Debt capital markets can do more to prevent climate catastrophe and nature loss

Posted on September, 30 2021

  • In spite of rapid growth in green bonds over the last 10 years, poised to reach US$2 trillion in value before the end of this year, the broader contribution of debt capital markets in mitigating climate change remains unclear. 
  • WWF’s report provides four scenarios on how debt capital markets can be transformed to harness the world’s largest and deepest finance pool for reducing carbon emissions and reversing nature loss.  
  • WWF offers a ‘More-Harm-Than-Good-Indicator’ to shed light on both the good and the bad practices in the debt capital market to spur competition among leaders in the financial services industry.   

A new WWF report ‘Can debt capital markets save the planet?’ published today (September 30, 2021) reveals that while large international banks make ‘zero carbon’ pledges, their investment banking arms often continue with a business as usual approach, ignoring the environmental impacts of most of the bond deals they arrange or underwrite.

While the growth in green and sustainable bond instruments is welcome, as a whole, global debt capital markets currently finance more harm than good to climate and nature. Transforming the world’s largest capital pool, with around US$1 trillion changing hands every day, must be a priority for the financial sector if the markets are to support a just transition to a carbon neutral, nature positive economy.

Despite the transparency advances in the green bond market, the report highlights that the vast majority of bonds traded on debt capital markets still provide very little, if any, information on their environmental impacts, with only 10% of global bond issuances in 2021 showing specific labelling of their environmental, social or sustainability benefits.

With impact at the core, the report asks what if those vested in debt capital markets – governments, central bankers, investor coalitions and investment bankers – took bold action to step away from a business-as-usual approach and embrace a net-zero, nature-positive economic transition. What if they ensured that financial flows support activities that preserve, restore and protect the planet and the vital services it provides to people and our economies?

Margaret Kuhlow, WWF Finance Practice Leader, said: “The science tells us we need to change and we need to change now if we are to avoid the worst impacts of a warming world. Debt capital markets have the potential to mobilise all the finance we need to meet the Paris Climate Agreement target of limiting warming to less than 1.5°C. Financial institutions will have to play their part if we are to tackle climate change in this decade.”

The report lays out the progress made in the last five years in the labelling, definitions, measurement metrics, and issuance of sustainable and green bonds, and emphasizes that those behind these transactions, including market practitioners, financial regulators, supervisors, and central bankers, must build stronger incentives to rapidly reduce financing of significant environmental harm and increase green capital raising efforts.

The report also highlights that in the past five years the top 30 investment banks, which play a pivotal role in raising and distributing capital, have facilitated almost US$3.6 trillion in environmentally-harmful fossil fuel debt, earning fees totaling almost twice the amount generated from arranging or underwriting green transactions.

Jochen Krimphoff, WWF initiative lead, sustainable bond markets said: “We need debt capital markets to be net-zero carbon and nature-positive. Investment bankers still underwrite far too many fossil fuel deals. They need to take into account the environmental impact of every single deal they are involved in, not only those labelled as ‘green’.

Investment banks must stop doing more harm than good by the end of 2021, and commit to become net-zero, nature positive by 2025. And deliver on these commitments. Central banks, regulators and supervisors of debt capital markets must support this trend, listen to the scientific evidence, recognise the link between climate risk and financial stability, and respond as quickly as they have with COVID-19.” 

To provide investors with a clearer picture of where and how debt capital markets significantly harm global environmental objectives, and building on the traditional Fixed-income League Tables that quarterly rank underwriters of global bonds, WWF has created the ‘More-Harm-Than-Good-Indicator’, which compares the volume of capital arranged or underwritten that is fossil-fuel-related against the volume which is labelled as green. The Indicator reveals that the largest players in the underwriting business tend to be laggards, in financing or underwriting projects that reduce carbon emissions.

More Information

The report lays out the progress made in the last five years in the labelling, definitions, impact reporting, and issuance of sustainable and green bonds. It reveals that rapid change is already happening in the debt capital markets. Building on what we have seen in recent years, WWF has identified Rapid Change Levers for key actors to pull. 

More specifically, the report also paints four rapid-change scenarios for leveraging debt instruments to address global environmental challenges during this critical make-or-break decade to 2030. The four rapid-change scenarios are:
  • Encyclopaedia – Governments and regulators strengthen financial regulation and work in a coordinated effort to develop a global common language, standardising definitions and taxonomies for sustainable-labelled and green bonds.
  • Science-based Central Banking – Central bankers recognise the impacts of environmental degradation on their economies and the urgency to act in mitigation of these effects through a conscious shift in policy, driven by climate science.
  • Investor Pull – Through co-ordinated efforts driven by investor coalitions, a shift away from environmentally harmful debt capital instruments into green debt instruments that fulfil the criteria of best practise green bond standards.
  • Unveiling – Radical transparency in reporting, enabled by innovation, technology and big-data, enables retail investors to make informed decisions as they seek out responsible investments with environmental stewardship as the core value.
Disastrous climate change and the alarming degradation of biodiversity and ecosystems need to be addressed urgently. Global debt capital markets can and must leverage their power to address the environmental challenges of our generation within this critical ‘make-or-break’ decade to 2030. 

According to the Global Commission on the Economy and Climate, US$90 trillion of investments in infrastructure are expected by 2030 and if such infrastructure is sustainable, those investments could yield economic benefits of up to US$26 trillion vs. a business as usual scenario. These numbers show that the opportunity is there for debt capital markets to radically transform.