In the latest The Green Bond report, experts explain why hope is likely to prevail and look closer at specific challenges that need to be solved if the transition is to be able to continue gaining speed, including how investors can make a difference.
There are currently mixed signals regarding the energy transition outlook. On the one hand, it now seems unlikely that the world will be able to limit global warming to 1.5 degrees Celsius. On the other hand, there are signs that the transition is picking up speed and that the world may be close to peak emissions.
“After a year of upheavals both in energy markets and financial markets, a new, faster long-term transition trajectory is starting to take shape at the same time as the negative effects of earlier procrastination is beginning to emerge,” says Thomas Thygesen, Head of Research, Climate & Sustainable Finance, at SEB. “From a climate crisis perspective, this leaves an outlook caught between hope and despair, but we continue to believe that hope will eventually dominate.”
While an accelerated transition – driven by the technological revolution of renewable energy – can still halt emissions in time to avoid a climate disaster, it comes with significant challenges that capital markets must address. These include raising capital for energy investment and adaptation costs, especially in developing economies; expanding the supply of basic inputs to the capex boom; and providing funds for companies that are first movers in sectors with high emissions.
“Sustainable investors now need to be clear about their objectives,” says Thomas Thygesen. “If you want to have an impact, your capital must go where the market is less willing to go – like funding renewable energy and adaptation in emerging markets and providing capital for companies in hard-to-abate sectors that launch the transition using technology that is not yet ready for deployment. This requires both a longer time horizon and a higher tolerance for risks. However, there is still a place for the more traditional ‘do no harm’ strategies.”
The report also contains an update on the market for sustainable financing, showing how October marked another year-on-year decline in sustainability-themed bonds and loans despite initial optimism that the market would recoup some of this year’s losses during the third quarter. A total of USD 1,203 billion have been issued so far this year, which marks a decline of 16 percent year-on-year.
“Given that the last two months of the year usually see a lower level of activity, we now assume that the sustainable finance market in 2022 will close around 15 percent below last year’s record,” says Gregor Vulturius, Advisor at Climate & Sustainable Finance at SEB. “While all bond issuance has declined, this outcome is clearly a disappointment, suggesting we may need to broaden the range of sustainable finance instruments to attract more sectors.”
About The Green Bond report
SEB, which together with the World Bank developed the green bond concept in 2007/2008, publishes the research publication The Green Bond 5-6 times a year. It strives to bring readers the latest insight into the world of sustainable finance through various themes. Even though the report covers all kinds of products and developments in the sustainable finance market, we have decided to keep its historic name – The Green Bond – as a tribute to our role as a pioneer of the green bond market. You can find The Green Bond report here.