Decades of finance research has focused on “shareholders’ supremacy” ignoring other stakeholders (employees, customers, suppliers, communities) as well as the environment that ultimately has an impact on the stakeholders. This ignorance has been acknowledged by the Business Roundtable by leading US chief executives in August 2019.  Although shareholders’ supremacy contributed a great deal toward financial instability in 2007-2008 yet it is still focus of the corporate world. Similarly in April 2021 in Royal Economics Society Conference Past President’s Address, Prof Nicholas Stern, the author of the landmark review on the Economics of Climate Change, emphasised the need for a time for action on climate change and a time for change in economics. Specifically for the financial institutions, the University of Cambridge Institute for Sustainability Leadership’s (CISL) Banking Environment Initiative (BEI) highlights the need for financial institutions to institutionalise sustainability throughout their organisations in their Bank 2030 report.

Because of the shareholders’ supremacy approach, most of the policy attention has been focused toward protecting the financial system from the climate change. However, not much attention has been paid toward protecting the climate from the risks posed by finance and financial institutions. This is not aligned with the transition to net zero for finance. For a transition to net zero, financial institutions need to reduce carbon emissions from their own operations known as Scope 1 and 2 emissions, from indirect emissions known as Scope 3 emissions and from the new green products and services for their customers. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed. Scope 3 includes all other indirect emissions that occur in a value chain.

Financial institutions perform an important function of providing finance to firms and households that keep an economy of a country going. A comparison of global green lending versus global non-green lending reveals that the precent of global corporate green loans and ESG-linked (ESG stands for Environment, Social and Corporate Governance) loans is 4.3% compared to the total corporate loans. Of these 4.3%, green loans constitute 1.5% and ESG-linked loans constitute 2.8% of total corporate loans. Although the share of green and ESG-linked loans is small yet it has shown a phenomenal growth from 2015 when the share of green and ESG-linked loans was only 0.01%. The figure 1 below shows the percentage of green and ESG-linked loans as a percent of total corporate loans. Green loans are the ones that finance environmentally and socially conscious projects and ESG-linked loans are the ones that are linked to ESG performance.


Figure 1: This figure shows the percent of green and ESG-linked corporate loans to total corporate loans. The numbers on the y-axis are in percent. Source: Bloomberg


The percentage of green and ESG-linked loans are slightly higher in the UK compared to the total corporate loan issuance. However, there is one exceptional year, year 2020, when about 40% of loan issuance was of green loans. This is because of one big project finance in the financial sector in the UK. In 2021, the green loans are 4% while ESG-linked loans are 10% of the total corporate loan issuance in the UK.


Figure 2: This figure shows the percent of green and ESG-linked corporate loans to total corporate loans in the UK. The numbers on the y-axis are in percent. Source: Bloomberg. Source: Bloomberg


The corporate green bond market is tiny compared to the green loan market. The issuance of corporate green bonds is estimated to be about $500 billion as of December 2021, which is a tiny fraction (0.8% only) of the total corporate bonds market, which is estimated to be about $128 trillion globally.

With regards to public finance and the UK government initiatives to achieve net zero by 2050, the UK Debt Management Office has issued only two Green Gilts and one three-year fixed rate National Savings and Investments Green Savings Bonds to fund green infrastructure projects. This is part of government’s initiative to help finance the transition to a green economy, tackling environmental challenges and creating green jobs across the UK. The government is intending to green financial system in three phases of informing, acting and shifting. Currently it is in the first phase of informing. As of now, there is no government data available to track financing to the SME sector as 60% of private-sector jobs come from the SMEs in the UK. However, they constitute only 2-5% of total bank lending. In the document ‘road to sustainable investing’, the UK government is in the planning phase to collect green and ESG data.

Overall, the steps are being taken in the right direction toward greening finance and financing green by the government, corporations and financial institutions yet there is a need to step up the process to meet net zero target by 2050. This could potentially be done through introducing targeted green lending schemes, decarbonising bond purchases and introducing Basel type green capital and systemic risk regulations.