Capital inflow to green finance continues to rise, belying certain concerns that this area has suffered a poor image in recent years.

The following article is by Jon Duncan (main picture), chief impact officer at REYL Intesa Sanpaolo. He talks about ESG and green investing ideas having fallen out of favour in terms of their image, but investment flows suggest that these themes have traction. The editors of this news service are pleased to share these ideas. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The topic of sustainability is broad, complex, and subject to changing political sentiment, as demonstrated by the recent Building Bridges event in Geneva. Take, for example, the arms industry whose contribution to societal stability and sustainability is now being re-evaluated in the context of current global conflicts. At the event, Swiss Federal Councillor, Martin Pfister, provided a strong reminder in his opening address that, “Sustainability leads to resilience. Resilience leads to security. Security leads to prosperity.” 

Social security standing as a pre-condition for sustainability was a timely reminder of how the fragmentation of global politics has destabilised sustainability investments in recent times.

Indeed, former US Secretary of State, John Kerry, recently provided a candid take on the negative sentiment surrounding sustainability in the US when he said that ESG had lost the PR battle. A recent Morningstar report confirmed the sentiment with the region’s ESG funds having suffered 11 quarters of back-to-back outflows. 

However, what really matters from a global climate perspective, are decisions made elsewhere, other than the US in the coming years.

Red-Green – the new global hegemony?
It is no secret that China alone emits one third of all current global emissions annually – yet its emission intensity per capita is low relative to Western levels. Energy system decarbonisation through electro-tech is a Chinese national security priority and regarded as a pathway to long-term energy independence. Over the past decade, fossil fuels, as a percentage of total energy consumption in China, have plateaued, and electricity, as a share of final energy consumed, has increased. Wind, solar and other clean sources now make up a material and growing portion of China’s annual electricity generation. 

Over the past decade, China has quietly dominated the area of “rare earth” minerals and green technology. Less well known is their dominance in the field of nuclear, key to their plans to electrify the nation with low carbon electricity. China will increase baseload nuclear from current 5 per cent levels to 20 per cent by 2060. 

Expected annual permitting rate is around 10 units per year facilitated by harmonised standards. China, which has the nuclear build rate globally with 28 reactors under construction, has reduced build times to around seven years, supported by a local technology supply chain.

As the US distances itself from the “great climate con job,” President Xi will use this as a moment to assert China’s leadership. 

Growing nature investments 
Despite the PR battle, there has been an increase in capital flows towards natural capital assets – restoration, conservation or utilisation – within non-US developed markets. Progress is being made as nature’s many goods and services are better understood through visible price points for items such as provisioning services (food, water, timber, energy), regulation services (carbon sequestration, water filtration, crop pollination), support services (nutrient recycling, soil regeneration, coastal protection) and social services (recreational, aesthetic and spiritual). 

Investment manager New Forests has been able to unlock layers of option value from their land assets as the recreational/wilderness value, wind/solar potential, carbon absorption, biodiversity and restoration value is recognised, providing useful evidence that stewardship of large-scale natural capital asset can generate appropriate risk adjusted returns for investors. 

At the same time, emerging legislation across Europe is making the concept of habitat banking more viable as countries seek to protect and enhance natural capital assets through the growth of domestic markets for biodiversity credits. In the UK, Gresham House Biodiversity Co-Invest LP invests in "habitat banks" (large areas of land restored into woodlands, wetlands and grasslands) that generate financial returns through improving baseline biodiversity.  

Debt for nature swaps have facilitated refinancing over $3 billion of government debt, reducing interest rates and increasing tenor. The savings are typically warehoused in a trust structure which disburses government-driven conservation, 25 per cent towards driving on-the-ground restoration and conservation science, and 25 per cent towards local businesses involved in natural capital activities.

For indebted nations with globally critical natural assets, such instruments can help improve sovereign short-term liquidity and longer-term macro stability – both precursors to being able to re-access the debt capital markets.

Beyond building bridges 
At COP30 in Belem, the fractious geopolitics surrounding change climate were evident. Host nation, Brazil, which can be proud of its effort to advance indigenous and nature rights, was active in launching $125 billion forever forest facility to support low-income nations to preserve their forests. 

Despite competing media narratives about global sustainability, both at COP 30 and Building Bridges, there is good evidence that capital flows to green and nature finance continue to scale as implementation skill and capacity evolves on the ground globally.