SUSTAINABLE GREEN BOND INVESTMENTS FOR CAPITAL MARKETS

                 In today’s constantly changing world, global challenges, and business landscape there are many challenges that the leaders and organizations must go through. For the Financial Services industry it presents new or increasing risks for investors, such as climate risk, increased regulatory pressures, social and demographic shifts, privacy, and data security concerns. Moreover, consumers and stakeholders increasingly demand more environmental, social, and governance transparency, with organizations expected to provide accountability on their sustainability efforts. Brand loyalty increasingly pivots on this transparency. Changing government regulations around the world also reinforce the need to focus on sustainability—to continue doing business, organizations must meet emissions reduction on targets across different geographies. So far, the global approach to sustainability has largely been about damage control, with businesses le􀅌 to develop their own approaches.

     This blog describes the futuristics ESG initiatives (Sustainable Green Bonds) within Capital Markets space using the emerging technologies to drive the ESG objective and related considerations as a main goal to select investments or funded sustainable projects that can help measure and monitor sustainable outcomes

Introduction 

           The old strategy of focusing solely on profit is no longer enough—to produce real value, companies need to reinvent themselves, moving beyond a pursuit of profit alone to establish a belief and purpose that defines their existence. Reimagining business models to address long-term sustainability challenges is truly entrepreneurial and world changing. By successfully transitioning from a shareholder capitalist system to a stakeholder capitalist system, businesses will better be able to use a belief and purpose-led growth strategy that benefits employees, communities, consumers, investors, and society at large.

Trends 

          ESG is moving from the boundary to the mainstream, transforming the capital and finance market. Investors are demanding assets that have sustainable growth. They are looking at the businesses’ commitment to sustainability before making their investment decisions. US Sustainable assets almost doubled every 3 years since 2016 e.g., $87B – $155B (2016-2019) & $155B – $250 B (2019-2022). Although, the reporting measures on the environmental impact of investments are still lagging is facing huge challenges.

Challenges 

The global transformation in capital and finance market has a higher traction in Europe as compared to other Geos driven by EU Climate policies and Green deals. Many companies want to take advantage of this momentum to finance themselves sustainably. At the same time, they are not familiar with ESG- investment specific requirements and market standards.

Implications

         These new transformations will have the following impacts on the business.

• • • Cost Impact – The investment bank may have to share their part of the underwriting fee with third party authority. They may also not know how to price this cost as there is no playbook to price an event based on environmental set-up.
    • Revenue Impact – The revenue will increase since automated data collection using emerging technologies will result in a drastic reduction in reporting cost.
    • Operations Impact - Need to find a dedicated team of sustainable finance experts who can structure deals and covenants.

Solutions & Benefits 

                    The environmental data that will be monitored are sourced from IOT liked sensors linked to Blockchain to create an immutable temper proof ledger. Environmental agreements (e.g. CO2 emissions, net energy use) are also smart contracts, so that covenant events can be triggered based on readings from IOT sensors. The Ledger is stored in cloud and accessible by all parties. AI algorithms can help on data authentication, predictive analytics and forecasting on contract advances or breaches.

Benefits of these type of futuristic solutions aligns with the trends mentioned below:

• Demand for sustainable investments is growing among all investor classes including institutional investors:
  • In 2019 more than $250B of green bonds were written representing 51% growth in year-over-year increases in signaling investors demand for this asset class.
• Regulatory requirements and government incentives are evolving for green investments:
  • EU’s taxonomy regulation is rigorously defining “green investments” standards. In the US under clean renewable energy bond program, 70% of coupons are paid for by tax credit or subsidy. In China ESG disclosures are becoming mandatory for public companies.

Even with few uncertainties and not matured processes, sustainable investments wave has already become the largest and fastest growing major market segment. Any delay in getting engaged will have an impact on market penetration.

            According to the Global Sustainable Investment Alliance, at the start of 2016, sustainable investments constituted 26 percent of assets that are professionally managed in Asia, Australia and New Zealand,Canada, Europe, and the United States—$22.89 trillion in total. Four years earlier, they were 21.5 percent of assets.

           The most widely applied sustainable investment strategy globally for two-thirds of sustainable investments is negative screening. ESG integration, which is the systematic and explicit inclusion of ESG factors in financial analysis is now growing 17% per year and used with nearly half of sustainable investments.

Green Investment Approaches 

        The customers have taken multiple approaches towards process improvements in sustainable investing to identify the likelihood of the impact, positive or negative, known or unknown, direct or indirect on any of the ESG dimensions.

First is the identification of the Goals out of the 17 SDGs that are attributable to the operations of the company with respect to its areas of operations, geography presence, Customers business operations and vulnerability to ESG impacts, company’s supply chain processes of and by its vendors etc. It is the holistic view that one needs to understand to ensure the impact on ESG is negated and not only contribute to net-zero impact but to generate positive net-gain to the ESG dimensions.

Second is the technologies available in the market to leverage help measure and monitor the operations in the entire cycle from Supply Chain to internal processes to Customer operations and ensure the right level of CO2 emissions and net energy are captured to assess correct level of Green Bond covenants.

A sustainable investment blueprint that leverages technology to ensure systematic, transparent, traceable execution will help the financial services company to achieve their ESG goals. The key elements are:

• • Capturing level 1, 2 and 3 carbon emissions like travel data, energy consumption, datacentre Energy Consumption and Calculate Emission Factors.
  • Intelligent insights to identify energy saving opportunities and impactful environment projects.
  • Ecosystem tracking and analysis by assessing sustainability of companies throughout the business ecosystem, value chain, supply chain, M&A pool to ensure alignment with green values.

Shortcomings to Approaches 

          The ESG dimensions are not construed to be providing the direct benefit on top-line or bottom-line of the operations in monetary terms and the benefit of these are not seen in early days, it becomes challenging to formulate these and follow right through the organizations. It needs to be inculcated in each individual within the organizations and within all its partners, associates and workers at all levels. It is imperative that these are recognized well in time and adhered. Overcoming these challenges require the mindset change – not only due to regulatory reasons but to cater to the universe at large, to prevent humanity and bio-dversity at large. Leverage systems and experts knowledge to baseline the objectives to achieve the goal of contibuting net-gain.  

Conclusion 

            Sustainable investing is becoming the core strategic driver giving a competitive advantage to organizations, especially as traditional linear business models continue to get disrupted due to market forces and the increasing effects of climate change. Although no one has the answers on how climate disruptions will ultimately play out, a holistic, a green bond investment based on collaboration and innovation will provide the most potential to move from a mitigation approach to one of regeneration.

The proposed futuristic solution explained in section 1.5 above and many others, provide thought leadership for banking and financial services companies by engaging early in providing sustainable solutions to their Customers. By spearheadng showcasing early adoption will get them a high reputation which in turn will generate excellent brand value.

• Glossery & References -