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Improving corporate sustainability with new financial sustainability-focused products

Alexander Kontoleon

Opinion Piece in The Digital Economist

Today, the world faces the need for and desire for meaningful economic change: retooling the world economy to embrace sustainability, environmentalism, and biodiversity as essential components of all modern economic systems. New financial products that are sustainability-focused and available for everyone will be crucial to the success of this change.

Two of the most powerful forces shaping the world economy over the past three hundred years have been capitalism and democracy. Capitalism is not inherently tied to democracy; autocratic and socialist regimes exist that embrace capitalism. However, the proof is in the pudding that democracies paired with capitalist economies adapt more effectively to necessary and desired social changes because they are responsive to public demands and capable of implementing reforms. Capitalist democracies have proven resilient in overcoming economic and social crises, from industrial revolutions to financial downturns, by adjusting policies through public discourse and innovation.

democracies paired with capitalist economies adapt more effectively to necessary and desired social changes because they are responsive to public demands and capable of implementing reforms

Classic economic thinkers like Adam Smith (1776) and Joseph Schumpeter (1942) both wholeheartedly defended democratic capitalism as a powerful change agent. Smith argued that democratic capitalism promotes agency and personal choice, allowing people to influence economic outcomes, multiplying impact by reinforcing economic freedom, and driving societal evolution and broad-based prosperity. Schumpeter explained how democratic capitalism grants individuals the freedom to innovate and adapt, enabling the replacement of outdated economic structures with new, more effective systems.

Given this, why is so much of sustainable green finance only devoted to serving large institutions rather than involving the average person? There is a clear need to democratize green finance—best achieved through the creation of meaningful green securities accessible to everyone. These securities should help companies meet their environmental promises while allowing the average person participate in the economic benefits of sustainability and have a say in the environmental outcomes.

Capital markets are undeniably important in supporting sustainability practices and successful climate action from corporations. However, the focus on green bonds and the lack of green equity products represent missed opportunities for companies, investors, and Wall Street alike. Why are there no widely available, easily accessible green equity solutions for individual investors? It’s time for Wall Street to offer new securities in the marketplace that enable tomorrow’s blue- chip companies to be truly green.

the focus on green bonds and the lack of green equity products represent missed opportunities for companies, investors, and Wall Street alike

While both debt and equity have their place in helping a company grow, bonds come with several drawbacks. Interest payments drag on revenue and profit until fully repaid. Interest must be paid back immediately, and there is often a delay of months to years before funds raised from bonds can generate income. Additionally, interest payments aren’t an expense companies can economize on or skip— failure to make payments results in default. Finally, bond raises are typically more accessible for big corporations with large, predictable, recurring revenue streams. For smaller to midsize companies, the fixed-income markets can be challenging places to raise money without burdening the company. Yet all companies need money to fund their journey to sustainability. In terms of investors, corporate bonds are typically out of reach but for all the largest (typically institutional) investors. This means green bonds are failing to help the majority of companies and are failing to involve the majority of investors.

A quasi-equity option exists today: Green ETFs (exchange-traded funds). However, they are plagued with many problems and fail to meet modern investor needs. Traditional sustainability-focused ETFs don’t address many investor concerns and needs. Often, there is a lack of stringent criteria to join the ETF, inconsistent and superficial screening of firms that are included, limited engagement and stewardship by the ETF fund manager, sector and geographic biases that result in overweighting, a lack of thematic focus, and the ever- present short-term performance pressure versus meeting long-term sustainability goals.

The world needs the creation of a true green equity—accessible to investors of all sizes and issuable by companies both large and small. Most importantly, the world is clamoring for creating this kind of new instrument.

The world needs the creation of a true green equity—accessible to investors of all sizes and issuable by companies both large and small. Most importantly, the world is clamoring for creating this kind of new instrument. There is an undeniable appetite for green investment products of all shapes and sizes. Even after a slight backtrack in 2023, the market for sustainability and impact-focused funds is still at $30 trillion right now (Marsh 2023) and is projected to grow to approximately $50 trillion by 2025 (Castano), with expectations of continued acceleration. It’s a sign that investors want to have their cake and eat it too—financial returns coupled with green outcomes are the expectation of many current and future investors.

It is well known that stocks generally outperform bonds over time due to the equity risk premium investors enjoy over bonds (at least for the last two hundred years or so) (Investopedia Team 2024). Stocks also benefit overall from a company’s performance and a growing economy (there are no “bond splits”). Additionally, stocks are more liquid than bonds, and the stock market has a lower barrier to entry since most bond trading is over-the-counter (OTC) and limited to a handful of sophisticated investors with deep pockets.

So if most companies don’t prefer bonds and most investors favor stocks, why not fund green transitions and green efforts differently? What might a green equity solution look like? What if there was a unique, dedicated stock issuance for green projects? Why not create a green equity tied to a company’s sustainability and environmental commitments?

All companies, regardless of size, could issue green equities and other liquid securities to readily access the large pool of sustainability- focused capital to fund their green projects, transitions, and initiatives.

All companies, regardless of size, could issue green equities and other liquid securities to readily access the large pool of sustainability- focused capital to fund their green projects, transitions, and initiatives. These new green equities could serve as a powerful tool for any company looking to accelerate its green journey—whether already eco-conscious or just beginning the transition. They could even provide an incentive for carbon-intensive companies to take sustainability seriously. Issuing companies would also get direct access to retail green investors, as opposed to the larger institutional investors who typically purchase green bonds. Retail investors often have a longer-term time horizon for returns, which could be a meaningful advantage for carbon-intensive businesses whose management teams understand that achieving sustainability is a long-term process.

Additionally, issuing green securities would signal a credible commitment to improving environmental operations, processes, and impact—especially if an accountability component were embedded in the instrument. Depending on its design, CFOs could even leverage treasury stock as part of the return of a green security when projects and initiatives are completed successfully. Furthermore, the existence of a green equity instrument would keep the debt-to-equity ratio lower than issuing bonds and, depending on how it was structured and designed, could even give less control to outsiders than just another offering of common stock.

At the end of the day, investors want to invest in a greener, future- ready company that is better prepared to seize market opportunities, lower costs, and increase revenue. Green stocks offer an attractive alternative for companies seeking to fund their green commitments and green journey, and they should appeal to investors who want credible green products that still deliver shareholder value. To succeed, capital market solutions should better align fiscal incentives and business strategy with green principles and outcomes.

Finally, consider the upside for Wall Street and global financial hubs. A whole new class of securities means potential opportunities—more jobs, more trading activity, and more profits. Imagine the potential for value and wealth creation vis-à-vis the syndication, issuance, listing, and trading of new liquid equity security classes devoted to sustainability and available to small and large investors. Reuters and Bloomberg both forecast that the market for sustainability investment products is projected to grow from $30 trillion to approximately $50 trillion in the next few years. Global equity markets are currently in the neighborhood of $100 trillion market capitalization. Now imagine that market growing by $20 trillion (or more) by adding green equity products into the mix. The only question bankers, traders, and market makers should be asking is: Where do I sign up? That the storied institutions of Wall Street have not deciphered this yet is a mystery.

Reuters and Bloomberg both forecast that the market for sustainability investment products is projected to grow from $30 trillion to approximately $50 trillion in the next few years.

There is room for—and a pressing need to create—an authentic green equity product. A product that empowers investors of all sizes to have the same impact on a company’s green initiatives that owning a modern plain-vanilla equity gives them a say in the daily financial operations and participation in the long-term success of a company. A new green equity instrument that allows companies to raise money for their sustainability initiatives while empowering any and all sizes of investors will be a crucial innovation to harness the power of democratic capitalism to deliver the change at scale in modern corporate operations that the world needs to meet its climate targets before it is too late.

Author
Alexander Kontoleon

Alex Kontoleon, the Chief Strategy Officer at Green Impact Exchange (GIX), drives strategies for sustainable impact. With a Master’s Degree from Columbia University and more than 14 years at State Street, he excels in innovation, business development, and collaborative growth. You can reach him on LinkedIn or at akontoleon@tradegix.com

References:

1. Castano, Ivan. “Global Demand for ESG Derivatives Grows.” Reuters. https://www.reuters.com/plus/global-demand-for-esg-derivatives- grows.

2. Investopedia team. “Which Investments Have the Highest Historical Returns?” November 5, 2024. https://www.investopedia.com/ask/answers/032415/which- investments-have-highest-historical-returns.asp.

3. Marsh, Alistair. “Global ESG Market Shrinks After Sizable Decline in US.” Bloomberg. November 29, 2023. https://www.bloomberg.com/news/articles/2023-11-29/global-esg- market-shrinks-after-sizable-drop-in-us.

Lawsuits and political pressure may save a few projects here and there but the future of climate financing under the current US administration seems clear—there isn’t one. From a high water mark of over $11 billion in climate aid for developing countries last year, the US has already cancelled over $4 billion in pledges and will almost certainly renege on most of its other climate-related commitments. In the blink of an eye, the US has ceded its position as the largest global climate donor. Here, we stare into the climate financing hole and ask what’s next.

Source: Carbon Brief

• • •

The Hole Is Dark and Deep

1. America last. The $11 billion that the US gave to climate financing last year accounted for about 8% of all international climate finance, according to this in-depth analysis by Carbon Brief. That was more than any other country, but still a lot less than its fair share calculated from its historical emissions and income level. Last year, the Center for Global Development estimated that the US should be paying between 45 and 55% of financing for climate projects and loss and damage payments. Anne Jellema, the executive director of 350.org, told The Guardian that the US move “is effectively abandoning millions of communities that have done nothing to cause global heating but are losing homes, livelihoods and lives because of it.”

2. Following the leader over the cliff. Right behind the US’s government were most of its big lenders. JP Morgan Chase, Morgan Stanley, Bank of America, Citigroup, Wells Fargo and Goldman Sachs have all now left the Net Zero Banking Alliance, a UN-sponsored group dedicated to keeping global warming to less than 1.5 degrees Celsius. Japanese and Canadian banks quickly followed suit. European countries have also announced cuts to their climate aid, in part in response to US calls for increased defense spending.

3. Unofficial climate aid is at risk, too. Low and middle income countries receive at least twice as much money from family and friends that have migrated to rich countries than they get from all official aid or financing. This eye-opening story from the Carnegie Endowment for International Peace unpacks the climate impact of those remittances, noting that remittances surge by a third after extreme weather events, directly increasing local resilience and adaptation to climate change. Earlier research provided good evidence that remittances also reduce deforestation and enable reforestation. With about a quarter of all global remittances originating in the US, a crackdown on economic migrants is potentially even more damaging for the climate than directly eliminating aid.

• • •

But Is The Hole Half Empty or Half Full?

1.  More loans in the wings. While the US decision is objectively bad for progress on climate change, it’s not quite the end of the world. The US contribution to climate financing slumped before, from 2017 to 2021, Then, other nations and particularly development banks and private finance stepped up to fill the gap, according to Carbon Brief. By 2024, banks and private finance were supplying about two thirds of all climate financing, compared to a third direct from nation states. That trend shows no sign of slowing down. At COP29 in December, development banks pledged to increase climate finance for the poorest countries by 60% over 2023 levels over the next six years, to $120 billion.

Source: Carbon Brief

2. The power of bonds. One recent financing innovation that shows no signs of slowing down is climate bonds. Like municipal or government bonds, these fixed income instruments pay a fixed return over time, but with the money raised used to finance environmental, renewable energy, or restoration projects. According to financial clearing house ICE, nearly $600 billion in green bonds were issued in 2024, the largest total ever. Around $150 billion in green bonds have been issued so far in 2025.

3. Red is the new green. With the US retreating to the shadows, other global superpowers are finding their feet. Although China has fewer funding and reporting commitments under UN plans, it has been quietly spending abroad on renewable power, water and sanitation, and disaster preparedness projects, to the tune of over $25 billion since 2016 according to state sources. The Center for Global Development last year calculated that China was already making more climate financing commitments than the US by some measures, and it will certainly be ahead of America in all areas this year.

 

• • •

What To Keep An Eye On

1. Greyer loans. The US International Development Finance Corporation, which committed over $3.7 billion in climate finance in 2024 seems, to have been spared the ax so far. But it might shift from funding renewable energy in poor countries to fossil fuel projects. Ritu Bharadwaj, a climate-finance researcher, told Carbon Brief that the bank could “signal a shift away from public, needs-based funding toward finance that prioritizes US commercial and strategic interests.”

2. Fickle voters. As unpopular as some of the current US administration actions are, cutting back on climate aid might actually go down well with the electorate. New research from Germany suggests that whilericher, more developed governments generally make larger pledges on climate action, citizens of those countries are the least willing to follow through on them.

3. Loans vs grants. All climate finance is not created equal. Grants of money are far better for recipients than loans, which have funneled billions of dollars in interest and other economic rewards back to wealthy nations, a Reuters investigation found last year. As wallets tighten in the likely coming recession, richer countries could look to profit even more from climate loans and projects.