But there are also potential indirect benefits for their national economies: establishing a ‘green risk free curve’ for private issuers to use as a benchmark for green pricing; setting conventions for issuance, including definitions of acceptably green projects or climate goals; providing assets for hedging and collateralising borrowing; and encouraging the development of climate finance expertise in the local financial services community, driving wider product innovation. The issuance of corporate green bonds in the Netherlands, for example, picked up materially after the Dutch government issued a SGB in 2018 (Chart 13). Building block 3: asset allocation strategies However rapid the progress in climate-related disclosures and financing vehicles on the issuer side of the equation, it has been totally eclipsed by the explosion in interest on the investor side. Gripped by an increasing awareness of the scale of the climate challenge, and the impact of past and expected future policy change, investors are demanding, ever more loudly, that those in charge of their savings demonstrate that they can measure, and direct, their investments in ways that are sensitive to the climate impact of those flows. Asset managers have launched an ever-increasing range of ‘climate aware’ funds in recent years (Chart 14), and invested heavily in internal expertise, building systems, and hiring in specialists (or buying their firms outright).36 The consequent shift in assets under management towards funds with higher sustainability ratings, and away from those with lower ratings, is striking (Chart 15).
This analysis draws out an interesting interaction between the quality of climate disclosures, the structure of the asset management industry and the scope for rapid growth in the role of capital markets in climate investment. Poor disclosures force investors either to form crude portfolios – which cannot send particular finely graduated price signals – or to seek active management – which, being costly, is not available to all. Neither is ideal. It is only when disclosures have reached true maturity that the full panoply of modern asset allocation techniques can be brought to bear. That underscores just how vital it is to make progress on disclosures. There are as yet few comprehensive studies of the relative performance of current strategies. Indeed, there is a genuine question about how such performance should be measured, given that one motivation for investing in climate-based funds is the desire to generate a measurable beneficial environmental impact alongside a financial return – so-called ‘impact investing’. There has been a long and lively debate about whether achieving this requires a willingness to sacrifice financial gain. Some funds explicitly recognise this possibility in their construction, for example granting explicit concessionary rates to climate-positive projects. But others dispute the existence of such a tradeoff, noting the range of non-financial tools such as investor engagement that can act as ways to achieve impact.