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Perspective

Green financing

Green investments – from alternative to mainstream

The global focus on the need for a green transition has seen a spike in the past 20 years. Green investments have gone from being viewed as high-risk to part of the average investment portfolio. Moreover, the trends are showing us that the green focus is here to stay: the share of green investments from institutional investors keeps growing.
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21 September 2020

A green pledge

During the 2019 UN Climate Action Summit in New York, the Danish pension industry in collaboration with the Danish government announced plans for the pension industry to invest more than EUR 46 billion in green transition towards 2030. The number corresponds to 12 per cent of the total Danish gross domestic product and more than half of the total public consumption in Denmark for a whole year. Following the pledge from the Danish
pension industry, the Climate Investment Coalition was established as a partnership between the Government of Denmark, Insurance & Pension Denmark, the Institutional Investor Group on Climate Change (IIGCC) and World Climate Foundation. The aim is to unlock private capital to invest in global green investments in both developed and emerging markets.

Push from the bottom

Until recently, green investments were considered both alternative and high-risk. However, between 2010 and 2019, more than EUR 2.28 trillion went into building new renewable capacity globally, primarily solar and wind energy. In Denmark, the pension funds have experienced a growing demand from the pension savers to invest in green stocks and bonds. According to a 2019 survey by Deloitte, it is vital for 49 per cent of the Danes that their
pension savings create a positive impact on the environment or the climate and 37 per cent are willing to accept a lower return on investment for a higher impact. Since 2015, the global market for sustainable investments has seen a 300 per cent increase and between 2014 and 2018, the Danish pension funds’ renewable energy investments more than doubled indicating that the trend has been underway for quite some time.

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Defining green investments

The definition of green investments is rather broad and for investors, the ESG (environmental, social and governance) term is in many cases the preferred approach to making sure an investment is indeed sustainable. Currently, it is mainly used for negative screenings, i.e. sorting out unwanted
investments, but the ESGs can as well be used in establishing a positive screening.

In March 2020, the European Commission put forward a 700-page long report outlining the EU taxonomy on sustainable finance or in other words: what constitutes a green investment and what does not. The aim of the report is to help standardise what is understood as sustainable investments and the findings are meant as a guide to act by for investors. Institutional investors have different approaches to green investments. While some aim to abandon all investments in fossil fuels, others choose to maintain ownership of these assets with an intent to push for a greener agenda through active ownership. In any case, green investments are now to be considered.

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