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What makes a green finance product green?

Green is the new black. The government’s launch of the Green Finance Institute as part of its Green Finance Strategy in 2019 helped to put green finance in the spotlight, but what exactly is it and how can it support sustainability for UK businesses? Rhian-Mari Thomas, CEO of the Green Finance Institute and David Farrow, Head of International Corporate Banking at Barclays explain more.

“The economy is going through a profound change in response to the inevitability of climate change,” says Dr Rhian-Mari Thomas, CEO of the Green Finance Institute, “and as a finance community and as a global society, we’re going to have to respond to that. Green finance is about supporting the transition of the global economy to a net zero and environmentally-resilient outcome.”

Rising sea levels, extreme weather events, temperature rises, air pollution – the effects and outcomes of climate change present clear risks for business in terms of their customer bases, resource availability and supply chains. Addressing these risks, particularly when funds are tight or other priorities are more pressing, can be a stretch.

Green finance can offer a solution that puts change within reach and, as David Farrow, Head of International Corporate Banking at Barclays, points out:

it sends a signal externally that you are investing in a more sustainable future for your business

Supporting sustainability

When it comes to the technicalities of green finance, there’s a whole taxonomy of green definitions, but as Farrow explains:

In essence, green finance is about clients taking out some kind of finance to make them more sustainable, and it can take many forms. It could be as simple as considering investing in more energy efficient light bulbs, re-thinking your transport policy to include electric vehicles, or considering your waste management or water usage strategy.

As sustainability becomes a key element of business planning and long-term strategy, green finance can help the development and delivery of those plans across the entire operational function of a business.

Applying a green lens

“Green finance is about applying a lens across a range of activities that support a business,” says Thomas. “It looks at lending, trade finance, supply chains, cash management, of course, but also supporting businesses to consider their own branding, their consumer positioning, regulatory developments and legislation affecting their sector and their own reporting requirements. It’s also where a bank can leverage the trusted relationships it has with clients to help them look to the future and evolve their strategy.”

Applying that green finance lens and providing support to clients transitioning to a more sustainable future is a key part of Barclays’ approach explains Farrow. “Our Green Product Framework can really help to focus minds when it comes to investment choices and meeting the requirements of different stakeholders. Competitive pricing also makes the opportunity more appealing. Then, through ensuring we have a full suite of propositions available, we can support clients on that journey.”

Challenges to adoption

However, there are challenges to the adoption of green finance and to the sustainability agenda overall, says Thomas. “There’s a real issue with the standardisation of data and the ability, therefore, to turn that into decision-useful, actionable data. Integrating science into our decision-making process can also be tough, which is why initiatives such as Chapter Zero, which looks to ensure that all boards have climate literate representatives, is a real step forward. As with any major transition of this nature, you need to combine buy-in at grass root level with top down support.”

One of the other challenges, Thomas points out is, to coin Mark Carney’s famous phrase, ‘the Tragedy of the Horizon’. In his 2015 speech on climate change, the then Governor of the Bank of England, said: “Climate change is the Tragedy of the Horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.”1 For businesses, Thomas says, “that means aligning short term prioritisation with decisions for the long-term, and that’s not easy.”

It’s especially difficult in today’s pandemic-orientated landscape. “Clearly there is only a certain amount of bandwidth, and people at the moment are absolutely focusing on what needs to be done in response to the health and economic impacts of Covid-19,” says Thomas.

However, sustainability is very much on the agenda and the commitment to that, from government, financial institutions and from business is undiminished. Ensuring that net zero and green are part of the recovery is vital. The road to prosperity and the road to a green recovery follow the same pathway.

Seizing the opportunity

Despite the challenges, businesses simply can’t afford to ignore sustainability and the opportunities green finance offers to develop their strategies and transition their operations. “One of the things we're seeing is more and more pressure externally on businesses, whether that be from employees, shareholders or other stakeholders to show that they are becoming more sustainable,” says Farrow. “So, taking out green finance or making green investments is actually quite a good way to signal to those communities that you really do take this stuff seriously and, most importantly, that you're actually taking action.”

As with so many aspects of business, embracing sustainability is about establishing the balance between risk and opportunity and carefully considering return on investment in the broadest sense. “Using green finance offers a couple of benefits for business,” Farrow continues. “It sends a clear signal that you are investing in a more sustainable future for your business, it makes people think about their investment choices, and in some cases there will be incentives within the pricing framework to make it attractive for businesses to take out.”

In many ways, Thomas says, green finance is an opportunity that businesses will increasingly be unable to ignore. “If you do ignore this, you run the risk of your business having stranded assets, of technology transitioning without you and of your business not being investible. More and more investors are demanding transparency and disclosure on sustainability, and they’re increasingly going to be channeling their capital towards companies that are leaders in that space. There are already 300 companies signed up to science-based targets, setting themselves very clear goals on transitioning their business. Those that ignore that, face significant risk.

But, fundamentally, I think this is a huge opportunity. Every sector is going through its own transition and by making green finance mainstream and harnessing the creativity and ingenuity of UK financial services, we can support that profound transformation.

Barclays has developed a suite of green financial products, including three ‘market firsts’:

  1. Barclays Green Home Mortgage
  2. Barclays Green Deposits
  3. A 2017 issuance of Green Bonds, backed solely by UK assets

In 2018 alone, we facilitated £27.3bn in financing for social and environmental segments. This includes developing a suite of leading green financial products and services to support our clients on their own transition to a lower-carbon economy and accelerate their investment in green initiatives.

From asset finance funding to support Reading Buses transition to a more environmentally friendly fleet, to financing Unipart to adopt a more energy-efficient lighting system, Barclays’ solutions are helping to support client journeys to a more sustainable future.

Read more about how we’re supporting clients to become more sustainable here.

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