UN body urges low carbon investment in wake of coronavirus

In a working paper (20 page / 2.7MB PDF) published this month, the body assesses how the financial system reacted to the pandemic, with a focus on implications for sustainable finance markets. It has also laid out a framework for assessing what levers may exist to strengthen the role of the financial system in supporting a low-carbon recovery, and the prospective roles for the different parts of the system.

The group said over the long term, a successful recovery from the economic downturn caused by Covid-19 would be contingent on decarbonisation with immediate investments in resilience. It said policymakers should consider investments in areas such as low-carbon infrastructure and innovative technology, while reforming public welfare to strengthen social cohesion.

The working paper suggested regulators could use data on the risk performance of financial assets during the crisis period to consider a wider range of interventions to control for climate-related risks. It warned that if governments leaned too far towards the relaxation of pollution controls, or providing major stimulus to the fossil fuel sector, and disparities in regulations for traditional and low carbon assets widened, the transaction costs and compliance burdens for sustainable finance may increase.

The working paper said sustainability had been a low priority for governments imposing emergency economic measures during the coronavirus crisis so far, but noted that stimulus efforts in the coming months provided new opportunities to channel capital to the low-carbon transition.

It said environmental, social and governance (ESG) funds and indexes, as well as green bonds, had outperformed traditional investments during the crisis.

Meanwhile, the Loan Market Association (LMA) has published guidance on the Green Loan Principles (5 page / 948KB PDF) and the Sustainability Linked Loan Principles (6 page / 1.2MB PDF), which were launched in 2018 and 2019 respectively.

Both documents set out the fundamentals of borrowing sustainably, and outline the differences between the two types of debt. They outline the principles involved in green and sustainability linked loans, including reporting, documentation and review of the loans and how they should relate to a borrower’s overall sustainability strategy.

The LMA said it hoped the launch of the guidance would help to further break down barriers to the use of the products in the syndicated loan market.

Finance law expert Lisa Matthews of Pinsent Masons, the law firm behind Out-Law, said the publication of the documents by the UN and LMA showed that sustainability and sustainable finance were still key focuses for both bodies.

“As restrictions in relation to Covid-19 are lifted, it is important that countries continue with their efforts to address climate change – the impact of which the UN has advised will also be global in scope and unprecedented in scale,” Matthews said.