Sustainable finance. Is this transformational or green wash?

The 2016 Kaikoura earthquake was devastating for Wellington’s CentrePort. Staff jolted awake just after midnight by serious shaking got to the wharf to find liquefaction, subsidence, stacks of containers toppled, and the massive cranes which loaded and unloaded the ships jolted off their rails.

It took 10 months of emergency repairs just to get the container terminal operational again. But as board and senior management looked at the longer-term rebuild plan, it made another decision. It wasn’t going to go back to business as usual; it was going to use the disaster-induced regeneration to also get its carbon emissions down.

Still, as Nikki Mandow discovered when she went to CentrePort for this podcast, going green meant more time investigating the options, a longer period of adjustment to new technology and importantly, more money upfront. Sometimes much more money.

For example, installing longer-lasting, more efficient LED lights at the port probably cost twice as much as sticking with halogen lights, CentrePort CEO Anthony Delaney tells her.

(These vehicles are sometimes called bomb carts - find out why in the podcast.)

The total cost of the bomb carts was $5.5 million - about a million more than it would have been to get the diesel-powered versions, Delaney says. Plus sticking with diesel would have been just so much easier.

CentrePort investigated various funding options for its emissions-reduction projects and eventually decided to go down the sustainable finance route - targeted funding increasingly available from banks and investment funds for projects with environmental or (less often) social goals.

In CentrePort’s case it was a $15 million loan from New Zealand Green Investment Finance, the Government sustainable investment fund.

“We wanted to create a bucket of money where emission reduction project A, B, C, D and E competed against each other, for money targeted solely for that,” Delaney says.

“So we've created a culture of people motivated to go and find out how to do the right thing. And then we've created the financial mechanism for the funds to be available to back that up, rather than all our funds just being dedicated to projects that generate a higher commercial return.”

There is no shortage of green funding around the world. These days, every Tom Dick and Harry investment fund wants to be seen as having clean, green, sustainable and ethical targets - ‘ESG’ as they are known, referring to ‘environmental, social and government’ goals.

Meanwhile there are a myriad of products out there - green bonds, green mutual funds, sustainable equity financing, carbon credits, ESG derivatives, and so much more.

According to Reuters, around one trillion NZ dollars-worth of investment funds flowed into global environment, social and governance funds in 2021, up 20 percent on the year before.

Bloomberg estimated total ESG assets could exceed US$41 trillion (NZ$ 65 trillion) this year and $US50 trillion ($US80 trillion) by 2025.

“I think it's something like a third of the global capital system has now set net zero targets,” Pip Best, a partner in EY New Zealand’s climate change and sustainability services team, tells Nikki Mandow in the podcast.

“And so that means regardless of government policy in any country, these big investors have signed up to net zero commitments. They say their investment activities, both equity and debt, will be net zero by 2050.

“And they're going to start measuring every year and reporting on progress towards it and set short term targets associated with that.”

This is important, Best says, because the finance sector lends money to the rest of the economy so if you help the financial sector decarbonise, that means the rest of the economy decarbonises as well.

“Five years ago, it may have been that a bank, or any other financial company was reducing its own emissions. But that’s meaningless, compared to where that bank or finance company’s money goes - what its money actually does or results in.

“As our understanding around climate change improves, we would no longer accept that a bank was saying it was net zero if it was only talking about the electricity that powered its computers. It's now about what its lending and investment activities do.”

So banks and finance companies vying with each other to be cleaner and greener is fantastic; it is also highly problematic, as we discuss in the podcast.
The more green finance, the more green washing.

As Tariq Fancy, a former top level investment banker and private equity professional, told the BBC recently: “There has been very little regulation around what you call a sustainable fund. Companies realise you can call a fund ‘green’ and all you need to do is tilt your allocations, so you own a little bit more of tech companies, a bit less of fossil fuels majors and you are able to sell that as a green product... Find a way to paint yourselves green.”

Some of this greenwashing is deliberate misrepresentation, as US news website Quartz wrote recently in an article which began: “The greenwash police are racing to Wall Street, sirens ablaze”.

The article describes a series of raids and investigations by regulators into big (really big) banks and fund managers, and a number of sizeable fines.

But sometimes greenwashing isn’t deliberate: sometimes problems arise because there is a lack of consensus - let alone regulation - around what “sustainable” means.

One person’s views on ‘sustainable’ might be quite different to another’s.

So, for example, Tesla - which has done more than any other corporate to promote electric vehicle sales - has recently being dropped from a major index of companies with top environmental, social and governance ratings. Oil companies remained on the list.

Tesla was pinged because while its green credentials are sound, it’s under the gun for workplace issues, alleged racism against black workers, and lack of diversity on its board.

Closer to home Greenwashing is not just an ‘elsewhere’ problem, as New Zealand’s Barry Coates from non-for-profit Mindful Money explains in the podcast.

“Greenwashing is basically where fund providers or companies are pretending to be more ethical than they actually are. Greenwashing is a form of exaggeration, it's a form of misleading advertising, it's a form of misrepresentation.

“And it's often just because it's not backed up by any evidence. Mindful Money does annual surveys which show more than half of the New Zealand public think there is extensive greenwashing with regard to investment funds, and I believe they're right. The Financial Markets Authority did a report on the issue at the end of July.

“They looked for evidence to see whether the statements around ethically responsible investing were backed up by evidence, and they found in almost every case there was not enough evidence to back up the statements.”

It’s complicated, as we explain in the podcast.

We also look at the history of sustainable finance, including a pivotal moment - the 2015 “Tragedy on the Horizon” speech by then Bank of England Governor Mark Carney.

And we explain why, despite its flaws, the role of green finance - banks and fund managers, including KiwiSaver funds - is more important than any other sector, including Government, in terms of meeting our 2050 greenhouse gas emissions goals.

Listen to this podcast (link above) and to the others in the series.