Finance can make a difference in reducing the impact of climate change, and green sectors can keep banks in business.

silvia

Greetings from Italy, where I am writing this month’s Better Banking column and where temperatures have broken new European records: 48.8 degrees Celsius in the Sicilian town of Syracuse on August 11. The data needs to be accepted by the World Meteorological Organization to become official — the current official record stands at 48 degrees Celsius, registered in Athens, Greece, in 1977, although an unofficial station recorded 48.5 degrees Celsius, again in Sicily, in 1999. 

Fires have been blazing across Sicily, as well as other parts of the country. They too have set another European record. Watching this unfold up close makes it even more alarming — as others have pointed out, there is now no safe place from which to witness the impact of climate change. And the fact that climate change is undeniably man-made, as the latest assessment by the Intergovernmental Panel on Climate Change (IPCC) found, makes it all rather confounding too: we’re in a ditch and yet we have not found a way to stop digging. Finance, like other sectors, has a role to play in getting us out of this hole.

In the series of avenues in which temperature rises could still be kept below 1.5 degrees Celsius since industrial times, the IPCC report also notes that ramping up annual investments in low-carbon energy technologies and energy efficiency globally, so that they overtake fossil fuel investments by around 2025, would help. Nudging corporate clients in that direction, and more broadly towards sustainable business models, should be within the reach of banks. By now, such decisions are simply rational business decisions: as green regulation and general awareness reshape markets, focusing on sustainable finance makes perfect sense. A more proactive role in scouting new, sustainable deal opportunities is what might well attract and retain corporate clients too.

Environmental groups’ naming-and-shaming of certain bank activities has had an impact as reputation remains a precious asset

Funding for projects labelled as green is already abundant, as shown by the ever-rising volumes of sustainable bonds and loans. Just as for Italy’s temperatures, these banking products have broken new highs this year. According to data provider Refinitiv, sustainable bonds totalled $551.6bn between January and June, an increase of 76% compared to the first six months of 2020, and an all-time first-half record. Of these, half were green bonds, about a sixth related to funds raised to turn issuers into more sustainable businesses, and the rest were a mix of social bonds and debt that was raised with general purposes by companies considered sustainable. At $321.4bn, sustainable loans also spiked to a new high and were more than three times the volumes of the first six months of last year. 

But the sustainable banking space is no longer comprised just of financing. Mergers and acquisitions (M&As) involving electric automakers, alternative energy companies and other businesses that align with a more sustainable view on the economy have also been on the rise: at $84.3bn worth of deals in the first half of 2021, this is more than four times the value during the same period last year.

True, the ballooning of sustainable markets has done little to ease off greenwashing concerns, but while green or sustainable labels on bank products attract criticism, the subsequent greater scrutiny of this area can only help. Environmental groups’ naming-and-shaming of certain bank activities has had an impact as reputation remains a precious asset. Regulation on corporate, as well as bank, disclosures will likely have a greater impact yet.

Considering financing and advisory services helps in other ways too. For example, the breakdown of sustainable M&As reveals geographical hot spots. In terms of deal numbers, China, the world’s largest polluter, saw the most activity, with more than a quarter of the total. The US followed with 13% of the total. Italy, with borders and an economy of only a small fraction those of the top two countries, came third with 6% of all sustainable takeover deals. Further, Italy’s Enel energy group was the largest sustainable borrower in the first half of this year; the Italian government was among the world’s largest issuers of sustainable bonds.

One can only hope that all this capital raising and deal-making will be put to good use and help reduce the impact of climate change — for Italy, Europe’s new climate record-breaker, and for the rest of the world.

Silvia Pavoni is the economics editor at The Banker.

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