Is green the new black? How can climate finance increase the spread between industries´ capital cost.

A unique chance fueled by the need for large fiscal response has led to intensified talk of a green recovery and climate smartly targeted stimulus. This implies e.g. directing financing to climate change mitigation and increasing correlation between the cost of financing and environmental impact.

Green funds and bonds

Investing with consideration to issues beyond financial returns, or active ownership, has become widespread during the past decade. ESG investing implies investments that simultaneously seek both positive returns and positive impact on society and the environment considering ethical, governance and sustainability issues. Change has been driven simultaneously by regulators, clients, companies as well as asset managers. BlackRock, the largest asset manager, has started abandoning companies invested in coal and demand comprehensive reporting on emissions as well as risk and exposure to climate change. Recently, the Dutch central bank issued a recommendation to consider physical and reputational investment risk derived from the loss of biodiversity. Only last year, some 500 environmental, social and governance funds were launched globally.  Many actors in the forest industry are amongst these.

Green bonds have traditionally been limited to international financial organisations. Recently, green bonds have been raised by actors such as EDF; to boost investments in green energy, Toyota; for financing of hybrid and electric vehicles, and Unilever; for reducing waste and emissions. In the pulp and paper industry, actors such as Stora Enso, CMPC and Suzano could be considered forerunners in the field. With this development and expansion of coverage, green bonds could quickly develop from a niche product to a commonplace financial instrument.

Limited impact, improved image

Despite the increase in the amount and variety of green financing tools, the environmental impact continues limited. Listed companies account for only a meagre share of total emissions. Without a widely adopted carbon tax, the effect on emission reduction will be both inefficient and insufficient, and carbon leakage will be impossible to avoid. Additionally, comparable and quantifiable objectives and measurable tools are largely absent and would play a key role in improving transparency and effectiveness.

However, it is obvious that green investing is an additional tool for risk management from a climate change perspective and sheds a positive light on the image on the investor. It could also lower the relative investment cost for sectors central to decarbonising the economy, where the pulp and paper industry has a strong foothold. Hence, the competitiveness of the entire industry will increase, but simultaneously forests’ role as carbon sinks, albeit being a cumbrous definition upon which no global consensus has been reached, could pose a downside risk in terms of wood cost and availability.

Vision Hunters provides strategic advisory services for the forest industry and energy sectors. We assist leadership teams in making the smartest strategic choices to improve the outcome of their company in the future. We are highly experienced and result oriented and have advised many of the leading companies in our industry.