Green Equities: Capital Markets as a Force for Good

At COP28 in Dubai world leaders set a very ambitious goal to triple global installed renewable energy capacity by 2030 from a 2022 baseline. Therefore, sustainability is set to take centre stage at governments and boardrooms across the globe, putting the transition towards a sustainable economy at the forefront of upcoming investment decisions and negotiations. Achieving that will require a step change in financing the transition as well as adequate market infrastructure and policies to unlock the full potential of public markets. Hence, exchanges have an extremely important role to play in facilitating the flow of sustainable capital at scale.

The Opportunity

According to the IPCC, roughly 2.4 trillion tonnes of CO2e have been emitted since the beginning of the industrial revolution and approximately 50 billion tonnes of CO2e are still being emitted every year. Moreover, current policies and commitments put the world on track for an average temperature rise of roughly 3 degrees Celsius above pre-industrial levels by the end of the century. Furthermore, according to the Ellen MacArthur Foundation, measures with a focus on the energy transition can address roughly 55% of the emissions whilst the remaining 45% would require the establishment of a robust circular economy globally.

Climate change is one of the greatest challenges of our age and also one of the greatest opportunities the humankind has ever had to create a better, more resilient, diverse and fairer world for this and future generations. It is also history’s biggest investment opportunity. Large flows of sustainable capital of hundreds of trillions of dollars will be needed between 2021 and 2050 across several sectors. According to Bloomberg, global ESG assets are on track to exceed $53 trillion and the ESG debt market could swell to $11 trillion over the coming years. The voluntary and compliance carbon markets have also grown steadily. The voluntary carbon market is now worth $2 billion approximately, and the compliance carbon market is worth over $850 billion across 30 markets worldwide. The IEA estimates that the 2023 total energy investment went up to a record of $2.8 trillion out of which $1.74 trillion were invested in clean energy, partly driven by the post-Covid recovery and the global energy crisis.

Capital Markets as a Force for Good

Given the size of the challenge, capital markets will be instrumental in supporting the transition, helping to turn billions of public money into trillions of sustainable investment. Furthermore, exchanges play a critical role in providing reliable market infrastructure, security, governance, transparency, access to investment opportunities and consistent, meaningful data to help investors worldwide streamline their decision-making processes, improving risk perception and investment strategies with a particular focus on emerging and frontier markets. Within that context, Green Equities are set to become a powerful instrument to support the transition towards a sustainable future.

In March 2023, the World Federation of Exchanges published the WFE Green Equity Principles, which set out the first global framework that can be used by individual exchanges to establish their own green offerings for listed equities. This global framework for designating equities as green brings the exchange industry together and lays the foundation for a new era in climate financing.

In addition to that, this framework brings more transparency, clarity, consistency and objectivity to the definition of green, helping counter greenwashing and support greater sustainable capital flows. By adopting internationally recognised best practices and promoting harmonisation, exchanges help prevent fragmentation and encourage comparability across different jurisdictions, supporting cross-border flows of sustainable capital.

Furthermore, the Principles enable exchanges to establish a level playing field, creating incentives for companies and investors to join their platforms, and address issues related to green definitions, labelling, standardisation, disclosure and consistency, which promotes greater transparency and unlocks market efficiencies. Green Equities also allow companies to better integrate ESG into their strategy, deliver on their sustainability goals, raise their profile among investors and showcase their green and transition business models.

In addition to that, a consistent Green Equity framework enables corporates to manage risks related to greenwashing and disclosure more efficiently, creating new opportunities to access a broader set of investors as well as improve their financial strategy. The framework also helps investors to access more reliable, comparable data across industries, sectors and regions, mitigate greenwashing risks, address issues related to disclosure and labelling, diversify portfolios and identify new investment opportunities.

B3 Ações Verdes

In line with the WFE Green Equity Principles, B3 launched this month its green offering B3 Ações Verdes (BAV) for equity issuers on B3 in any segment. The BAV Designation can be attained by listed companies that have more than 50% of their revenue derived from green activities, more than 50% of their investments in green activities and less than 5% of their revenue derived from fossil fuel activities. Brazil has an enormous potential to become a sustainability powerhouse, helping fast-track the world’s decarbonisation process whilst supporting inclusive, sustainable growth.

Total installed solar and wind power capacities in Brazil are now over 35GW and 20GW, respectively. Additionally, Brazil could be a key supplier of green hydrogen thanks to its favourable solar irradiation and wind profiles as well as lead the way on many fronts including carbon markets, critical and transition minerals, circular economy, biofuels, SAF, biomass, biomethane, CCS, electrification, et cetera.

Brazil’s new green economy could represent an additional GDP of hundreds of billions of dollars which would create jobs and improve income significantly, helping raise the quality of life of communities across the country. Often unmet needs sit in emerging markets, so do great investment opportunities. That is why transparency, access to information and a clear level playing field are essential. Also, there could be a unique two-year window of opportunity with G20 and COP30 in Brazil to support investment solutions that would help corporates and investors deliver on their climate goals and fast-track the transition. Therefore, it will be very important to mobilise public markets in order to catalyse scalable and replicable financial products listed on exchanges to deliver on those goals. Sustainable capital at scale will be vital to unlocking these opportunities, especially in emerging and frontier markets.

Thus, Green Equities provide a robust framework to improve transparency, consistency and comparability, bringing policymakers, exchanges, investors, governments and the private sector to work together to galvanise capital markets into action and pave the way towards a new sustainable global economy.

Achieving this transformation will require a concerted effort of a number of different stakeholders. No single organisation will do it alone. New business models and sustainable investment solutions will be crucial to put climate, biodiversity, social and the circular economy at the centre of the finance agenda.