Moving towards more sustainable financial practices is a goal shared by many. But there is little co-ordination at a global level, and policy approaches vary significantly between countries. OMFIF’s Sustainable Finance Policy Tracker aims to help navigate this complex space, highlighting developments in 14 policy areas including financial supervision, net zero strategies and green bond issuance. In our latest quarterly update, we expanded the coverage to 23 jurisdictions: all G20 countries plus Hong Kong, Singapore and European Union-wide policies.
While a lot of ink has been spilled over central banks’ fight against inflation, one development that may have slipped under the radar is progress with climate stress testing. In the past quarter, both the European Central Bank and the Bank of England undertook major exercises to judge the preparedness (and vulnerability) of their financial sectors to climate risk.
These tests varied in size and design. The ECB adopted a thorough bottom-up approach, including qualitative assessments on governance and risk management. The BoE’s Climate Biennial Exploratory Scenario, inclusive of major insurers, featured broader coverage in their climate stress test, though evaluated over a narrower set of climate scenarios. These differences can be seen in the tracker’s new country directory tool (Figure 1).
Figure 1. Sustainable Finance Policy Tracker features new country directory tool
Data availability is a key hurdle in both climate stress tests. In an OMFIF podcast, Christoffer Kok, head of the stress test modelling division of the ECB’s directorate general for macroprudential policy and financial stability, mentioned the lack of data on Scope 3 emissions (those indirectly linked to organisations within their value chain). Data shortfalls more broadly was identified as a challenge in the CBES report. While these climate stress tests complement existing efforts in financial regulation, there is work to be done to address data gaps ahead of banks’ own exercises.
Green, social and sustainability-linked bonds have not been immune from the recent global financial market turmoil. In their latest quarterly ESG Finance Report, the Association for Financial Markets in Europe noted that European sovereigns put the brakes on headline GSS bond issues earlier this year. This was partly linked to the winding down of the Support to mitigate Unemployment Risks in an Emergency social bonds programme – the European Commission’s €100bn pandemic-targeted employment support. However, AFME revealed a Q2 rally in sovereign and supranational issuances in the green bond market. The market share of environmental, social and governance-linked bonds as a share of total European bond issuance was 19.1% in the first half of this year, a whisker away from 19.5% in 2021.
The borrowing framework on which these amounts were raised – Next Generation EU – was highlighted by a July conference convened by OMFIF and the European Commission in Singapore. As the successor to SURE, NGEU will disburse $800bn, targeting sustainable assets and digitalisation as the principal vehicles of economic recovery. Of this endowment, 30% (€250bn) is scheduled to be deployed in the form of green bonds, promising to make the EU the world’s largest primary issuer. To date, around €28bn of this allocation has been disbursed, all documented under the tracker’s sovereign sustainable bonds category.
There have been other innovations in this area at a country level. The French authorities became the first sovereign to issue an inflation-linked green bond, to the tune of €4bn. Others may follow suit, particularly if high inflation persists, to entice investors into ESG investments while providing some protection against broader macroeconomic pressures.
Elsewhere, sovereign issuers in Asia have diversified their investor base by offering retail investors access to the green bond market. Hong Kong’s inaugural issue of HK$20bn ($2.5bn), under its wider Government Green Bond Programme, was oversubscribed by more than 60%. Shortly after the publication of this latest quarterly update, Singapore issued its inaugural green bond, which included a more moderate S$50m ($36m) retail allocation.
In the run-up to COP27 in Egypt in November, sustainability is bound to rise further up the capital market development agenda. Be sure to follow latest developments in our Sustainable Finance Policy Tracker over the coming quarters.
Edward Maling is Research Assistant and Nikhil Sanghani is Managing Director of Research at OMFIF.