Sustainable finance has been a key financial trend this decade. In particular, many investors have become increasingly interested in sustainable clean energy. Given the climate change backdrop of the world currently, this is understandable.
However, there are a number of challenges that accompany sustainable clean energy investments. In this article, we will be discussing these challenges and how they can be mitigated.
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Lack of Standardization in ESG Data
One of the primary issues clients face when making sustainable clean energy investments is navigating through the myriad of differing ESG data utilized by companies. Over the past couple of years, the sustainable finance market has been dominated by a lack of standardization and uniformity with ESG data and disclosure.
In essence, ESG disclosure by companies has been on a voluntary basis. However, this also means ESG reports from various companies aren’t comparable as they employ different standards. Furthermore, this situation casts a shadow on the reliability of ESG reporting since there is no regulation to check inaccurate or misleading data.
Thankfully, it appears that the world is making progress with regard to the standardization of ESG. The formation of the International Sustainable Standards Board (ISSB) is evidence of this. In addition, there have been legislative and regulatory efforts in the US and Europe to standardize ESG reporting.
There has been an increased politicization of sustainable energy-related projects in various countries. This could be in various forms, such as a volatile regulatory environment with governments worldwide changing their climate change mitigation targets, as well as public skepticism regarding sustainable energy projects that might impact government behavior.
These are all factors that could have a significant effect on the financial returns of sustainable clean energy investments. Since these investments might be levered through various loans such as home equity loans, balance transfer loans, and other personal loans, investors desire significant profits. Thus, investors increasingly have to evaluate and navigate the nuances of these political risks during investment decision-making.
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The sustainable finance market has undoubtedly developed significantly over the past decade. The first green bond was launched in 2008, and since then, the green bond market has grown significantly. Similarly, the annual issuance of labeled green bonds has been on the rise. On the equity side, we are also seeing a lot of climate-aligned stocks.
However, despite this apparent growth, the sustainable finance market has been bedeviled by liquidity issues which remain a primary concern for investors. This shows how shallow the market still is, constituting a challenge for investors, especially institutional ones.
Nevertheless, the sustainable finance market looks positioned for a strong growth trajectory in the future. In essence, liquidity concerns should become less prominent.
For the most part, investors in sustainable clean energy prioritize their values while investing. The practice of greenwashing, however, has the effect of misleading such conscious investors. Greenwashing could come in the form of companies promoting their business and activities as environmentally sustainable when they are, in fact, not. Similarly, greenwashing occurs when the green credentials of certain financial products are exaggerated in their contribution to positive environmental outcomes.
This is a problem for both retail and institutional investors. For instance, an investment in an ESG ETF may turn out to be an investment in a regular ETF that was simply branded as ESG-compliant. In addition, since there is no legal definition for the term ‘green bonds,’ some bonds that are more or less regular bonds can be inaccurately represented as being environmentally sustainable.
Of course, this is a problem that can be resolved by having a globally uniform taxonomy that properly classifies financial products with respect to their sustainability. Similarly, the move towards standard ESG reporting should help mitigate this issue.
Sustainable clean energy investments are a critical part of the global movement towards a more environmentally sustainable world. This is why it is crucial for relevant stakeholders around the world to take proactive measures to stem the challenges that generally discourage these investments.