INSIGHT: the State of Sustainable Finance

How far have we come, and what more needs to be done? Michael Eckhart shares his reflections based on a career working in sustainable finance.

If one joined this community in the past four years, since the time of the UN's adoption of the Sustainable Development Goals (SDGs) and negotiation of the Paris Climate Agreement, both in late-2015, many would say that we are in a state of chaos with a rush of attention from all corners, overcrowding of players, over-establishment of new groups seeking leadership positions, underachievement of concrete results, and repeat of the same speech – in summary, the SDGs and climate change represent enormous challenges that will require concerted efforts by public and private sectors, the magnitude of funding and investment far exceeds what the public sector can provide, so we must engage the approximately $250 trillion of capital under management by institutional investors in the debt capital markets, equity capital markets, and banks.

One of the reasons I am positive about the current state of affairs is because I joined the situation in the 1970s, doing new energy technology studies for President Jimmy Carter. In the US, the Clean Air Act and Clean Water Act were only a few years old. The US Environmental Protection Agency, established in 1970, was just getting its legs. The US Department of Energy was still a year from being formed. Similar activities were taking place in Europe, Japan and elsewhere. But in terms of "sustainable finance" we were at ground zero.

Rachel Carson's now-famous book Silent Spring was not yet a best seller. Bill McDonough had not yet written Cradle to Cradle. The UNFCCC had not been formed.

Our thoughts have been forming over these years.

The world has come a long way in the past nearly 50 years, towards massively increased funding by governments of environmental and social challenges, and financing by Multilateral Development Banks (MDBs) and other Development Finance Institutions (DFIs), now of the order of $50 billion/year. And already, the world is investing in and financing clean energy at a level of approximately $300 billion/year, according to BNEF.

We have a base to work from, many successes to replicate, many lessons learned, and a tremendous talent pool going after it.

The seeming chaos we see in sustainable finance today reminds me of Silicon Valley in the 1980s after the microprocessor was invented by Intel in 1972, Apple emerged with the Apple II in 1978, and Microsoft introduced MS-DOS. There was a rush of inventors, programmers and venture capitalists in Silicon Valley, all rushing towards success. It was a period of chaos.

With this as an analogy, the rush we see in sustainable finance is that same kind of human energy seeking to win an important race, this time in the realm of social entrepreneurship, creating organisations that will address and overcome the great SDG challenges, and organisations that will stem climate change, one action at a time. They will get funding, raise and deploy capital, make a profit, raise more capital, and do it again.

Chaos is the front-end part of a process towards success. The winners will emerge and attract funds and the best human resources. Others will fold tents and join the winners.

A key to the resolution of the chaos and scaling-up is the adoption of rules of the road, such as the Feed-In Tariff in 1998-2004, Renewable Portfolio Standards in 1999-2009, the Green Bond Principles in 2014, and the SDGs and Paris Agreement in 2015. These are creating future highways of capital.

Think of these rules for capital to flow as being like digging canals for water to flow. We in sustainable finance are in the business of digging new canals.

This has been going on for some time. It was at the Bonn 2004 Renewables conference – the first global meeting of government, business, finance and civil society on the sole topic of renewable energy – that we conceived of the International Renewable Energy Agency (IRENA), the Renewable Energy Network for the 21st Century (REN 21), and voluntary national Action Plans (that later became the basis for the Paris Agreement).

Now, we must establish similar organisations, guidelines and mechanisms for the other aspects of climate change – buildings, transportation, agriculture, and oceans, all plus adaptation. We must turn issues into revenue-producing businesses that can be financed with the $250 trillion mentioned before. We must do the same with each of the SDGs.

We need to create investable businesses out of social issues, as we did with clean energy, which can serve as a conceptual model or example, as it was a conscious and somewhat coordinated effort by hundreds of people over a period of 20+ years, as illustrated by the continual effort:

  • 1975: US formation of the Energy Research & Development Administration

  • 1977: US formation of the Department of Energy (DOE)

  • 1978: US Public Utilities Regulatory Policy Act (PURPA)

  • 1992: US Production Tax Credit (PTC)

  • 1995: Danish wind power initiative

  • 1996: Japanese Sunlight programme for solar PV

  • 1998: German Feed-In Tariff

  • 1999: Beginning of state-level Renewable Portfolio Standards (RPS)

  • 2001: Founding of American Council On Renewable Energy (ACORE)

  • 2002: Founding of the European Renewable Energy Council (EREC)

  • 2003: Founding of the Chinese Renewable Energy Industry Association (CREIA)

  • 2004: Bonn Renewables 2004 Conference

  • 2005: US biofuels incentives

  • 2006: Chinese Renewable Energy Law based on PURPA and the FIT

  • 2008: US Investment Tax Credit for solar and PTC extension for wind

  • 2009: US RD&D funding, loan guarantees, and additional tax credits

  • 2014: Adoption of the Green Bond Principles (GBP)

  • 2016: India's solar initiative and UDAY recapitalisation

With this example of success on a global basis, we must take each of the SDGs and each element of climate solutions, and do the same – dig a canal to it.

One example is about the oceans. In my recent review of the investment situation for the oceans, I sadly learned that all of the capital being raised for the oceans is going for purposes that are destroying the oceans – shipping, corporate fishing, oil and gas production, undersea mining, and other industrial purposes, plus using it as a free dump for trash, garbage and plastics.

In my forthcoming book to be titled Climate Finance and published by Columbia University Press, there will be a proposal to hold a Constitutional Convention to form the oceans as a new nation, Oceana, that will govern the oceans, make and enforce laws, collect taxes and fees from those who use the oceans for economic gain, and deploy the funds for the restoration and on-going protection of the oceans.

We cannot expect to change the course of society if we do not break out of the modes that caused us to get where we are. Three famous quotes by Albert Einstein give a roadmap:

  • "Insanity Is doing the same thing over and over again and expecting different results"

  • "Imagination is more important than knowledge. For knowledge is limited to all we now know and understand, while imagination embraces the entire world, and all there ever will be to know and understand."

  • "Never give up on what you really want to do. The person with big dreams is more powerful than the one with all the facts."

We must act fast and forcefully. One indicator of the urgency of the situation is the bond market, where there is about $12 trillion/year in new issuances, mostly government bonds, but also including $1 trillion/year in investment-grade corporate bonds. We are issuing about $180 billion/year in designated green bonds – a great success – but which is only about 1.5% of new issuances.

What is the real message here? The message is that, still today, 98.5% of all bond issuances are NOT designated green. We are continuing to raise capital for climate change-inducing purposes, like we always did. This needs to change!

I conclude by saying that the state of sustainable finance is in its infancy and needs to go very quickly through growth to maturity. So, in the context, I like the chaos of the moment, a sign that serious and talented people are stepping up and rushing forward to lead.

In 2020, we need to see the new leaders taking action and raising capital. I've always said that government looks for problems to solve, while the private sector looks for successes to replicate. It is time to create and communicate about more and more successes, to create a snowball.

In summary, to build sustainable finance to its ultimate scale, we are on the right track, and must now dig canals to create a snowball.

Michael Eckhart is adjunct professor at Columbia University and a founding member of the Blended Finance Taskforce. He was formerly a managing director and global head of environmental finance at Citigroup, and was previously founding President of the American Council On Renewable Energy (ACORE). He is one of the founding authors of the Green Bond Principles.