Climate change ETFs, anyone? China’s green bonds show how sustainable investment can work

The UN has a climate action plan and investors are increasingly heeding the call for sustainable investing, but options remain fuzzy. China’s focus on green finance may be the most pragmatic way to get much-needed funds into climate action

Anthony Rowley

Published: 12:00pm, 5 Jan 2020

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Everyone (except Donald Trump) seems to be getting worried about climate change – and so they should. They need to worry about the known problem of governments failing to get to grips with the issue and also the lesser known failure of the financial system to deliver solutions.

It is not that the money is not there to help supply solutions; it is more that market economies lack optimally designed vehicles to channel funds into critical areas such as fighting global warming (let alone into dealing with other economic and social challenges).

China arguably has the most pragmatic approach. Even if it does not appear as sophisticated as other advanced economies’ mechanisms for directing savings into the general area of sustainable investment, China’s focus on green bonds does at least provide an easily recognisable target to aim for.

The urgency of dealing with climate problems is apparent in everything from Australians having to take refuge in the sea from bush fires, the failure of negotiations at the United Nations climate change summit in Madrid COP25, and the charge by Bank of England governor Mark Carney that companies and investors are not doing enough to avert climate change.

As the primary author of a recently published book on sustainable investment, I have become aware that the subject is something of a jungle with no clear way through, and with disasters such as fires, floods, droughts, typhoons and blizzards dogging our every step.

Rapidly growing numbers of investors (no longer just philanthropists and foundations, but legions of pension funds, insurance companies, private equity groups and individual investors) are eager to “save the planet”, but it is not clear how they can do so.

When they try, they come up against what even expert industry practitioners call a rather “fuzzy” array of investment opportunities, chief among which is buying (or selling) shares in companies that promise (or do not promise) to adhere to ESG, or environmental, social and governance, criteria.

This is all well and good in the sense that it encourages better corporate behaviour and governance in general, but it is hardly a direct approach to curbing global warming and other effects of climate change. Increasing numbers of savers/investors want more direct, hands-on involvement.

Three reasons Asia is the next hotbed for sustainable investment

There is a promising area called impact investing which aims at measurable social, economic and financial returns on investment, and there are other forms of sustainable investment that go by different labels. But all are rather indirect solutions to climate change.

Things began to become more focused in 2015 when the UN General Assembly approved a set of 17 sustainable development goals (SDG) representing a “universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity”.

Lofty aims, but they cover so many areas (climate action is only one of 17 although others link indirectly to it) that they risk dissipating what arguably needs to be a much more focused and targeted attack on global warming and climate change.

There are, of course, other initiatives such as the UN climate change conferences, but these are for intergovernmental organisations while the sustainable development goals are supposed to involve both the private and public sectors in identifying and channelling funds into economic and social reforms.

Governments can provide only half of the US$5-7 trillion needed annually to finance the development goals between now and 2030 (says the UN), with private investment doing the rest. This does not sound impossible given the estimated US$300 trillion of financial assets in the world – but how is it going to happen?

It is not possible to invest in a “sustainable development goal” fund as such, beyond a few limited opportunities such as the PG Life Fund run by Swiss-based Partners Group. But if private funding going into these objectives is going to grow from “billions to trillions”, something has to change.

As Marc-Andre Blanchard, Canada's permanent representative to the UN, has said: “Though there will not be any one silver bullet that solves the SDG financing challenge, private capital is the one source both large enough and with the potential to reach the scale required by 2030.” This will require significant “collective efforts”.

China is focusing on “green” finance rather than the more diffuse approaches taken in the United States, Europe and Japan. It is, as the Rockefeller Foundation and consultancy FSG put it, in a report, “encouraging a transition towards a green economy and financial system to help address environmental degradation”. China’s green bond market is now “the world’s second largest in cumulative issuance”, in a sector that is also “seeing innovations across a range of areas including green bond ETFs [exchange traded funds], green asset-backed securities (ABS), and construction finance for green buildings”.

Maybe this is the way to a green and pleasant land.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs, and the primary author of “Sustainable Investment – Impact in Asia”, published jointly by Asia Asset Management and the United Nations Development Programme

This article appeared in the South China Morning Post print edition as: The problems facing investors who want to save the planet

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