Markets In Action

A Public-Private Partnership for the Planet

Some investors care about more than simply maximizing returns.  They want to save for the future, but they want to do it in socially responsible ways that align with their personal values.  And for an increasing number, that includes improving the environment and responding to climate change.
Last year alone, according to a Climate Policy Initiative report, the global total of green investment – in both the public and private sector combined – increased 18 percent from $331 billion in 2014 to $391 billion in 2015 for underwritings ranging from water treatment to wind power to mass transit.  One type of such financing is the “green bond,” a seed planted less than a decade ago that has grown into a whole crop of innovative ways for investors to steer their money toward specific projects that address environmental concerns.
Leaders in the capital markets industry gathered in May on Capitol Hill to discuss with federal policymakers about ways to work together to build upon this growth.  A wide variety of approaches was considered, but there was universal agreement that private sector involvement is not only necessary – government will never be able to provide all the resources necessary to move toward a low-carbon economy – but also that it presents enormous potential for growth, job creation and even a stronger U.S. foreign policy.
“The job of the financial industry is to educate and expand the investor base by finding out what they care about,” noted one analyst.  Added another: “Rational investors will only put their money behind the projects with the best potential,” bringing clear-eyed analysis to a sector that has proven vulnerable to political influence in the past.  “But they need more information.”
What kind of information?  For starters, many participants pointed out that there is not yet a commonly-accepted definition of what precisely qualifies as “green investing,” making it sometimes difficult to validate, much less quantify, the success of any given venture.
While green bonds have been a growing success, the majority thus far, in the U.S., have been used for highly tangible municipal public works projects such as transportation and energy infrastructure.  One current challenge within the green financing space is what is considered a “green project?” Without some level of standardization, questions quickly arise: Who determines the ‘green-ness’ of a particular project, based on what criteria?  Who is qualified to perform third-party review?  And what constitutes best practices in this field?
Roundtable participants generally agreed that initiatives to address these issues – and more of the voluntary guidelines that have begun to appear within the financial industry – may be long overdue.  And they must be sufficiently explicit to provide clarity and predictability for investors, while allowing enough flexibility to avoid stifling innovation; no small challenge for a market that didn’t even exist when Twitter was founded in 2006.
The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, headed up by former New York Mayor Michael Bloomberg, goal is to, “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.” The hope is that by providing information, climate-related risks will be better assessed, priced and managed.
Other participants went even further, urging the federal government to focus on providing broader stability in financial public policy, from disclosure requirements to tax credits and everything in between, since unpredictable change from Washington reduces the attractiveness of green as well as most other forms of investment.  (Particularly in the long-term bond market, where maturity is often measured in decades.)
Many participants in the roundtable were confident that green finance will soon be able to prove its competitiveness on its own merits.  The costs of solar and wind power, for example, have dropped dramatically in recent years and the latter is approaching parity with traditional sources.  Last year 70 percent of new generating capacity in United States came from renewable energy.  In addition to contributing to our energy independence from foreign countries, this kind of investment creates large numbers of high quality jobs. The assumption is that green finance could follow a similar path.


One Representative from New York City proudly cited a high-profile example:  an energy-efficiency retrofit of the Empire State Building that saves more than $2.5 million a year in energy costs.  That’s for just one building!  America has 120 million other buildings, which together consume 72 percent of our electricity – a vast market for financing projects that can put thousands to work and ultimately pay for themselves by reducing costs, while simultaneously improving the environment.
Given the potential of green finance, it is hardly surprising that other countries are also pursuing it aggressively.  Europe and Asia, particularly China, have made a substantially larger commitment than the United States to date (see chart).
But it doesn’t have to be that way.  Demand for energy is only going to increase:  the race is on to find and harness sustainable clean sources, and we are second to none in research and development and creative thinking.  Our capital markets have the resources to finance these discoveries by connecting innovators with investors.