Green Finance: Success lies in focusing on the day-to-day
Sustainability is sweeping investment and banking decision-making in an extraordinary way as we learn how to incorporate risk into our business models and devise products that meet those goals. Tesco has now launched one of the first sustainability linked bonds, where the cost of the loan diminishes as sustainability targets are met. It aims to encourage the bond holders to both buy and participate in Tesco’s net journey to zero, and also for the company to demonstrate that it’s serious about reaching net zero.
The challenge – and the opportunity – lies in finding products that make sense commercially while also meeting sustainability goals. For the Tesco bond, the only reduction of yield is whether sustainability targets are met, and they’re still probably happy with the yield they’re getting because they've met the sustainability target, so everybody wins.
This is the point about sustainable finance: it’s got to be win-win. The environmental movement has moved out of the hands of environmentalists and into the hands of companies and bankers and governments. It’s commercial thinking that’s driving it, even more than environmentalist thinking. Of course, we want a sustainable future, but it has to be one that makes sense commercially.
I sit on the judging panel for the Chartered Banker Institute’s Young Banker of the Year competition, and what I love about the ideas that the participants come up with is that it’s not about capital markets and big bond stuff. On the whole, it’s about day-to-day, practical retail.
It’s about investment products for me, as a person; my pension fund for example, rather than whether I’m a big institution investing a hundred million dollars in a new bond. That focus on the day-to-day banking is where a lot of the challenges lie, and it’s one of the things we’re thinking hard about in the Green Finance Institute. And I have no interest in a pension that doesn’t perform.
How do you persuade people to convert their gas boiler to advance air exchange or heat exchange, for example, or be part of a community digital heating scheme? There are 26 million gas boilers in the UK and we want to change every one of those. How do you persuade individuals to do it?
It’s about really digging down into these kind of issues. What’s the financial scheme that will help persuade people to exchange their current gas boiler when it’s renewed over the next five or 10 years? Does it need government incentive? What would the bank need to make that loan secure and what would that product look like?
These are the kind of day-to-day issues that we need solutions to – and that, taken together, would have a terrific impact on creating a more sustainable future.
Read more from Sir Roger Gifford in our Young Banker of the Year article on pages 56-58 of the Spring 2021 issue of Chartered Banker magazine.