“The fight against climate change is a combination of a sprint, a middle-distance run and a marathon,” Lord Stern, independent climate advisor to NatWest Group since 2020, emphasised during a NatWest event for SSA ESG Issuers and Investors about the global drive towards decarbonisation and climate finance. 

Lord Stern, who is the Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, stressed that the next few years are “absolutely critical”, with the period between 2030-2040 “shaping what we can do by 2050” – the year when the world is to become net-zero. 

While pointing to “the deeply worrying fact that, with current policies, we are heading to a rise of global temperatures of the order of 2.5-3.0°C; with potentially devastating consequences,” the climate expert brought the positives into focus: tackling climate change will save the lives of millions of people (currently 5-10 million people globally are estimated to die due to air pollution each year), tremendous progress in climate technologies means that “clean is often already cheaper than the dirty”, and “tackling climate change will significantly boost growth”. 

Summarising the finding of his work as Co-Chair of the Independent High-Level Expert Group on Climate Finance, Lord Stern outlined the scale of investment required: G7 countries will have to invest an additional 2-3% of their GDP per year to tackle climate change, while developing countries’ total annual investment will have to increase to $2.4 trillion by 2030, of which $1 trillion has to come from external sources, mainly development banks and the private sector. Directly addressing the guests at the event, Lord Stern said: “To generate investments of this size, favourable conditions for investments need to be created. However, this can’t be delivered solely by the Treasury. It is your job to help them. This is a moment where the roles will be shaped, the game is determined – and your role is absolutely vital.” 

Addressing the varied pace of decarbonisation across the world – with China moving very fast, investing 150-200GW a year in Renewables (while the UK total power capacity, all sources, is approximately 80GW), and the US government having delivered a game changer for clean energy with the IRA – Lord Stern reminded the participants that UK investments should not only focus on “what we might be good at such as wind power, carbon capture and storage, sustainable finance, and AI”, but should also be channelled into funding “simple things” such as insulating homes, domestic electrification, and clean transport. 

Two workshops on “Regulation and Policies” and “Rates Strategy” hosted by NatWest, and 88 meetings between SSA issuers, investors, and other market players brought several key themes to light. These included: 

• The increasing sophistication in analysing the ESG profile of sovereign issuers: rather than only looking at labelled bonds, investors are further developing their scorecards to assess ESG at the sovereign level. In this context, investors flagged the need for more forward-looking data with enhanced granularity, while being centralised to allow for benchmarking across sovereigns. 
• Investor focus and priorities differ, reaching from net-zero targets and agenda, exclusion criteria, focus on R&D ‘use of proceeds’ and demand for clarity on criteria around proceeds going into “research” to a focus on a “just” transition and a critical assessment of how sovereigns help developing countries with funding for climate projects. 
• Issuers and investors want to see a swift implementation of the EU Green Bond Standard, however, the majority expects considerable hurdles.
• ESG integration is on the rise: while historically driven by asset managers and asset owners, bank treasuries and even some selected hedge funds are now introducing ESG integration for their investments. 
• Investors show willingness for further currency diversification towards EUR and GBP for traditional EUR issuers in the labelled bonds market: while GBP is currently under-represented as a currency, investor feedback points to demand in this space, especially in shorter maturities (up to 10 years). Similarly, there was interest for short dated GSS issuance from new money market funds – either as new GSS issues, private placements or taps to meet dedicated short-term mandates
• Some contrarian views around Green Bond issuances in the SSA market are emerging: Investors argue that the issuer level supersedes the Green Bond issuance and also point to others flaws, such as:
  • a lack of segregation of green cash flows,
  • the pari passu nature of the Green Bond – hence not mitigating credit risk, 
  • a lack of clarity around how the greenium is spent on green expenditures, and
  • the lack of a legal commitment in the documentation to deploy funding towards green assets. 

Hosting the event, Jonathan Peberdy, NatWest’s Head of Capital Markets, commented: “Tackling climate change is one of the biggest growth and investment stories we have ever seen, with both the environment and our society benefitting. At NatWest we are committed to play a proactive role by providing climate and ESG financing for a just transition to net-zero, and today’s event is testament that issuers, investors and the financial services industry are willing to collaborate closely to advance the sustainable finance market and supply crucial funding. As such, we are absolutely delighted to have been able to provide a platform for many fruitful meetings between SSA issuers and investors.”