How can we create the right environment for green finance?

Researchers and leading practitioners in investment and green innovation shared insights into green finance and fintech in this CIMR Debate in Public Policy.

How does innovation play a role in green finance, and how can we change investor sentiment towards green based innovation? Our latest CIMR Debate in Public Policy brought together researchers and practitioners in the green finance sphere to begin to answer these questions.

Chaired by Professor Michael Mainelli, Executive Chairman, Z/Yen Group, the discussion explored investor sentiment towards green investment, the reality of green innovation in industry and how fintech innovation could support the transition to green finance.

Green finance and environmental innovation

Dr Ellen Pei-Yu, Lecturer in Finance at Birkbeck, began the discussion by sharing research exploring whether environmental innovation can help firms access cheaper finance.

Ellen defined green finance as ‘any financial activity that has been created to ensure a better environmental outcome’ and highlighted the US, China, France, Germany and the Netherlands as the top five countries issuing green bonds in 2020.

While there is increased awareness among global fund managers and the wider public on the importance of addressing climate change, the results from the study suggest that companies with higher environmental innovation are seen as a risk by investors, so their financing costs could be more expensive.

Ellen highlighted policy interventions as a route to changing investors’ perceptions and reducing demand for certain types of company, such as oil or coal producers. She also emphasised that, while investors may not yet see the value of green innovation, they do prize companies’ financial transparency.

Digital finance: new business models and products to enable green transition

Dr Alessandra Tanda, Assistant Professor of Banking and Finance at the University of Pavia (Italy) shared developments in digital finance that could support the green transition.

The fintech revolution – the provision of financial solutions and products via technological devices or business models – has been underway since 2008, but has accelerated in the last few years, especially as companies have been forced to digitize their processes through the COVID-19 pandemic.

Alessandra highlighted ways in which new technologies are disrupting traditional business models:

  • Platforms which enable retail investors to select the entrepreneur or initiative they would like to finance can specialise in green finance, such as Bettervest.
  • The robo-advisors that have replaced in-branch financial advice can be specialised in green investment and only offer opportunities that satisfy given ESG requirements.
  • Insurance products are now offered digitally and some start-ups are developing new insurance policies to deal with climate change.
  • Crypto-currencies, which are typically very energy intensive, are now awaiting green bitcoin.

Alessandra concluded that digital finance may enable investments to be directed to more green or ESG investment opportunities. She called for greater transparency among international bodies to foster the opportunity for companies to raise funds for the green transition.

Case studies in environmental innovation: Pulpex and DiOX

Harry Elliott, consultant for GEAS Group and commercial director for LiquidNano Group and DiOX shared his professional experience in environmental innovation. Harry noted that investor sentiment towards green finance is shifting, demonstrated by Pulpex’s latest fundraiser, which was oversubscribed. Pulpex is a packaging company that replaces glass and PET bottles with 100% biodegradable materials. It has been adopted by large firms such as GSK and Diageo. Part of Pulpex’s success was in not going down the traditional manufacturing path, but licensing the technology in order to scale more quickly. Harry also noted the success of DiOX, a company finding eco-friendly solutions for the textile industry, which is the second most polluting industry after oil.

In light of a likely increase in regulatory action, Harry argued that investors could benefit from changing trends by backing emerging businesses, while companies could adopt modern business principles, such as licensing and the use of products as a service to gain investment from the private sector.

However, significant hurdles, such as high initial costs and long lead time to profitability, still remain and a long-term view is required in order to look beyond the quick pursuit of profits.

Trends in sustainable finance

The presentations were followed by discussion from Dr Bac Van Luu, Global Head of Currency in the Investment Division of Russell Investments, based in London.

Van gave wider context to the discussion by highlighting five long-term trends in sustainable finance from the perspective of the investor or asset manager:

  • Climate change risks – Climate risk is becoming an investment risk with assets such as oil fields. Asset managers are increasingly looking to become carbon neutral in their portfolio.
  • ESG Investing – Incorporating ESG into investments is a way to align the short-term horizons of asset managers with the long-term horizon of environmental risks. However, ESG is currently measured subjectively by humans and is therefore not wholly reliable.
  • Impact investing – This type of investing involves making decisions to have a positive impact in the environmental or social sphere, for example by investing in renewable energy, even if this means a lower return.
  • Innovations in information processing – At the moment it is difficult to judge the quality of data and how it can be incorporated into the investment process. Greenwashing, the act of claiming a product or process is green when it is not, is a concern.
  • Financial Innovation – The EU has been at the forefront of defining a green bonds standard to support the transition to low carbon economy.

The discussion raised further questions from participants, who were interested in the role of angel investors to upscale inclusive entrepreneurship and how business impact funding could be redirected to support emerging businesses.

We would like to thank the presenters and participants for a thought-provoking discussion on the challenges and opportunities of green finance.

The recording of this event is available here