Right disclosures boost confidence in green investments

The growth of green investments, including the increasing array of financial products, has attracted the attention of investors, policymakers, and various stakeholders due to their potential to deliver financial returns, alignment with societal values, sustainability and climate-related objectives.

Growing investor demand has yielded to a growing need to build investor confidence as to the “greenness” of the investments. However, not everything that is labelled as ‘green’ actually fulfills the green promise.

There is a looming risk of ‘greenwashing’ that needs to be addressed for investors to trust that the investments they make into green projects are used to generate the desired environmental and social impacts.

The credibility of green claims is one of the most critical elements of green investment products. While the investments need to show how they preserve investors’ financial capital and create financial returns, they also need to demonstrate how they preserve, restore and enhance natural capital and provide returns to the environment and society over the lifetime of the underlying investments.

Without the right level of commitment by issuers and collaboration among policymakers and stakeholders to develop and encourage timely and adequate disclosures for green investment products, the market would run the risk of being ‘in default’ to its green pledge.

For example, global debt capital markets are among the largest and deepest financial markets, providing investors with fixed-income investment opportunities that allow them to preserve and increase their financial capital at relatively low risk.

They also play a paramount role in financing sustainable development. However, compared to the equity markets, very little is known about what the vast majority of the capital raised on debt markets is used for.

Issuers of green investments products must therefore provide investors with information that would serve as a tool for investment decision making.

Enhanced disclosure and transparency will serve to nurture greater investor confidence in the potential of green finance to address some of the most pressing global challenges; increase deal-flow; reduce transaction costs; streamline transactions and improve liquidity in the market making it more attractive for large mainstream investors such as pension funds.

As the green finance market continues to develop, stock exchanges and financial market regulators will play a critical role to strengthen the integration of ESG (environmental, social and governance) risks and opportunities into market frameworks and products in a manner that enhances efficiencies.

As a step in the right direction, the Central Bank of Kenya recently issued guidelines to banks and mortgage finance companies on climate-related risk management.

Overall, greater international cooperation is needed to ensure that ESG and climate transition-related practices progress in a manner that ameliorates the current fragmentation in reporting standards and strengthens investor confidence and market integrity.