In 2019, the sustainable finance landscape continued to grow more diverse in terms of issuers and geographies, and more complex in terms of instruments. Last year, total assets under professional management invested according to responsible investment strategies exceeded US$30 trillion for the first time.
Issuance of sustainable debt in 2019 looks set to fall just short of US$400 billion, with green bonds expected to account for around two-thirds of this or US$250-265 billion (well above most market estimates from the beginning of the year).
These trends are now accelerating. In July, nine Dutch pension funds managing 800 billion euros (US$885.77 billion) in assets committed to reduce their carbon footprint, necessitating a more active management approach. By 2020, we see total assets invested according to responsible investment strategies exceeding US$40 trillion.
Sustainability and impact-focused investing can account for US$4-5 trillion of this total, nearly tripling from 2018. Based on our analysis of the prospects for sustainable debt issuance, we expect issuance to reach US$560-620 billion in 2020 and US$720-810 billion in 2021. We expect that green bonds will account for US$320-360 billion of this total in 2020 and US$400-450 billion in 2021.
As the sustainable finance industry grows, regulators and voluntary initiatives are looking to bring welcome standards and transparency to the sector. The EU Commission’s action plan on sustainable finance is a case in point, comprising the establishment of a taxonomy to classify sustainable activities, an EU standard for green bonds, benchmarks related to decarbonisation, and disclosure requirements on ESG integration.
Market trends are supporting these regulatory and policy trends. Costs of wind and solar power continue to fall and the International Renewable Energy Agency (IRENA) forecasts that by 2020, auction prices of solar and wind power will fall below the operating cost of 700GW and 900GW, corresponding to 35%-45% of the coal industry’s current capacity.
Nonetheless, upfront capital costs can be significant, creating a role for the finance industry in bridging the gap between near term funding requirements and future returns. We believe a vast increase in investment levels is still required. Current policies place us on a pathway towards a 3-5°C increase this century.
IRENA estimates that to meet the goals of the Paris Climate Agreement, additional funding in the range of US$27 trillion (over and beyond present commitments) will be required to support energy, mobility and related transitions.
The finance industry will be ready to support that increase in scale, but it is a pipeline of investable projects that is the missing part of the equation today. Policy ambition will have to significantly increase to create the magnitude of projects commensurate with the challenge, beyond what market forces and corporate action can deliver.
Christopher Kaminker, PhD, is the head of Sustainable Investment Research and Strategy, and Thomas Hohne-Sparborth, PhD, is sustainability analyst at Lombard Odier Investment Managers.