Green Finance Briefing: What to expect in 2022

What to keep an eye out for in 2022

It’s hard to be an optimist these days when it comes to climate change. As a kid growing up in Romania, I used to play in the snow over the holidays. This NYE weekend I was sporting a hoodie in the 17°C weather - felt like I was living in Spain all of a sudden.

To avoid more than 1.5°C of warming, the world has to decarbonise at 13% a year, over eight times the rate historically achieved since 2000, according to PwC. Not great.

Everybody’s got a role to play in this, including financial markets. So as we kick off 2022, let’s see what we should be keeping an eye on in the green finance space. 

1. ESG on the rise 

ESG investments are quickly being adopted across the board, turning into “must have” portfolio assets. The ESG market experienced a meteoric rise in recent years, with global sustainable investment up nearly 70% since 2014 to over $30 trillion. 

Plus, the market for ESG exchange-traded funds took in about $120 billion last year according to Bloomberg, as investors rush to get a ‘green’ sticker on their portfolios. 

There’s a lot of buzz around this asset class, but also a lot of confusion as there’s a wide spectrum of ESG criteria and investment strategies. Moreover, as social and governance factors often rely on self-reported information, it can be trickier to substantiate, so banks might choose to focus more on the environmental side of the equation. 

Another pressing issue is the lack of consensus around what constitutes ESG, who rates these assets as ESG, and who regulates the ratings agencies. There are many skeptics out there who claim that it’s just another greenwashing moment and that government regulation is needed to standardize methodologies.

Nevertheless, ESG is well positioned to be of strong interest for investors next year as well.

2. More regulation

Another key emerging trend is the growing regulatory pressure coming from government agencies. They want to incorporate climate risks into regulations, asking for stress testing from large US financial institutions to identify systemic risks that could affect the economy as a whole. 

Investment and lending practices are also coming under increased scrutiny from both the public and federal watchdogs. Bank regulatory agencies are to develop supervisory expectations around climate-related financial risks. 

However, it is complicated to measure, monitor and manage climate-related financial risks as neither regulators nor bankers have the capacity or data necessary to do this.

And as I mentioned before, the rise in greenwashing will likely result in more ESG regulation in order to standardize criteria, measurements and reporting.

3. The Build Back Better bill

US President Joe Biden’s Build Back Better package of social and environmental spending is set to pass, which includes more than $500 billion in climate investments. If enacted and implemented, it will be the biggest investment in mitigating climate change in US history.

The bill has provisions for tax credits for clean electricity generation, electric vehicles, carbon capture and sequestration, and clean hydrogen production. These tax credits are set to play a valuable role in developing the technologies necessary to reach emission targets. 

At the moment, it’s uncertain whether progress has been made with the bill, but negotiations are due to start again soon after pausing over the holidays. 

Chart of the week

Climate tech investment accounted for 14 cents of every VC dollar in 2021, according to PwC’s new report on the state of climate tech. The increased focus on ESG led to a sharp increase in climate tech investment last year, after plateauing between 2018-20.

The largest amounts of funding continue to go towards mobility and transportation areas. But in terms of growth, financial services recorded some of the highest metrics expanding over 260% year-on-year between H1 2019 and H1 2021. 

Of this category, banking (business and retail) received the most funding at $855 million, but investment banking is also growing fast and recording an increasing number of deals. 

Quote of the week

As the green finance sector is expanding, one thing to keep in mind is how we talk about innovation in the space. It’s not just about creating new technologies, but also updating old structures.

"Innovations need to overcome the hurdles of affordability, adaptability, scalability, replicability and sustainability. Any new technology or process that does not create a positive change in the lives of people does not really qualify as innovation. The Industrial Revolution 4.0 will open up new avenues for science-driven creativity and innovation. The world must resort to the ultimate renewable resource: human ingenuity and creativity."

Hans d’Orville, Special Advisor to the Director-General of UNESCO

What we’re reading

Empowering women is vital to tackling climate change (ESG Today)

From pollutant to product: the companies making stuff from CO2 (The Guardian)

The ESG market is controlled by a few big investors (Bloomberg)

Why most Scope 3 data is ill-suited to investor needs (Responsible Investor)

The centrality of ministers of finance in a changing climate (E3G) 

What we’re writing

• Tearsheet’s roundup of our biggest stories over the past year.
• The Green Finance outlook for 2022: Trends, concerns and new entrants
• Transparency and the issues around green investments, hologram NFTs, and the new greentech taxonomy