Outlook 2020 - Sustainable finance: Bridging the gap to decarbonisation

investment viewpoints

Outlook 2020 - Sustainable finance: Bridging the gap to decarbonisation

Christopher Kaminker, PhD - Head of Sustainable Investment Research & Strategy

Christopher Kaminker, PhD

Head of Sustainable Investment Research & Strategy
Thomas Höhne-Sparborth, PhD - Sustainability Analyst

Thomas Höhne-Sparborth, PhD

Sustainability Analyst

In 2019, the sustainable finance landscape continued to grow more diverse in terms of issuers and geographies, and more complex in terms of instruments.

Last year, total assets under professional management invested according to responsible investment strategies exceeded USD 30 trillion for the first time.1 Issuance of sustainable debt in 2019 looks set to fall just short of USD 400 billion, with green bonds expected to account for around two-thirds of this or 250-265 billion (well above most market estimates from the beginning of the year).2

These trends are now accelerating. In July, nine Dutch pension funds managing EUR 800 billion in assets committed to reduce their carbon footprint, necessitating a more active management approach.3 By 2020, we see total assets invested according to responsible investment strategies exceeding USD 40 trillion.4 Sustainability and impact-focused investing can account for four to five trillion of this total, nearly tripling from 2018. Based on our analysis of the prospects for sustainable debt issuance, we see the potential for issuance to reach USD 560-620 billion in 2020 and USD 720-810 billion in 2021. We expect that green bonds could account for USD 320-360 billion of this total in 2020 and USD 400-450 billion in 2021.    

 

Figure 1: Volume of assets under professional management invested according to responsible investment strategies, 2014-2020F (USD billion)

Outlook_2020-Sustainability-Fig1_EN.jpg (Print)

Source: Data from Global Sustainable Investment Review for 2014-20185; LOIM forecasts for 2020; note that as many forms of sustainable investment combine several of the strategies listed, the sum of the individual strategies exceeds the total figures shown

As the sustainable finance industry grows, regulators and voluntary initiatives are looking to bring welcome standards and transparency to the sector. The EU Commission’s action plan on sustainable finance is a case in point, comprising the establishment of a taxonomy to classify sustainable activities, an EU standard for green bonds, benchmarks related to decarbonisation, and disclosure requirements on ESG integration.6

 

Figure 2: Timeline of ongoing regulatory initiatives

Outlook_2020-Sustainability-Fig2_EN.jpg (Print)

Source: LOIM analysis

Market trends are supporting these regulatory and policy trends. Costs of wind and solar power are continuing to fall and IRENA forecasts that by 2020, auction prices of solar and wind power will fall below the operating cost of 700 GW and 900 GW, corresponding to 35%-45% of the coal industry’s current capacity.7 Nonetheless, up-front capital costs can be significant, creating a role for the finance industry in bridging the gap near term funding requirements and future returns.

 

Figure 3: Trends in levelised cost of electricity in the US (USD/MWh, 2018 real terms)

Green Bonds chart EN-01.jpg (Print)

Source: LOIM analysis based on BloombergNEF8

A vast increase in investment levels is still required. Current policies place us on a pathway towards a 3-5°C increase this century.9 IRENA estimates that to meet the goals of the Paris Climate Agreement, additional funding in the range of USD 27 trillion (over and beyond present commitments) will be required to support energy, mobility and related transitions.10 The finance industry will be ready to support that increase in scale, but it is a pipeline of investable projects that is the missing part of the equation today. Policy ambition will have to significantly increase to create the magnitude of projects commensurate with the challenge, beyond what market forces and corporate action can deliver.

 
 

Sources.

Global Sustainable Investment Alliance (2019). 2018 Global Sustainable Investment Review. And previous editions. Accessed at http://www.gsi-alliance.org/wp-content/uploads/2019/03/GSIR_Review2018.3.28.pdf
LOIM forecasts, dated November 9, 2019. Note that the percentage of debt issued towards the end of the year has steadily increased from 2014 to 2019, as a result of which full year figures are forecast to be substantially higher than year-to-date figures.
3 Financial Times (2019). Dutch pension funds set to pivot from passive to active management. Accessed at https://www.ft.com/content/942dd387-d676-4206-888b-021d96f9b065
4 LOIM forecasts
5 Global Sustainable Investment Alliance (2019). 2018 Global Sustainable Investment Review. And previous editions. Accessed at http://www.gsi-alliance.org/wp-content/uploads/2019/03/GSIR_Review2018.3.28.pdf
6 European Commission (undated). Green finance. Accessed at https://ec.europa.eu/info/business-economy-euro/banking-and-finance/green-finance_en
7 IRENA (2019). Renewable power generation costs in 2018. Accessed at auction prices of solar and wind power will fall https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2019/May/IRENA_Renewable-Power-Generations-Costs-in-2018.pdf?la=en&hash=99683CDDBC40A729A5F51C20DA7B6C297F794C5D
BloombergNEF (2019). Levelized cost of electricity. Accessed at https://www.bnef.com/core/lcoe?tab=Forecast LCOE 
9 LOIM analysis based on International Institute for Applied Systems Analysis (2018). SSP Database (Shared Economic Pathways) – Version 2.0. Accessed at https://tntcat.iiasa.ac.at/SspDb/dsd?Action=htmlpage&page=10
10 IRENA (2018). Global Energy Transformation: A Roadmap to 2050. Accessed at https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2018/Apr/IRENA_Report_GET_2018.pdf

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