As of March 2018, Fiji and Nigeria are the only two
emerging markets to have issued sovereign green
bonds. They are two of just four countries globally
indicating a commitment to independent
sustainability policies and carbon emission
reduction under the Paris Agreement. Outside of
these two sovereign bonds, the big corporate issuers
in emerging economies are China and Mexico with a
combined green bond deal value in 2017 of US$28.8bn.
China, the world’s top carbon-emitter, has faced
criticism about where and how the money raised is
being spent. This highlights a challenging issue for
the proliferation of sustainable finance in emerging
markets – what specifically is classified as
‘sustainable’ and what official measurements are
there of the outcomes?
Sustainable development is hugely expensive. The UN
estimates that up to US$7tn in investment is needed
each year to achieve the Sustainable Development
Goals however it is certain that it will be even
more expensive in the long run if we turn a blind
eye. As the driving force of the worlds’ economy,
sustainable development across emerging markets is
both critically important and likely even more
expensive than in their developed market peers. In
general, emerging markets lag behind developed
economies in environmental stewardship as well as
social and governance areas, highlighting the need
for emerging markets to take an active role in the
move to a more sustainable future.
There is often controversy around what is classified
as sustainable or ‘green’. While initiatives such as
the Task Force on Climate-Related Financial
Disclosures and the Sustainable Banking Network are
seeking to create internationally recognised
guidelines, these blueprints are ultimately still
voluntary. Issues around corporate disclosure are an
enormous barrier to gaining investment from
institutional investors.
If the problem exists at the level in which
companies are sophisticated enough to try and
attract investor funds, the problem is on an
unimaginable scale at the small end of the market.
Small businesses applying for green loans from their
bank face an uphill battle when it comes to securing
the debt, assuming the bank even has a specialised
product that businesses can apply for. Small
businesses across all markets but particularly those
in emerging markets need knowledge and guidance that
green financing is available and attainable for
them.
Emerging economies have undergone rapid urbanisation
and industrialisation over the past few decades at a
time when developed markets have already reached
their limit, leading many to place the blame for
todays sustainability woes at the feet of emerging
markets. Perhaps because of this, as well as a lack
of legacy issues and resources leading to the need
to improvise, emerging markets are taking a lead
role in sustainability initiatives.
The Sustainable Banking Network, launched in 2012,
is a community of financial sector regulatory
agencies and banking associations from emerging
markets committed to advancing sustainable finance
in line with international best practice. Members
including Argentina, the Philippines, Bangladesh,
China, Mexico and Nigeria facilitate a global
knowledge network on sustainable banking to develop
regulatory guidance and national policies to support
their local businesses and financial institutions.
Regulators are only one part of the solution for
actionable outcomes that result in suitable capital
allocation to sustainable practices in the real
economy. Banks need to be more involved on a local
level. JP Morgan Chase has committed US$200bn to
combat climate change through sustainable policies.
HSBC and BBVA have both pledged US$100bn with HSBC
also reducing its funding of coal projects, Deutsche
Bank and Credit Agricole have also exited coal
lending however how much of this money is simply
going to proven technology and large institutions in
established markets rather than innovating
businesses in emerging markets?
Emerging economies are a hot topic at the moment,
bandied about by investors and banks as the next big
growth area. Notably risk always accompanies rapid
growth opportunities. As the market for sustainable
finance and Environmental, Social and Governance
criteria (ESG) is still developing, financial
returns are still far from guaranteed. Combining the
two areas, one with as yet unproven returns and the
other with both known and unknown risks, it’s not
hard to see why most banks are hesitant at putting
their PR, and funds, into practice.
At this early stage it appears a ‘trickle down’
approach to the adoption of sustainable investment
principles will occur among small business borrowers
as more pressing concerns keep them awake at night
such as cash flow constraints, staffing and
cybersecurity. If banks were to offer green loans at
better interest rates or more favourable terms than
standard debt perhaps uptake would be better,
without such loan products however SMEs can only
wait for solutions that have been implemented at the
top end of town to filter down.
Emerging economies continue to be the next frontier
for the finance industry. Initiatives such as the
Sustainable Banking Network as well as sovereign and
corporate green bonds issued from emerging markets
indicate their appetite and interest in the area
however middle market and SME businesses are yet to
engage fully. It could be a ‘chicken and egg’
conundrum in which no one is sure what comes first –
the demand from businesses or the supply of
appropriate solutions from providers. It is likely
that supply will drive demand in this case, if
finance is available for ESG complaint initiatives
then businesses will seek it out and alter products
and practices to secure the funding.
Most commercial banks have now put in place defined
policy regarding their attitude and stated actions
towards furthering the sustainability agenda in both
developed and emerging economies. It remains to be
seen who will actively work to fund real businesses
and which banks are only offering platitudes for
good PR. |