2nd Edition | June 2024
How risk-sharing can catalyse private
investment in the green transition
INTRODUCTION
Dr. Rhian-Mari Thomas OBE
Chief Executive | Green Finance Institute
Are we irrevocably damaging our climate and depleting the world’s natural resources?
Sustainability in its broadest sense is defined as meeting the needs of the present without
compromising the ability of future generations to meet their own needs. In financial services, our
interpretation of sustainability is also about how durable, stable and resilient our system is. As the
world’s natural resources are depleted and our climate potentially irrevocably damaged, are we
sowing the seeds of a future crash? This is of particular concern for the Bank of England, which
monitors financial stability closely. This issue of GFQ is about how these worlds are destined to
collide – how preserving our natural world will lead to better and more sustainable financial
outcomes.
Our Nature-based Risk Quantification Report (RQR) looks at the impact that the degradation of
our natural environment is having on the real economy. What it shows, is that nature-related risk
is as big a threat to economic and financial stability, as Covid19 or the 2008 Financial Crisis. It is
time, therefore, that both regulators and CEOs of financial institutions grip this issue, before it
impacts the UK’s bottom line. This is not about compliance and disclosure; it is about the solvency
of our system.
We also look at adaptation in a similar vein. While we continue to grapple with the ‘tragedy of the
horizon’, aspects of climate change have already arrived and we need to adapt. There are
several unhelpful myths that we need to address about the viability of adaptation investment,
including lack of revenue streams and overly long payback periods. What we do need to do is
better enable adaptation to be accounted for, so that investment can flow. Our work chairing the
adaptation committee of the Climate Financial Risk Forum sets out how to do this, including more
policy guidance on what constitutes climate resilient infrastructure and what effective scenario
modelling looks like.
A key aspect of resilience is its global import – the most exposed regions of our world are also the
most vulnerable. So we also look at both global supply chains – the importance of securing
access to critical resources for the transition – and how we can ensure developing markets have
access to the capital they need for both adaptation and mitigation. We need secure supply
chains for renewable energy infrastructure, but they cannot come at the expense of sustainable
development. This means ensuring that for example, lithium mining and processing has access
to Carbon Capture, Utilisation and Storage (CCUS), and that blended finance mobilises capital
into adaptation and nature-based solutions.
Finally, across all of these issues, we look at regulation. How do we ensure that financial
institutions act before it is too late? Disclosure is useful, but only if it changes behaviour. We need
to ensure that corporate strategy is aligned to net zero - not just the ESG team. To do this we need
to create the opportunity, but also anticipate the material risk of not aligning business practices
to net zero. It is existential for our economic system and our planet.
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Green Finance Quarterly | June 2024
Contents
09 Supply Chain Risks:
Upstream and Downstream
04 The Nature of Nature-
Related Risks
12 Overcoming Credit Risk to Finance
the Transition in Africa
Foreword 02
The Nature of Nature-Related Risks 04
Emerging Regulatory Risks 06
Supply Chain Risks: Upstream & Downstream 09
Overcoming Credit Risk to Finance the Transition in Africa 12
3 Green Finance Quarterly | June 2024
NATURE
The Nature of Nature-Related Risks
F
or decades, we have seen how the
The results are stark. Nature-related risks, driven
continued degradation of nature
by water shortages and pollution, soil health
harms our immediate environment.
decline, and biodiversity loss, and compounded
Perhaps we also now see how water
with inevitable shocks such as drought, may have
pollution doesn’t just destroy the natural a greater impact on our GDP than the Global
environment we love, but how it negatively impacts Financial Crisis in 2008. As the risk of antimicrobial
fisheries and tourism. Or maybe we have read that resistance-driven pandemics increases, we may
the ongoing decline of soil health is lowering the even see a hit to our GDP greater than COVID-19.
resilience of our farms, as well as increasing prices
and impacting food security. We are acutely aware Nature risks are on a par with climate risks, and the
that zoonotic diseases (like COVID-19), air pollution compounding, day-to-day degradation of nature
and reduced access to green spaces, are is doing as much damage to our economy as an
impacting our physical and mental health, reducing acute shock, like a drought or a pandemic.
our workforce and putting a strain on our National
Health Service. We see all of this, but what is being
done to stop it?
Time for action
Over the last five years, the Green Finance Institute
(GFI) has been working to support the transition of Armed with this evidence, there is now no excuse
the global economy to one that values and invests for delay. We must swiftly transition our economic
in the natural environment. However, to-date, there and financial system to one that values and
has been no value ascribed to the degree of risk invests in our natural environment. To do so, we
that our economy and financial system face as a must first stop treating nature and climate as
result of nature degradation. separate issues. One underpins the other. Even to
regard climate and nature as ‘two sides of the
In a first-of-its-kind analysis, the GFI, the same coin’ does not do justice to their degree of
Environmental Change Institute at the University of interrelatedness. An integrated and holistic
Oxford, University of Reading, UNEP-WCMC and the approach is now needed.
National Institute for Economic and Social Research,
have quantified the impact that nature
degradation, both domestically and internationally,
could have on the UK’s economy and financial
sector.
4 Green Finance Quarterly | June 2024
NATURE
At a practical level, we must use this evidence as a rallying call for central banks, supervisors, financial
regulators and governments to assess if, and where, these nature-related risks may ‘fall through the cracks’ of
current supervisory, regulatory and policy frameworks, and where this would necessitate action.
The analysis also indicates possible near-term adjustments in the values of domestic holdings of up to 4-5%,
for particular sectors and banks, from nature-related risks alone. Financial institutions and corporates can take
steps now to assess and manage nature-related financial risks in line with the Task Force for Nature-related
Financial Disclosures (TNFD) framework, integrate nature into their transition plans, and develop technologies
and business practices that reduce their impact on nature.
Secondly, we must recognise that these risks cannot be tackled by an individual country alone. Half of our
nature-related financial risks are international. Our economic interrelatedness means that we must not only
restore and protect nature here in the UK, but also work internationally, collaborating to meet the goals of the
Global Biodiversity Framework.
Thirdly, we need to have real economy actors recognise and react to their nature-related risks. Financial
institutions have an integral role to play by working with their clients to address nature-related risks, but
corporates across sectors will be the key players in mobilising private sector finance for nature restoration and
nature-positive outcomes.
We now have an opportunity to set a new course; one in which we value and invest in nature, and in doing so,
create a future in which we can better ensure that our companies succeed, that our financial system remains
strong, that our food system is secure, that our health and well-being is supported, and that our economy
thrives.
For further information about this first of a kind analysis or to discuss the Taskforce for Nature-related Financial
Disclosures which can be used to identify nature-related risks and opportunities, please reach out to
[email protected].
5
REGULATION
Emerging Regulatory Risks
The green finance regulatory landscape is quickly evolving with a plethora of standards, rules, labels,
and regulatory regimes – offering firms an opportunity to make their business more sustainable and
lead the transition to a net zero economy.
Many of these seek to ensure that products, services and businesses that promote their green
credentials are genuinely contributing positively to the environment. Their primary focus is to clamp
down on greenwashing – the “practice of giving a false impression of the environmental impact of the
benefits of a product which can mislead consumers.”1 While regulations are a critical part of ensuring
effective governance and standards, and will ultimately accelerate the pace of change, they can also
pose a regulatory risk to many firms, causing losses via fines and compliance costs as they adjust to
new rules.
For example, from 31 May 2024, firms in the UK need to ensure their sustainability references are fair, clear
and not misleading, and proportionate to the sustainability profile of the product and service as part of a
new Financial Conduct Authority anti-greenwashing rule.2 Similarly, at the beginning of this year, the
European Parliament adopted a new law banning greenwashing and misleading product information. 3
Last year, South Korea was the first state in East Asia to draft a law that would fine firms for false or
exaggerated green claims.4 Across the world, the direction is clear – policies that cracks-down on
misleading green credentials and claims are being implemented more regularly, across markets.
For firms and businesses to adapt to these emerging regulations, they will need two things: a clear,
understanding what is and isn’t considered green; and the right resources and guidance to be able to
effectively comply with these regulations.
1. https://www.europarl.europa.eu/topics/en/article/20240111STO16722/stopping-greenwashing-how-the-eu-regulates-green-
claims#:~:text=What%20is%20greenwashing%3F&text=To%20achieve%20that%2C%20the%20EU,the%20producer%20is%20offsetting
%20emissions
2. https://www.fca.org.uk/publications/finalised-guidance/fg24-3-finalised-non-handbook-guidance-anti-greenwashing-
rule#:~:text=We%20introduced%20the%20anti%2Dgreenwashing,making%20misleading%20sustainability%2Drelated%20claims.
3. https://www.europarl.europa.eu/news/en/press-room/20240112IPR16772/meps-adopt-new-law-banning-greenwashing-and-
misleading-product-information
4. https://www.reuters.com/article/idUSL8N3672FQ/
6 Green Finance Quarterly | June 2024
REGULATION
The role of taxonomies
For anti-greenwashing regulations to be effective, businesses need
long, loud and clear policy signals about what is and isn’t
considered green in each jurisdiction they operate in. This is one of
the fundamental purposes of a green taxonomy. Taxonomies are
useful in setting clear definitions of the economic activities and
investments that can be defined as environmentally sustainable,
and thus help channel capital towards net zero-aligned and
resilient investment, as well as addressing greenwashing. Firms
may have compliance obligations to report against a taxonomy
but beyond these, will also have important decisions to make as to
the extent to which they incorporate the use of green taxonomies
into their business practices. With significant, and growing, market
appetite for green finance, clear signals and common definitions
from taxonomies can be transformational in mobilising private
finance towards net zero activities.
Currently, despite the 50 taxonomies in development or available
worldwide, there remains ambiguity and most businesses lack a
clear and specific expectation of what will be required for their
activity to be compatible with the transition to a net zero and
nature-positive global economy by mid-century.
The Green Finance Institute (GFI) has chaired the Green Technical
Advisory Group (GTAG) over the last three years, providing
independent, expert advice to the UK Government on the design
and implementation of a UK Green Taxonomy – all advice can be
accessed here. Whilst the UK Green Taxonomy remains in
development, for it to be useful and usable for the market, it must
be interoperable with the other taxonomies in existence worldwide.
For firms operating across borders, there is a risk of regulatory
difficulties and significant extra costs if taxonomies lack
interoperability. GTAG made a series of recommendations to
support increased interoperability between taxonomies which
cover the design of the taxonomy criteria and of the applicable
disclosure regime.
7 Green Finance Quarterly | June 2024
REGULATION
Resources & Training
To facilitate the economy-wide shift to net zero, all businesses need the right resources and guidance in
place to support market actors to understand the environmental impacts of their business so that they can
sell products and services, within regulatory boundaries, to clients. The GTAG has also advised on the
importance of specific guidance and clear criteria for businesses to comply with taxonomy reporting
requirements.
There is a huge amount of market innovation happening in this space. For example, the GFI has recently
launched a Certificate in Green Mortgages for mortgage professionals to help them understand, define and
sell green mortgage products to homeowners. With 23% of the UK’s total carbon emissions coming from
buildings, there is an urgent need to decarbonise the built environment. However, there is a knowledge gap
around green mortgages among customers, intermediaries and brokers. 83% of advisers said their clients
had no understanding of green mortgages, and 14% only partially understand them. 1 The majority (84%) of
mortgage transactions are completed via mortgage brokers, illustrating the need for brokers to understand
and be able to educate customers on green mortgages and other green products.
We’re seeing this kind of innovation happening across the market with qualifications and courses in green
finance and sustainability becoming increasingly available. For example, the Chartered Banker Institute’s
Certificate in Green and Sustainable Finance is aimed at all financial services professionals globally who
wish to develop and demonstrate their knowledge and expertise in green and sustainable finance.
1. https://www.ftadviser.com/mortgages/2022/11/08/brokers-urged-to-educate-clients-on-green-
mortgages/
8 Green Finance Quarterly | June 2024
SUPPLY CHAINS
Supply Chain Risks: Upstream to
Downstream
R
eaching our climate ambitions For many emerging sectors, there are technology
requires a whole economy hardware supply chain risks, given the significant
transformation to ensure that the infrastructure needs; and for some, there are
industries of the future are robust significant raw material risks. Without robust
and resilient; be they batteries or sustainable supply chains here in the UK, companies will need
aviation fuels (SAF), many of these low-carbon to import materials and goods, reducing the
industries are scaling at pace – and have sustainability of their operations, and potentially
incredibly complex supply chains. putting the supply chains at risk of global supply
chain shocks.
In all sectors with complex supply chains,
businesses face risks, which can stem from a range In the context of national security, this becomes
of factors – inflation, climate disruptions, raw even more important. If we are to deliver a
materials shortages or demand volatility, among resilient, secure, net-zero economy by 2050, our
many others. This is particularly pronounced for industries of the future need to have reliable
nascent industries that need to scale at-pace in supply chains that can withstand global
order for economies to reach national and global disruptions.
net zero goals.
9 Green Finance Quarterly | June 2024
SUPPLY CHAINS
Technology Hardware
The UK Government has an ambition1 to have five
commercial SAF plants under construction in the UK
by 2025. To produce SAF at scale at these plants,
we will need a range of technologies, which require
a spectrum of hardware across the value chain.
Some of this can already be done here in the UK,
however, if the industry is going to scale by 2025,
supply chains will have to develop considerably to
meet these ambitions
In the last year, we have also seen announcements
of major car manufacturers making investments in
gigafactories here in the UK, such as Jaguar Land
Rover’s £4bn investment in an electric vehicle (EV)
battery factory in Somerset.2 Without the
supporting supply chain to process materials,
manufacture components and recycle batteries at
the end of their lifespan, automotive production
won’t reach its potential in the UK, pushing car
manufacturers to look elsewhere for production
sites.
Upstream & Raw Materials
Another important element of robust supply chains is securing the production of materials, such as those
required to manufacture SAF or EV batteries.
Although the UK is unlikely to satisfy the entirety of its raw material demand for batteries from local supply,
there are a variety of investment opportunities required to grow the UK’s promising pipeline of raw material
extraction facilities, which include companies experimenting with new faster extraction technologies, and
expanding pre-existing processing capabilities. Regulation is driving increased transparency across the
supply chain and demand for domestic extraction and processing projects from battery manufacturers
downstream.
Similarly for SAF, it is critical to develop production capability domestically. There are many different ways to
generate SAF – used cooking oils, advanced biofuels, or power-to-liquid technologies. The recently
announced SAF mandate will be critical to drive demand, but it doesn’t sufficiently ensure domestic
production. If we fail to ensure the production of these sustainable fuels in the UK, they will be imported from
elsewhere – which will be counterproductive to reaching our net zero ambitions, due to lower sustainability
criteria elsewhere in addition to the increased emissions and cost from importing them.
1. https://questions-statements.parliament.uk/written-statements/detail/2023-09-
04/hcws1002#:~:text=It%20is%20also%20helping%20to,in%20the%20UK%20by%202025.
2. https://media.jaguarlandrover.com/news/2024/04/jlr-powers-zero-emissions-charging-go-first-battery-energy-storage-
system-using-second#:~:text=As%20part%20of%20its%20Reimagine,in%20energy%20storage%20and%20beyond.
10 Green Finance Quarterly | June 2024
SUPPLY CHAINS
Financial Solutions
Financing these supply chains in the UK requires
public-private partnerships to increase investor
confidence and reduce risk.
For example, in the EV battery sector, a Battery
Investment Facility which blends public and private
capital for scale-up companies can be highly
effective to de-risk specific investments in the
supply chain which would otherwise sit outside of
traditional risk appetite.
For first-of-a-kind plants being developed, such as
those for SAF, the GFI has been supporting the UK
government in reviewing the different financial
mechanisms that will be needed to facilitate
access to finance – including government-led
private law contract models, such as a CfD or
buyer-of-last-resort, as well as market-based
offtake models, which can help mitigate revenue
uncertainty and support the growth of a UK supply
chain. Without revenue certainty for SAF producers,
they will not be able to access the project finance
and capital needed for construction. There is a
legitimate concern that the development expense
already invested will be sunk capital, including
government grant funding and private capital.
Across these sectors, developing the production
capability in the UK is critical not only to mitigate
supply chain risks, but also to develop national IP in
these emerging sectors, create jobs and boost our
energy security.
11 Green Finance Quarterly | June 2024
INTERNATIONAL CLIMATE FINANCE
Overcoming credit risk to
finance the transition in Africa
H
aving initially focused on delivering One of the main challenges with mobilising
the 2009 Copenhagen international private finance towards projects in
commitment for $100bn per annum developing markets is currency risk, as offshore
in climate finance to developing funding made available for local climate
markets, it is now widely recognised that this is not infrastructure from the Global North likely is
nearly enough. We need to redouble our efforts denominated in dollars. This leaves project
again. The G20 Independent Expert Group puts the sponsors exposed to currency fluctuations beyond
need in developing markets, excluding China, at their control as they generate project revenue in
$1.8tn annually by 2030. The Climate Policy Institute local currency but repay debt in dollars. The
estimates that Africa alone needs nearly $300bn a obvious solution is to raise finance in local currency
year to meet its 2030 climate goals. This is not by – the execution gap is likely to be smaller as
2030, this is now. investors will have a better understanding of
projects, sector policy, regulatory frameworks and
We need a new approach that is not predicated for example in energy, the intricacies of power
solely on government aid and Development purchase agreements. But further risk mitigation is
Finance Institutions. A key challenge is unlocking still required.
private capital - it is the only source of viable
capital sufficient to meet the amount of finance Despite an abundance of technical assistance
required In 2020, private finance made up only 14% programs from aid agencies and charitable
of the total in climate finance, demonstrating the foundations designed to unlock finance, and
significant growth potential. The GFI has long hundreds of billions of private capital looking for
advocated for an approach that closes the climate investments, project sponsors across Africa
‘execution gap’, mobilising notionally committed are struggling to access financing to meet their
private capital, into real projects supporting NDCs climate-smart infrastructure needs. This is because
in the Global South. To do this we need a sector- project sponsor credit risks are likely to be
by-sector focus and new institutional architecture perceived to be too high to meet the investment
to broker deals at scale. grade needs of domestic institutional capital.
12 Green Finance Quarterly | June 2024
INTERNATIONAL CLIMATE FINANCE
This is particularly true in areas where first of a kind technology is being deployed, such as carbon
capture utilisation and storage, or in nature-based finance, where revenue streams may be less certain.
This leaves a significant source of viable capital untapped. It also has wider economic consequences as
domestic pension funds end up buying domestic sovereign debt at lower returns.
Credit enhancements in the form of guarantees can be particularly powerful in addressing project
sponsor credit risks, circumventing the need for sovereign guarantees and addressing perceived risks
pervasive in developing markets - while unlocking local capital to accelerate capital deployment for
climate-smart infrastructure projects. Whereas development finance institutions are better equipped to
address currency risk by providing lending in local currency or by providing the sovereign secured access
to hard currency.
Drawing from an evidence base provided by existing instruments over a track record of several decades,
the use of flexible guarantees for climate-smart infrastructure projects can significantly mitigate the
potential for loss associated with these projects. In models currently used by the US government for other
sectors, a contingent liability (non-cash commitment) of US$100 million unlocks, on average, US$700
million of direct capital deployment – a 1 to 7 leverage ratio.
Domestic financial institutions have significant pools of capital and can provide it in local currencies to
developers, provided they have the right access to a guarantee facility. The GFI has designed the Green
Finance Guarantee Facility (GF2) to respond to specific demands from investors and the public sector to
de-risk transactions. It would work alongside direct grants in intergovernmental climate aid, as well as
development finance investors like British International Investment and USAID. This combination will have
a catalytic impact on the market and crowd in private investment at scale. We are piloting this in South
Africa, on climate infrastructure projects sponsored by municipalities.
If the combination of these initiatives is directed at specific sectoral transition under new institutional
approaches, there is a realistic chance that both domestic and international private capital can be
mobilised to begin to address the $1.8tn gap. Any public and indeed philanthropic finance that continues
to be committed is still essential. But where possible it should be deployed where it can have a catalytic
impact on private financial flows. Only this approach can deliver the scale we ultimately need to meet the
challenge ahead.
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Green Finance Quarterly
[email protected]
