiator in their investments finance green activities is often available determining industry leaders.124 PRI statistics provide only in anecdotal form. While awareness seems to be further insights about listed equity being the most widespread, implementation appears poor. commonly held asset class for their signatories.125 Climate-related data is captured more widely: Bloomberg Within listed equity, the proportion of investment New Energy Finance provides the most comprehensive managers incorporating ESG into decision making grew dataset in that area. The Global Investor Coalition to 95 percent in 2015, up from 93 percent the year on Climate Change created a low-carbon investment before. Further details were provided by 342 investors: registry in 2014, the first public, online database showing examples of global low-carbon investments • The most commonly reported ESG incorporation made by institutional investors.122 In addition, several strategy remains the integration of ESG factors large institutional investors have announced how much into buy-sell-hold decisions (84 percent [286] of they will invest in clean energy, sustainable investing, respondents). Only 30 percent (103) do so as part and green bonds. The G20 Green Finance Study Group of fundamental analysis. Only 16 percent (56) keep input paper 3 gives a good overview of leaders in this systematic records on how ESG integration influences area. actual decision making. PRI provides some comprehensive figures on sustainable • About 76 percent (259) positively or negatively screen investments: As at 2015, about 63 percent of professionally stocks based on ESG considerations. managed assets globally were held by PRI signatory • About 36 percent (108) manage ESG-themed funds. Section 3: Bond Market and Institutional Investors | 37 38 | Green Finance A Bottom-up Approach to Track Existing Flows Section 4: Conclusions and Recommendations A lot of work has been done by different actors to support and measure green finance. The analysis presented in this report proves that it is possible to roughly estimate green finance flows through private financial institutions. However, it also highlights that additional work is needed to make green finance more accountable and visible. Definitions and tracking are most advanced in the bond A better understanding of the current status of green market and could serve as an example for other areas. In finance will allow for a thorough analysis against policy the banking sector, existing tracking of loans should be targets, with implications for multinational organizations, improved, while institutional investors need to develop national governments and regulators, the private financial clear approaches in their decision making to move from sector, data providers, and standard setters. The next awareness to implementation. steps outlined below set out specific action points for each stakeholder group to improve the tracking, and thereby the shaping, of green finance. SHORT-TERM STEPS: RAISE AWARENESS, AND UNDERSTAND AND IMPROVE CURRENT PRACTICE Multinational organizations • Analyze clients’ demand for green finance: For multinational development banks in particular, it is important to understand their clients’ needs for green finance in developing their services. Insights should be gathered from policy makers, but also from industry specialists and researchers. • Convene efforts between organizations to establish green finance typologies: To develop tracking standards that are coherent and comparable with the formulation of policy targets, different research, actions, and interests should be aligned. This can be facilitated at future Sustainable Banking Network meetings, COP side events, or working groups at organizations such as the UN Environment Programme Finance Initiative, World Resources Institute, World Economic Forum, 2DII, CDP, Global Reporting Initiative, International Integrated Reporting Council, and standard setters (SEC, Climate Disclosure Standards Board, and the new ISO standard on climate finance). (continued ) Section 4: Conclusions and Recommendations | 39 National regulators • Understand market players’ current tracking of green finance: To develop explicit regulations and guidelines for green finance in the medium term, policy makers need to gain insights into local market players’ green finance tracking, both broadly and in detail (who tracks what). • Understand and articulate national needs for green finance: For the implementation of policy targets to reach the Paris Agreement and Sustainable Development Goals, national plans need to be translated into clear indicators per sector, and ideally the different financing instruments needed for the planned transitions should be identified. • Promote transparency and consistency in financial datasets: Regulators should urge data providers, financial sector participants, and companies to agree on existing best practice regarding green finance tracking and jointly develop new indicators. Private financial sector • Bank lending—improve application of existing use-of-proceed classifications: One easy way to improve the quality of existing data is to ensure the consistent application of the use-of- proceed classification indicating the use of project finance, especially for renewable energy. Classifying general purpose bonds and corporate loans may be a challenge because the use of proceeds can be diverse. • Institutional investors—integrate existing ESG criteria more resolutely into decisions: To track green finance flows as well as their performance, ESG criteria and existing company data on sustainability measures should be applied more thoroughly into standard decision-making processes, in a quantitative format. Data providers & standard setters • Increase awareness of the need to integrate green finance into existing datasets: When collecting information and computing datasets, data providers should put more emphasis on sustainability, climate, and green indicators. • Engage with peers to increase consistency in indicators across datasets: Company unique identifiers and industry classifications should be harmonized, and a joint typology around green finance should be developed. MEDIUM-TERM STEPS: DEVELOP A COMPREHENSIVE SYSTEM TO TRACK GREEN FINANCE Multinational organizations • Pilot analysis comparing supply and demand for selected countries with clear policy plans: For countries with advanced development plans on how to reach the Paris Agreement and Sustainable Development Goals, an early comparison of the existing green finance supply could yield further insights into the types of policies needed to close any financing gaps. 40 | Green Finance A Bottom-up Approach to Track Existing Flows • Implement green finance typologies and standards: Following the alignment of various actors’ interests and existing approaches to green finance, recommendations need to be put into action and consistent green tracking standards that align with policy targets need to be developed. Organizations such as IFC, Sustainable Banking Network, UN Environment Programme Finance Initiative, World Resources Institute, World Economic Forum, 2DII, CDP, International Integrated Reporting Council, Climate Disclosure Standards Board, and Global Reporting Initiative are well placed to facilitate such processes. • Link bottom-up approach on green finance with top-down research: Organizations such as the Food and Agriculture Organization, World Health Organization, International Energy Agency, G20, and Intergovernmental Panel on Climate Change published estimates on the total required amounts of money to reach the respective Sustainable Development Goals. Methodologies for these estimates on a macro level should be aligned with a bottom-up approach. National regulators • Develop new regulations for banking, bonds, and institutional investors: Without regulations, consistency is rare or takes a long time to develop. Policy makers should cooperate with the insights gained by multinational organizations and the private financial sector to establish clear guidelines. • Build on lessons learned from peers, such as China’s green banking regulation: China regulates the tracking of green bonds and green lending. Other countries should consider this example when developing their own regulations. Private financial sector • Bank lending—build on the green bonds experience: The Green Bond Principles provide clear definitions and tracking mechanisms for bonds. Similar processes should start for the loan market, and possibly also for equity investments. The tracking could be integrated into existing measures, such as use-of-proceed categories. For certain industries, a new green tag can build on existing energy-efficiency standards. • Institutional investors—integrate green revenue into decision making: The recently launched FTSE LCE green revenue data point could serve as an additional factor in investors’ decision-making processes, saving a lot of time and effort. Data providers & standard setters • Advocate for better data on green activities at company levels: A green revenue share data point could be integrated into existing reporting procedures, such as CDP, Global Reporting Initiative, or integrated annual reports (International Integrated Reporting Council), and thereby into Bloomberg terminals and other financial datasets provided such as Thomson Reuters and Bureau van Dijk. • Develop new services for clients supplying or demanding green finance data: Given the increasing demand for green finance information from investors, multinational development banks, researchers, and policy makers, new products (datasets) and services (research) could provide a business model for data providers. Section 4: Conclusions and Recommendations | 41 Annex USE-OF-PROCEED CATEGORIES AND THEIR USE IN THE THOMSON REUTERS DATASET Category Sublevel In use? Acquisition related Acquisition financing Used in TR data for 2014 Acquisition related Acquisition of securities   Acquisition related Future acquisitions Used in TR data for 2014 Acquisition related Infrastructure LBO Used in TR data for 2014 Acquisition related Leveraged buy-out Used in TR data for 2014 Acquisition related Demerger   Acquisition related Sponsored buy-out Used in TR data for 2014 Acquisition related Management buy-in   Acquisition related Management buy-out   Acquisition related Spinoff   General corporate purposes General corporate purposes Used in TR data for 2014 General corporate purposes Improve balance sheet   General corporate purposes Marketing & sales   General corporate purposes Pay on LT borrowings   General corporate purposes Reduce indebtedness   General corporate purposes Relending   General corporate purposes Tax payment   Green bonds Energy efficiency   Green bonds Environmental protection projects   Green bonds Renewable energy Used in TR data for 2014 Green bonds Green bond purposes   Green bonds Green construction   Green bonds Waste and pollution control   Green bonds Water efficiency and sustainability   Investments Bridging loan   Investments Investment/loan Used in TR data for 2014 Investments Investment in liquid assets   Investments Investment in other companies   Investments Investment/loan to affiliate   Other Balance of payments finance   Other Bank deposit   Other Coal mining   Other Communications   Other Divestments   Other Down payment   Other Economic development   (continued ) Annex | 43 Category Sublevel In use? Other Evaluation of prospects   Other Exit financing   Other Foreign exchange stability fund   Other Capital expenditures Used in TR data for 2014 Other Export/import finance Used in TR data for 2014 Other Joint venture   Other Land transport   Other Finance-linked trade Used in TR data for 2014 Other Medical   Other Metal products   Other Military   Other Municipal services   Other Natural reserve/agriculture   Other Operating fund/cash reserve Used in TR data for 2014 Other Other Used in TR data for 2014 Other Overdraft   Other Pay fees & expenses   Other Payment for borrowings   Other Petrochemicals   Other Place funds on deposit   Other Pre-del ship fin   Other Product development   Other Restructuring Used in TR data for 2014 Other Working capital Used in TR data for 2014 Other Railways   Other Rescheduling   Other Sale and leaseback   Other Sanitation/recycling   Other Sewage   Other Social   Other Unknown/not applicable   Other Working fund   Project finance Airports   Project finance Combined utilities   Project finance Dams   Project finance Education   Project finance Electricity   Project finance Energy   Project finance Gas   Project finance Harbors   Project finance Highways/roads   Project finance Hydroelectricity   Project finance Industrial development   Project finance Land infrastructure   Project finance Limited recourse project finance   Project finance Metal ore mining   Project finance Mining exploration   Project finance Non-recourse project finance   44 | Green Finance A Bottom-up Approach to Track Existing Flows Category Sublevel In use? Project finance Nuclear   Project finance Oil financing   Project finance Pipelines   Project finance Public-private partnership   Project finance Recourse project finance   Project finance Aircraft financing Used in TR data for 2014 Project finance Project finance Used in TR data for 2014 Project finance Ship financing Used in TR data for 2014 Project finance Water infrastructure Used in TR data for 2014 Project finance Telecommunications   Project finance Transport finance   Real estate Assisted living   Real estate Buildings   Real estate Build-operate-transfer facility   Real estate Cont care ret comm   Real estate Housing stk transfer   Real estate Leases   Real estate Mortgage financing   Real estate Property development   Real estate Construction Used in TR data for 2014 Real estate Property acquisition Used in TR data for 2014 Refinancing Add-on   Refinancing Debtor-in-possession   Refinancing Ref eq-linked bonds   Refinancing Refinance acquisition debt   Refinancing Refinance comm paper   Refinancing Refinance eurobonds   Refinancing Refinance fixed-income debt   Refinancing Repricing   Refinancing Refinance bank debt Used in TR data for 2014 Refinancing Refinancing Used in TR data for 2014 Security related Backup facility   Security related Common stock repurchase   Security related Dividend recapitalization   Security related Issue/placing paper   Security related Preferred stock repurchase   Security related Proceed to shareholders   Security related Recapitalization   Security related Redeem class A shares   Security related Redeem class B shares   Security related Redeem shares   Security related Secondary   Security related Standby/CP support Used in TR data for 2014 Annex | 45 TOTAL GREEN SYNDICATED LOAN AMOUNTS PER COUNTRY Amount of green loans per country in $ billion, and green loan amount (Thomson Reuters dataset on global the respective shares as a proportion of the total global syndicated loans, financial closure data in 2014). Amount of green loans per country in $ billion Total sum = 164.7 Amount of green Domicile loans (according to Nation nation attributed shares Share of total green loans in Thomson (Headquarters) code per project) Reuter dataset (per $) United States US 56.8 34.5% United Kingdom UK 13.0 7.9% Australia AU 10.2 6.2% France FR 9.2 5.6% Japan JP 8.3 5.1% China CH 6.9 4.2% India IN 6.5 4.0% Canada CA 5.9 3.6% Netherlands NT 4.7 2.9% Spain SP 4.5 2.7% Turkey TK 4.2 2.5% Hong Kong SAR HK 3.7 2.3% Singapore SG 2.9 1.8% Germany WG 2.7 1.7% Switzerland SZ 2.0 1.2% New Zealand NZ 1.7 1.0% South Korea SK 1.7 1.0% Italy IT 1.4 0.8% Utd Arab Em UA 1.4 0.8% Republic of Ireland IR 1.3 0.8% Saudi Arabia SD 1.0 0.6% Ghana GH 0.9 0.6% Norway NO 0.9 0.5% Chile CE 0.7 0.4% Indonesia ID 0.7 0.4% Mexico MX 0.7 0.4% Brazil BR 0.7 0.4% Thailand TH 0.6 0.4% Denmark DN 0.6 0.3% Nigeria NI 0.6 0.3% Romania RO 0.5 0.3% Qatar QA 0.5 0.3% Finland FN 0.5 0.3% Sweden SW 0.4 0.3% Bermuda BE 0.4 0.3% Greece GR 0.4 0.2% Austria AS 0.4 0.2% Russian Federation RU 0.4 0.2% Philippines PH 0.4 0.2% 46 | Green Finance A Bottom-up Approach to Track Existing Flows Amount of green Domicile loans (according to Nation nation attributed shares Share of total green loans in Thomson (Headquarters) code per project) Reuter dataset (per $) Malaysia MA 0.4 0.2% Belgium BL 0.3 0.2% Luxembourg LX 0.3 0.2% Jordan JO 0.2 0.2% Poland PL 0.2 0.1% Portugal PO 0.2 0.1% Taiwan TW 0.2 0.1% South Africa SA 0.2 0.1% Croatia CT 0.2 0.1% Hungary HU 0.2 0.1% Uganda UG 0.2 0.1% Monaco MO 0.2 0.1% Ethiopia ET 0.1 0.1% Macau SAR MC 0.1 0.1% Colombia CO 0.1 0.1% Vietnam VT 0.1 0.1% Barbados BS 0.1 0.1% Morocco MR 0.1 0.1% Peru PE 0.1 0.0% Georgia GE 0.1 0.0% Czech Republic CC 0.1 0.0% Kuwait KU 0.1 0.0% Egypt EG 0.1 0.0% Liberia LB 0.1 0.0% Guernsey GG 0.1 0.0% Chad CD 0.0 0.0% Marshall Islands MS 0.0 0.0% Panama PA 0.0 0.0% Ivory Coast IV 0.0 0.0% Serbia QS 0.0 0.0% Ukraine UE 0.0 0.0% Sri Lanka SL 0.0 0.0% Pakistan PK 0.0 0.0% Cyprus CY 0.0 0.0% Argentina AR 0.0 0.0% Honduras HN 0.0 0.0% Jersey JE 0.0 0.0% Myanmar (Burma) BM 0.0 0.0% Namibia NM 0.0 0.0% Bangladesh BG 0.0 0.0% Israel IS 0.0 0.0% Dominican Republic DR 0.0 0.0% Ecuador EC 0.0 0.0% Kenya KE 0.0 0.0% Lithuania LT 0.0 0.0% Slovak Republic SV 0.0 0.0% Annex | 47 Endnotes 1. “NAZCA—Climate Action.” UNFCCC, 2015. 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