Andrea Blackman supports the work of the climate board leveraging her experience in business leadership, strategy transformation, company performance and risk measurement, alongside expertise in sustainability, climate transition and sustainable finance. Previously, Andrea spearheaded the digital transformation of Moody’s flagship research, data and analytics business and went on to lead Moody’s ESG Solutions where she engaged with companies, global regulators, and financial institutions to advance the greening of the economy and the creation of standards and practical tools to foster the journey toward a sustainable future. As part of her role she worked across Moody's to integrate ESG considerations into credit ratings and risk analytics underpinning compliance, supply chain, physical and climate transition risk solutions. In her early career as a banker, Andrea worked with global corporations and financial institutions, and then in the automation of global trading markets where she experienced first hand the complexity, challenges and opportunities at the heart of business transformation.
One does not equal the other. Green finance might be a good signal; it may also be a way of greenwashing. The form green financing takes and the use of proceeds, and what the investment creates will demonstrate a lot about a company, their focus on a sustainable transformation and their ability to innovate.
There are a number of measures you could consider, such as: a) Green share or brown share metrics, such as green/brown revenue as a percentage of turnover and how it changes over time. b) R&D spending c) Investment in green products/businesses. Strategic objectives, management focus, performance. d) Performance KPIs and where those KPIs sit within the corporate structure (board level vs. executive leadership vs. operational manager level) e) How much lobbying does a company do? If a company is claiming to be investing heavily in green innovation, yet they spend more on lobbying for the extension of the CO2-emitting products/businesses than the investment in renewable innovation— that says a lot. f) Coherence – what story does an organization’s financial strategy tell? How did an organization raise funds? What is their strategy to spend this funding and how else are they spending their money? How many adverse media allegations are there against a company? g) Percent of production transition. For example, automotive manufacturers set targets and monitor the percent of their fleet production converted to EV. The corporate strategy and the sustainability strategy of the firm need to be reflected in asset allocation, product innovation, process reengineering, and so on - to bring about business transformation. You can look at things like expenditure on the future and how that compares to management’s focus on and investment in preserving, even enhancing less sustainable aspects of the business. Another thing to consider is that innovation doesn't always work. Organizations invest a lot of money into innovation, but what is the outcome and what is an organization’s transformation plan?
Yes, a few sectors that come to mind are agribusiness, transportation in general (including automotive and airlines), energy, and ancillary services like packaging. Innovations are happening everywhere, but I think the biggest areas of innovation are those that address large emitting processes that are not impossible to abate. There are some industries, like the oil and gas industry, in which you can be a good corporate citizen and minimize your impact, but there is not a lot you can do unless you diversify into renewable energy. A lot of companies are trying to innovate, but innovation is hard. Other interesting innovations in the industrial sector are green steel and cement, especially if you think about what a developing economy consumes at scale. Financial services is another industry that’s innovating – this includes insurance, banks, asset managers, etc.
No, I don't. Large caps are notoriously bad at innovating. It's incredibly difficult, particularly if you've got an operating business that's very successful. In fact, there are many forces within a corporation that suffocate efforts at innovation. Large companies do have deep pockets, and those that can do it very well will really drive innovation in their sector. Mid-cap private companies can focus and innovate. Public mid-cap companies may be financially constrained, making innovation challenging. Small to medium-sized companies seem to be good at focusing on being really good at one thing, and that is good for innovation. The challenge is then one of funding to scale.
It's not specific to any industry, as anyone can raise green finance with a compelling investment case and willing capital. Large companies already being financed in the public markets have been able to raise green finance by issuing a variety of labeled bonds and loans taken up by institutional investors. Companies perceived to offer a more sustainable future have seen their equity prices rise. Smaller firms work with VCs and PE firms to access capital. Regional differences in depth and risk tolerance of private and institutional money can impact innovation in green financing. Policy and legislation can be another key aspect in the mobilization of capital and innovation in green finance. A big challenge for green finance is the absence of well-defined performance metrics that can be used to evaluate and price risk and return. It can be difficult to predict performance outcomes even with full information. In the absence of clear, well-articulated transition plans from companies and reliable performance data to evaluate the success of plans and outcomes, that task is made even harder. Technologies to transform industries are still in development, policy is taking shape and changing rapidly, and business opportunities must navigate an array of unknowns to be successful. I see green financing innovation maturing as transition pathways for industries, policy frameworks, and transparency around plans and performance improve. Sustainability and the transition to a low carbon economy represents a substantial opportunity for industry and finance. Green finance will continue to innovate and evolve in response to the demands of their customers, employees, regulators and investors, overcoming the challenges encountered at this early stage of development.
I don't think they are. I would say it can be as much a signal of a company bringing focus to the early stages of their sustainability journey, as evidence of a company that has embedded sustainability into their business model. I personally wouldn’t wait to pursue green financing. The challenge for many companies is determining how much to invest or raise and for what purpose. As companies embark upon their sustainability journey, including green financing, they often start small in order to get a good understanding of what it means for the business.
This goes back to the fundamentals of the company and the appropriate financial profile for the future success of the business. What and how much should I be investing to achieve sustainability success? The financing approach (ie. sustainable debt, equity) should not be a prerequisite for re-orienting the management of the business to account for sustainability risk, impact measurement, and management. Having said that, issuing green debt may be a useful tool to bring cross-departmental focus and shared objectives to drive the sustainability journey forward. More generally, however, issuing sustainable debt has to be part of a company's broader business, capital allocation, and financing strategy. In the context of a company’s debt financing strategy, a company may decide to target a lower credit rating for a period of time to invest in transitioning the business. The question for any company is, “How comfortable do I feel about my ability to make a success of this investment and strategy?” and “How uncomfortable do I feel not making the investment and failing to transition the business?” The automotive industry is a good example of a rapidly transitioning sector. EVs are becoming attractive, policymakers are shifting the target year forward for automotive manufacturers to transition their fleets, and there are commitments at the government level to transition related infrastructure and supply chains to support EV manufacture at scale. Companies that have not invested are under pressure to shift in short time frames with increased execution risk. As a competitive imperative for their business success, the delay in investing - whether it is with equity or debt - may result in downward rating pressure anyway. Every industry has an inflection point. Higher sustainability scores and more sustainable business practices have been shown to reduce industry transition and company default risk. Issuing sustainable debt may form part of a company’s financing strategy to realize their sustainable future.
The sustainable bond market softened at the end of 2022 as debt markets globally weakened. As 2022 progressed, companies began to feel the strain. Following Russia’s invasion of Ukraine, energy costs and interest rates were rising, there was disruption of global supply chains, and global economies slowed. As companies adapted to the economic uncertainties, there was a shift away from green bonds, which are use-of-proceeds bonds, to sustainability-linked and general-purpose bonds as they offer companies more flexibility. Prior to the market slowdown, the US had become an engine of green bond growth. Europe remained the biggest market for green social and sustainable bonds, however the US was growing faster. European and Latin American sovereigns had issued a lot of social bonds as a way for governments to enter the markets and encourage industry to consider the asset class. Social bonds are suited to the social welfare orientation of Europe. In Latin America, there are numerous social deprivation challenges and sovereign social bond issues are well subscribed. If you can improve education levels and people's prospects for the future, there are both political and economic benefits to issuing a social bond to invest in a country's future. The Inflation Reduction Act in the US offers significant incentives for companies to invest in green initiatives in the run up to the next election. However, the debt issuance markets have been weak globally, and they are expected to remain weak through the remainder of the year. This is having an impact on green bond issuance as well. With the recent interest rate rises, any recovery in 2023 is likely to be late and slow. Additionally, the end of 2022 and year to date 2023 has seen increased scrutiny of the sustainable bond market as investors scrutinize use of proceeds and impact from green bonds, the application of funds from general purpose sustainability bonds, and the ambition of the goals that govern step-ups and -downs of sustainability-linked bonds and loans. As the market matures and company performance reporting improves, the ability of investors to track sustainability performance and risk will contribute to the smooth functioning of the market.