Sustainable finance is rapidly evolving, with innovations emerging from various corners of the globe. In our discussions with the authors of SEB’s Green Bond Report, we explored the latest trends in sustainability leading up to the forthcoming Sustainable Finance Live conference.
The Green Bond Report, while its title suggests a primary focus on green bonds, goes beyond that scope. It is named in recognition of SEB’s collaboration with the World Bank during the issuance of the first green bond in 2007/2008. The September 2023 edition delves into a range of pertinent topics including updated EU regulations, challenges related to nature-based risks, and advancements in the carbon removal sector.
Gregor Vulturius, lead scientist and climate finance advisor at SEB, co-authored the report and expressed optimism about the groundwork laid by the European Sustainability Reporting Standards (ESRS) for a standardized framework in sustainable reporting. He underscored the importance of clearly defined terminology in these regulations to enable effective reporting.
Vulturius pointed out that the EU’s new sustainable finance platform has a clear mandate from the EU Commission to enhance the usability of the EU taxonomy. Ensuring clarity in definitions, particularly regarding terms like biodiversity and pollution, is essential for practical application in the real economy. He noted the current “silent period” within the EU Commission and anticipates that next year’s European Parliament elections will help to pivot the focus from establishing groundwork to ensuring a comprehensive understanding of sustainability.
A significant aspect highlighted in the report is the evolving role of ESG (Environmental, Social, Governance) in investment strategies. Vulturius remarked that with the introduction of entity-level disclosures mandated by regulations rather than voluntary standards, investors can now access bottom-up data directly, reducing their reliance on ESG rating agencies. This shift is expected to diminish the importance of aggregated ESG ratings at the portfolio level as investors gain deeper insights into the companies they support.
The influx of data is likely to influence the way ESG is perceived and utilized in evaluating the value of financing tools. Vulturius noted that while ESG concepts remain vital, merging environmental and governance risks may not provide the most accurate assessments.
The report also addresses the critical topic of carbon removals, which Vulturius considers essential for companies aiming for net-zero emissions. He emphasized the urgent need to develop a reliable carbon removal market, currently described as largely unregulated. According to him, companies should actively engage in the market to build portfolios of carbon removal credits, which will facilitate a more transparent and liquid marketplace.
Vulturius highlighted that major companies securing carbon removal agreements often do not disclose pricing or contract duration. He argued for a culture of transparency to foster growth in the carbon removal market, enabling new entrants to participate and understand market dynamics. Notably, there have been significant multi-million deals recently in this sector, indicating robust growth.
Another key focus of the report is the pressing issue of nature-related risk and biodiversity. Vulturius detailed the complexities of establishing benchmarks and sustainable frameworks within the biodiversity sector, citing SEB’s collaboration with Stora Enso, a leading forestry company, in enhancing its financing strategies to incorporate biodiversity considerations.
An illustrative case involves SEB’s assistance to REWE, one of Europe’s largest grocery retailers, in developing a sustainability-linked bond framework. REWE recognized that a substantial portion of its emissions stemmed from its supply chain and set targets to mitigate scope 3 emissions related to forest, land use, and agriculture. This not only aids in managing value chain risks but also enhances understanding of supply chain challenges, yielding benefits beyond mere risk mitigation.
Moreover, Vulturius discussed an emerging aspect of sustainable finance: bluetech, which aims to improve both the quality and quantity of water resources, thereby highlighting the water sector’s significance within clean energy assessments for investors.
Overall, Vulturius anticipates further growth and innovation in sustainable finance, with hopes that insights from the Green Bond Report will promote initiatives requiring attention and foster ongoing strategic developments within the sector.
To learn more about the Sustainable Finance Live conference and register for this important event, visit Finextra’s site, where industry experts will congregate on October 10, 2023, to explore strategies for building sustainable urban environments.