Green Equity: Supporting the Transition Towards Sustainable Business Models
Green financing plays a crucial role in supporting the green transition. It provides financial resources and supports investments, environmentally sustainable projects and initiatives. Issuers are on the lookout for methods to increase investors’ understanding of their green initiatives. Objective and trustworthy, yet cost-effective, ways are needed to support this work.
Green debt instruments have been used for a long time. Green bonds are well-known and widely used. They support a certain investment or certain line of business within a company. A prerequisite for using green bonds is that the company – and thus also the investor – can define in advance what the financing is going to be used for.
Green equity has a different approach. It aims to attract investors with a green agenda to invest in companies with sustainable business models. Green equity is granted to companies with over 50% of their revenue and investments assessed as green. As such, this does not make the whole company green, but it is a clear indication that the business has, or is aiming towards, a sustainable business model.
Companies meeting the green equity criteria include, for example, businesses and projects that promote a circular economy, which enhances resource efficiency and reduces waste. This involves designing products that can be recycled; promoting recycling practices; and minimising the use of non-renewable resources.
Green equity can also be directed towards projects that protect ecosystems, preserve biodiversity and promote sustainable land use. Overall, green equity is supporting progress towards a sustainable economy. It includes certain social criteria, on top of having a positive impact on the environment.
Green in the eye of the beholder
Transition is not possible without financing. It is impossible to make energy production, construction businesses or other industries carbon neutral without significant research, development and capital expenditure. Investments can never be made with debt financing only. They always require equity-based funding as well.
Green equity is one method to recognise the companies that support a green transition and try to mitigate climate change. It increases the transparency of the actions taken, and the review methods included in the system assure investors that the company truly meets the standards of green equity.
On the other hand, investors typically also set their own criteria when defining what is green and what is not. Commonly used principles when defining green investments would support both issuers and investors in determining green initiatives. For some reason, the knowledge around green equity is still quite limited – among both issuers and investors.
Our understanding about interdependencies between climate change, biodiversity loss and scarce resources is continuously increasing. It is crucial that companies can have a clear understanding of what is required for a certain activity to be classified as green. Inevitably this evolves as new technological advances and scientific discoveries are made, but it should not be an annual cause of excitement – and maybe even a shock - for the issuer or the investor to discover what is green and what is not.
Designation or transition?
Green equity designation is a label given to companies whose revenue and investments are over 50% green. To make sure that the loss of biodiversity ends gradually, and that climate change is mitigated, the focus should also be on companies that are in the transition phase.
Occasionally it seems that investors are not willing to back companies in the transition phase, but only those whose business meets the criteria of a green company. Yet only by transforming as many companies as possible to be carbon neutral, by using scarce resources carefully and recycling materials efficiently can we save the planet. Thus, the financing of companies in the transition phase is equally important as financing those whose businesses are already green.
In the best-case scenario, green equity investors engage with the companies they invest in, encouraging them to adopt more sustainable practices and reporting. This kind of active steering can drive positive change within companies and contribute to a broader green transition.
Does the market for green labelled shares already exist?
Green equity is a relatively new label for companies and investors. Since labels always require additional work from the issuer, it is important to promote the trustworthiness and added value of mechanisms like this.
To make sure that green equity really supports the green transition, each investor should know the criteria met by green equity companies. In addition, investors should be able to trust that the third-party reviews are reliable, and that the green activities are making a positive impact. Transparency of reporting and actions taken to support the green transition are both important steps towards increasing the impacts of this instrument.
In addition, issuers should be able to rely on the green equity label when they have made the extra effort to apply for it. Investors will get the reassurance of annual reviews included in the process, knowing they are reliable and give a true view on how the company is playing its part in building a sustainable economy.
1. Everything is based on trust! Simple and trustworthy ways to follow and report the progress of the green transition is a must.
2. Funding is a key element when transforming the world towards more sustainable business models. Simple methods are needed to highlight green initiatives for investors; Green equity is one example of such methods.
3. The climate crisis can only be solved by working together. The money invested in green projects or companies should lead to actual changes. It is important to have companies that have green ways of working in their DNA, but it is equally important to support those in their transition towards more sustainable business models. Green equity is a great method to support companies making such changes.
In summary, green equity serves as a powerful tool to drive the green transition by allocating financial resources strategically to projects and initiatives that have a positive impact on the environment and contribute to a more sustainable and resilient future.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.