Sustainable Finance Market
Sustainable Finance Market: What to expect in 2023-2024
The year 2022’s emphasized on raising awareness and achieving harmonization. A shift towards a focus on implementation, execution and delivery in 2023/2024 is expected. There will likely be less effort spent on advocating for sustainable financing and more emphasis on the practical aspects of integrating sustainability into the market. Considering this, we have identified three significant trends that are expected to shape 2023.
There are three overarching trends to keep an eye on in the coming year or two on the the Sustainable financial market. These trends are interconnected and multifaceted, each deserving separate attention.
Trend 1
Defining Greenwashing
Greenwashing has been a recurring topic for some time, but its prominence in sustainable finance surged when the U.S. authorities initiated an investigation into the ESG claims of Deutsche Bank’s asset management arm, DWS. As we venture into 2023, this issue takes center stage, driving discussions and shaping decision-making processes.
Despite the growing momentum and the serious implications associated with greenwashing, one fundamental question remains: How do we precisely define “greenwashing”?
While different stakeholders may offer varying interpretations, there is a growing call for establishing a common understanding of greenwashing. Institutions like the European Supervisory Authorities (ESAs) and the UK Financial Conduct Authority (FCA) emphasize the need for clarity. Additionally, the European Commission is expected to propose a directive to regulate “green claims” made by organisations.
The call for a clear and shared definition of greenwashing is justified, but one must approach this challenge with caution and objectivity. While the consequences of greenwashing are indeed undesirable, there is a risk of overly severe punishments that could hinder the necessary investments and innovation. It is important to recognize that inaction can also pose significant risks beyond the issue of greenwashing.
Trend 2
Unraveling the Essence of Transition Finance
Similar to the concept of “greenwashing,” the notion of “transition finance” has been part of the market discourse for a while. However, it has recently gained substantial traction, making a significant impact on the market. This trend comes as no surprise, considering the ongoing global efforts to transition toward a low-carbon economy, which necessitates diverse parties moving at different paces through various iterations and investment cycles. ‘The OECD ‘2021 review of transition finance-related approaches suggests that, under existing approaches, transition finance has been generally understood as being intended to decarbonise entities or economic activities that: (i) are emissions-intensive,1 (ii) may not currently have a low- or zero-emission substitute that is economically available or credible in all relevant contexts,2 but (iii) are important for future socio-economic development. ‘ Source: OECD Guidance on Transition Finance.Ensuring credibility of Corporate Climate Transition Plan.
Within the financial markets, this topic has been extensively debated, leading to tangible developments such as the emergence of “transition bonds.” Even structures labeled as “sustainability-linked,” supported by reputable organisations like the International Capital Market Association (ICMA) and the Loan Market Association (LMA), inherently embody the essence of “transition finance.” Numerous publications from prominent institutions have aimed to clarify the concept and enhance transparency in these discussions.
Despite these well-intentioned efforts, the nature of “transition finance” remains elusive, much like “greenwashing.” It is unrealistic to expect a definitive top-down framework or a single universal definition for “transition finance.” Instead, it is likely that a globally aligned understanding of “transition finance” will emerge organically, resembling a mosaic of diverse applications, some explicitly labeled as such, while others are not. In 2023, we may witness the initial glimpse of this evolving landscape.
Trend 3
Evolving Landscape of Sustainable Finance Products—Innovation and Quality Take Center Stage
One of the pivotal factors in reshaping the financial markets towards sustainability has been the remarkable growth of the green bond market and other sustainable finance products. These products have now become an integral and stable part of the market, with the ICMA Green Bond Principles soon celebrating their decade-long existence.
At first glance, it may seem peculiar to consider this area within sustainable finance as a trend for 2023, given its established presence. However, a closer look reveals the potential for a second wave of products and innovations to emerge. With the momentum behind the “transition finance” theme, we anticipate a resurgence of the “transition” label, which could gain significant traction this time around.
Moreover, the notion of “hybrid” structures is poised to enter the sustainable finance conversation as market participants seek fresh and innovative approaches to stay relevant to stakeholders.
This novel structure combines a dual approach: a “use-of-proceeds” (UoP) framework level and a “sustainability-linked” asset level. Investors’ funds are allocated to assets that align with the framework’s definitions, similar to other green bond frameworks. However, the assessment of these assets goes beyond their eventual use of proceeds and extends to the overall commitments of the borrowing entity, initially focusing on climate-related aspects.
In addition to the drive towards new structures and tools, a steadfast commitment to quality is expected, particularly in relation to definitions (such as “materiality” and “ambitiousness”) and EU Taxonomy-related categories, as well as data accuracy and verifiable impact. While this topic has received attention for several years and demands ongoing focus, it is worth highlighting its significance this year due to the imminent launch of the EU Green Bond Standard, the introduction of additional Taxonomy categories, and the overall push for higher quality ESG data.