Sustainable finance for a shared future

Minister of Climate Change James Shaw. Photo / Marty Melville

What vehicles will drive us to the green economy asks James Shaw.

Increasingly, governments and institutional investors are reorienting towards green bonds because of their international obligations.

In a makeshift conference hall, down the corridor from the rooms where negotiators were thrashing out the Paris Agreement in late 2015, I attended a press conference fronted by Michael Bloomberg, former Mayor of New York, and Mark Carney, Governor of the Bank of England.

Although the language they used was as dry as dust, what they said — and the sense of alarm with which they said it — startled me. They estimated that, globally, billions — perhaps trillions — of dollars of unquantified and undisclosed risk was sitting on corporate balance sheets, invisible to directors and shareholders alike.

This ranged from the insurance costs of physical losses caused by sea-level rise and increasingly frequent and intense floods, fires, droughts and storms, to stranded asset risk in fossil-fuel companies which might find themselves having to leave their oil fields untapped.

These risks could incur massive losses both for the firms involved and their investors, bankers and insurers.

This was something directors and shareholders might want to know about, they said.

And so they launched the Taskforce on Climate-related Financial Disclosures (TCFD), a framework for measuring and reporting climate-related risks. Bloomberg and Carney believed that once this information was made available, then capital would flow away from the "brown economy" and toward the "green economy".

Mark Carney has said that he viewed climate-related risks as the single biggest threat to the UK economy (although he now has, shall we say, "other things" on his mind).

Our own Reserve Bank Governor, Adrian Orr, has voiced similar concerns and has started asking questions of bank boards about how their approach to climate-related risk.

The New Zealand Insurance Council, in its submission on the Productivity Commission's Low Emissions Economy report, suggested that directors' fiduciary duty in existing corporate law should already cover these risks, given how material they seem to be. But they also proposed that, given that almost no companies in New Zealand were reporting on these risks, a compulsory regime may be required — a proposal the Productivity Commission has recommended to the Government.

All this suggests that New Zealand companies may be on the verge of measuring and reporting on climate change matters, not just as a matter of "corporate social responsibility", but of responsibility to shareholders.

But if Bloomberg and Carney are right, and markets respond to better information by flowing away from the 'brown economy', what is the 'green economy' it is flowing towards? And what are the vehicles by which it gets there?

'Green bonds' are an enormous and growing market worldwide. They generally go into projects that were going to happen anyway, but can be certified as low-carbon investments attractive to those wishing to put their money where their values are.

Increasingly, governments and institutional investors are reorienting towards green bonds because of their international obligations: Article 2(c) of the Paris Agreement which commits countries to, "Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development."

Green bonds are only just emerging in New Zealand, the highest profile so far being Auckland City Council's oversubscribed $350 million issue to raise capital for electric trains and cycle ways in 2018 and 2019. That's a decent chunk of money for our trains and bikes. More active green finance includes funds that seek out projects that specifically reduce emissions. This requires a level of specialist expertise that most New Zealand fund managers don't have in-house.

This was part of my reasoning in setting up Green Investment Finance Ltd, a publicly-owned but fully commercial specialist fund with the explicit objective of shifting capital towards the low-carbon economy of the future.

Green Investment Finance will act as a kind of icebreaker on behalf of the private sector funds. At $100 million, it's too small to change the world by itself and so needs to "crowd-in" private finance.

That's a growing field too, particularly with a new wave of ethical KiwiSaver funds on the scene. Some of these are a direct response to Mindful Money — an NZ non-profit service, which helps investors find low-emissions investment options, including for KiwiSaver.

We've also got the Climate Leaders Coalition — a New Zealand private sector group that is working to reduce emissions, including public disclosure of climate related risks.

The Climate Leaders Coalition is a group of about 130 companies that covers a quarter of private sector GDP and 60 per cent of New Zealand's total greenhouse gas emissions profile.

This represents incredible leverage for the transition to the low-carbon economy. As the group develops, its members should be able to offer an enormous array of opportunities for green investors to participate in.

Another group, the Sustainable Finance Forum, aims to develop a roadmap for sustainable finance in New Zealand and has an interim report due imminently.

There's a lot more to do, but globally and here in New Zealand, in private enterprise and in central and local government, we are starting to shift our economy, and society, to a brighter, kinder, more sustainable future.

• James Shaw is Associate Minister of Finance and Minister of Climate Change

Read the Sustainable Finance Report here.