Creating a future through sustainable financing

A mix of community awareness and public policy reform have made sustainability a focal point for international banking and the broader industrial and commercial settings of most economies. Environmental, social and governance (ESG) factors have become prime considerations for business, and the business bottom line is no longer composed of mere financial considerations.

There is a growing international consensus that sustainability considerations must be at the forefront of all decision making, as our medium to long term wellbeing depends on a healthy environment supported by sustainable economic and social development.

Climate change has been described as the key challenge of our time. It’s the cause of rising temperature, land and sea erosion and salinity. To combat this, governments are raising awareness of initiatives launched by the UN such as the Sustainable Development Goals (SDG) and Paris Agreement, which seeks to limit warming to 1.5 C. While some advanced economies are closer to meeting these requirements set by the UN, emerging and developing countries are facing a funding gap that requires support from banks and the private sector. While 90 percent of the SDG financing needs are covering in developed nations, only 60 percent of the investment needs are addressed in emerging and developing regions (and as low as 10 percent in parts of Africa). Looking closer to home, it is estimated that climate threats could impact the UAE’s GDP by up to 24 percent. China is predicted to face the biggest costs in absolute terms, while coastal communities in Sub-Saharan Africa are already being washed away, losing up to 30–35 meters of land each year.

As investors and companies continue to realize the vast implications which climate change presents, they have also begun to take the environment into consideration when making business decisions. Because of this, the term “sustainable investing” has garnered traction across the globe. We are now seeing many initiatives being launched worldwide in support of the UN ESG’s. Globally, various frameworks have been introduced in the green financing field, such as the Climate Bond Initiative, the European Commission’s Sustainable Blue Economy Finance Principles and the WWF’s Blue Finance Principles. Last year Standard Chartered issued the world’s first blue bond, on behalf of the Republic of Seychelles, and raised $15 million from impact investors to finance the expansion and transition of its marine protected areas, improve governance of priority fisheries and develop its blue economy. In the Middle East and North Africa region alone, there have been investments of $163 billion in clean energy. Changing demographic needs are driving demand for infrastructure investment. The UAE energy sector is moving from hydrocarbon-based toward a diverse mix of energy sources — propelled by growing demands from rapid urbanization in the country, oil market volatility, and greater momentum for sustainable growth.

Sustainability is a key driver of financial sector innovation, and is being steered by financial imperatives whereby the borrower is incentivised to become more sustainable by receiving discounted financial terms. We recently launched the world’s first “sustainable deposit,” dedicated to financing sustainable assets in developing countries aligned to the UN SDGs, allowing investors access to dynamic markets and giving them an opportunity to put their money into a vehicle that addresses some of the world’s key long-term social and environmental threats.

Liquidity raised by the deposit will be used to finance SMEs in developing countries, support microfinance and provide funds for a variety of sustainable projects. Indeed, the industry is seeing a sharp rise in the development of products that positively impact the environment such as social and green bonds.

Additionally, according to Moody’s Investors Service, global green bond issuances are forecast to increase by 20 percent, reaching $200 billion in 2019. In 2018, the Middle East witnessed the first green loan worth $2 billion with an Islamic format that links pricing to environmental performance, which Standard Chartered assisted with extending its maturity.

With awareness on the UN’s SDGs at an all-time high, and demand from investors increasingly looking for options that help to make our world more sustainable, financial institutions are uniquely placed to create positive impact.

Driven by the fact that finance touches every aspect of the economic cycle, there are huge opportunities for banks to shift more of their balance sheets into sustainable projects to support economic and social development for the future wellbeing of the planet.

Sunil Kaushal, is the regional CEO of Standard Chartered