Private finance has work to do on ESG: S&P Global Sustainability1

Boosting private sector engagement in green financing remains an urgent priority, while companies need to improve the quality and consistency of their environmental, social and governance disclosures, panelists said during S&P Global Platts' inaugural Sustainability1 conference May 25.

Green bonds were flourishing and there was innovation in financial markets when it came to green investment, but the dominant role of the public sector was "still in play," said Carmen Reinhart, Vice President and World Bank Group Chief Economist at the World Bank.

"It is disturbing that the issue of guarantees, or sweeteners, is still a recurrent theme in private sector discussions," Reinhart said. "We have to work on devising more incentives for the private sector before it is fully engaged on the financing side."

Catherine Mann, Global Chief Economist at CITI, said that for multilateral institutions, offering a guarantee was often a cheaper way to incentivize private finance than going down the direct lending route.

Many green projects were too large and of too long duration to be financed in the local bond market, resulting in foreign exchange risk for private funders.

"Then there is policy risk – projects and policies go together tightly in the environmental domain. We've seen some significant policy pivots in recent years, and not just in emerging countries," Mann said.

Even for long-term players such as pension funds, the market for green projects was not liquid enough.

"The theory that there is a natural marriage between long-term assets and certain funds does not stand up. Pension funds also need liquidity," she said.

Panelists agreed that asset-backed securities needed to evolve further to offset this risk.

"Ideally this involves a collection of projects, diversified in an asset-backed security by geography, or by theme, or both," Mann said.

Patchy disclosure

Michala Marcussen, Group Chief Economist and Head of Economic & Sector Research, Societe Generale, said how the finance sector classified an investment as green was key to a successful transition.

"We must ensure existing companies can participate in the transition, but what is the quality of some of these net zero pledges? Can we measure it? We're getting more disclosure, but it needs to be comparable," she said.

A common taxonomy for sustainable investing was proving hard to pin down in Europe alone, Marcussen noted.

"The risk is that we end up with competing taxonomies [globally]. We have to build a consensus on how we think about climate, and then how we do our economic modelling," she said.

The first efforts at disclosure and on taxonomies were a work-in-progress, Victor Van Hoorn, Executive Director, EuroSif, said in the following panel session on labelling.

Differences of opinion on whether, for instance, nuclear or natural gas should be included in green finance taxonomies would be swept away, however, by the scale of the overall challenge, he said.

"The magnitude of the effort needed to reach net zero, as set out by the IEA's pathway report last week, is so great that at some point there won't be much scope for variations at regional level. We'll all have to row in the same direction," he said.

Carbon driver

Panelists across the event agreed that strong carbon prices would have to play a central role in the transition.

A comprehensive carbon price embraced by the G20 would be the single biggest driver of positive change, Mann said.

"And recognition that a carbon price has to have a redistribution, with transfers from winners to losers," she said.

"At some point we have to talk carbon price," Van Hoorn said. "We will need to start pricing in externalities much more forcefully, and accurately, if we want to shift capital towards long-term investments that today do not make sense."

Near-term targets

In the day's final session, Storebrand Asset Management CEO Jan Erik Saugestad said there was a need to "bring targets into the present," setting interim climate goals for 2025 and 2030, because 2050 was "too far away."

The Task Force on Climate-related Financial Disclosures and the UN Sustainable Development Goals were useful frameworks that companies could use to work towards reaching net-zero, he said.

While progress had been made on targets and alignment between investors and companies, "emissions are still cheap, and negative-emission technologies are still expensive," he said.

The Walmart way

Walmart Executive Vice President and Chief Sustainability Officer Kathleen McLaughlin said advances in technology were cause for optimism.

"We're so much further ahead than we were even five years ago," she said. "The innovation that we're seeing is exciting and going in the right direction."

Walmart had a target to reach zero Scope 1 and 2 emissions by 2040 without offsets, focusing on energy consumption, its delivery fleet, refrigerants and on-site fuels.

It also aimed to reduce its Scope 3 emissions by one billion metric tons by 2030, working with supply chain partners on energy, waste, packaging, agriculture, forestry and product use.

McLaughlin said Walmart was also investigating farmland and forestry carbon sequestration projects, but noted that more studies were required in these areas to understand and quantify their impact.

There were legitimate questions around "what's real and what's smoke and mirrors" in some carbon sequestration schemes that had to be addressed, she said.