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Emerging Markets

Green Finance: A Necessary Divergence Towards Humanity’s Survival

 6 min read / 

The world is currently engulfed in a controversial debate following the decision by the United States of America to withdraw from the Paris Accord. The spirit of the Paris Accord is essentially steered towards regulating countries’ emissions levels as well as the maintenance of climate friendly policies that would ensure the future of the planet while ensuring that finance flows are consistent with an aim towards low greenhouse gas emissions and climate-resilient development.

The pullout by the United States of America came as a shock to many but is expected to offer a buffer to US heavy industry manufacturers in terms of implicit compliance costs in the medium term unless this decision is reversed.

Climate Change, a Reality

According to Just Facts, it is estimated that average global temperatures rose by 0.8ºC between the 1850s and 2000s, with significant acceleration post-1911, which correlates with the rise of the industrial age. The graph below confirms the fact that emissions have been on an upward trajectory as the world entered the industrial age.

Source: National Aeronautics and Space Administration

If this trend keeps up, it is only a matter of time before the earth becomes uninhabitable; sea levels continue to rise, and the glaciers are melting away at an unprecedented pace. Humanity seems to have become comfortable with taking a 2 degree Celsius annual increase in warming which was previously deemed catastrophic. More progressive thinkers have put forward the idea of colonising other planets, which has resulted in increased space activity; but this requires a lot of investment and research whose benefits could be generations away.

As an immediate measure, there is a need to coalesce around the mantra of reduced emissions and shift towards more climate friendly manufacturing and ways of life. The only hurdle is that the laws of economics dictate that firms and consumers require incentives to shift behaviour. This leads to the important debate on green finance which has emerged to address this fundamental mismatch in incentives.

Emergence of Green Finance

The finance world has rallied in support of climate friendly initiatives with the emergence of “Green funds” in the recent past. There has emerged an ethical breed of investors who are unwilling to allocate portions of their portfolios to sectors, initiatives or corporations that are deemed to engage in activities that are perceived to have an adverse impact on the long-term sustainability of the planet.

Developed countries have also committed to mobilise funds for climate finance to the tune of $100bn by 2020 and to keep annual financing at this level at least until 2025. China published a 35 point plan to guide the roll out of green funds, and the G20 leaders have also recognised the need to scale up green finance. In 2016, issuance of green bonds stood at $81bn and is expected to exit at $206bn in 2017.

The private sector has taken the lead in this, and in June 2017 Apple raised $1bn in green bonds to finance renewable energy projects in what is the largest issuance by a corporate to date. Indeed these are positive measures that will go a long way in ensuring that global warming and greenhouse gases are contained and kept at levels deemed optimal.

Government Support

For the green economy to thrive, government policy should complement and facilitate the deepening and stabilising of the markets for green financial instruments. The private sector will naturally take the lead in this, but the government also needs to step in to cover potential sectors that may be deemed too risky by the private sector but require funding to address a societal need.

Governments can also offer tax breaks, grants and credit guarantees to companies that are heavily invested in the renewable sector. Investors also need assurance that the funds they are putting at risk are utilized for the intended purposes, and this has been well catered for by the Sustainability Reports that we are seeing more and more progressive corporations publish. Standards and guidance to govern accounting for carbon credits have also been developed and published.

The future indeed looks bright for green finance given the upside inherent. Currently, less than  1% of global bond issuances are green so the scope for ramping up is massive taking into account the antecedent benefits and policy directions being adopted by governments and influential global organisations.

Green Finance Leadership

Cities are falling over themselves in an attempt to emerge as the financial hub of green finance with Hong Kong, London, Paris and Geneva launching initiatives that would position them to take advantage of this opportunity.

The critical question is what proportion of global finance will be green in the medium term and what incentives can financial market regulators and policy makers put in place to ensure this industry thrives. As long as the world’s energy needs keep growing, the future of green finance will keep soaring as this will mean more capital required to fund wind energy plants, energy efficient manufacturing plants and solar parks while chasing the twin goals of growth and sustainability.

The IEA predicts that global energy demand will increase by 40% by 2030 so when you marry this with initiatives to drive sustainability, the upside for green finance is enormous. Africa needs to position itself to benefit from this opportunity given its enormous green energy potential and existence of financial markets that can do with greater deepening.

Conclusion

Scientific research has proven that if we continue with our current production norms and consumption of fossil fuels, our very survival as species will be at risk. Initiatives such as the Paris accord and rise of the green economy all bode well in ensuring we stem this race to the bottom. We need to stem aside nationalistic sentiment in this very critical problem that we face and address it from a common perspective.

Ultimately the countries with larger industrial bases will pay a heavy price in the short to medium term, but this should be looked at in perspective. Politicians need to step up and offer important leadership and drive the sustainability agenda and not necessarily draw political mileage by taking divergent positions. As Barack Obama stated in his State of the Union address in 2015, “No challenge poses a greater threat to future generations than climate change.”

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Americas

Venezuelan Digital Currency Backed by Oil

 2 min read / 

Venezuelan Digital Currency

The Story

Venezuela has announced plans to launch a digital currency, “the petro”, backed by the country’s oil and mineral reserves. The petro aims to help ease the country’s monetary crisis but sceptics claim the proposal has no credibility and will not help those in extreme need.

Why It’s Important


source: tradingeconomics.com

Hyperinflation has eroded the Venezuelan bolivia’s value by 97% this year, making imports incredibly expensive and causing many to abandon trust in the currency. The country’s oil reserves made up 95% of its exports in 2016, while oil and gas extraction accounted for 25% of GDP. Rich supplies of resources provide some initial credibility to the proposal, but President Maduro’s questionable track record when it comes to monetary policy is making many sceptical about the proposal. His currency controls and money printing have only added to the monetary crisis. Maduro has not announced when the digital currency would come into use or any details regarding how the country would create such a system.

Opposition leaders argue the country’s shortages of food and medication are far more pressing and that the digital currency will not address this. The digital currency may provide a more trusted medium of exchange, but it is unlikely to help those in excessive poverty.

Keep reading |  2 min read

Americas

Venezuela’s Inflation Is at 4000%. Here’s Why

 2 min read / 

Venezuelan Digital Currency

Venezuela’s currency, the bolivar, has lost 96% of its value this year. As the currency becomes near worthless, imported food and medicine are in short supply. A humanitarian crisis is unfolding.

The government and state-owned oil company, PDVSA, owe bondholders $60bn alone and have recently defaulted on debt repayments. More defaults could mean investors seizing their stake in Venezuela’s oil.

Why Is Venezuela in Debt?

Acting upon the country endowment of natural resources made it an economic success in the mid-2000s.

Yet, while the price of oil skyrocketed during the late-2000s, former President Hugo Chávez matched this with Venezuelan public debt.

Once the price of oil dived in June 2008, lenders stopped extending credit to the country.

Oil – price per barrel; Source: Macrotrends.net

Venezuela’s Inflation

The recent defaults have caused Venezuela’s inflation to rise astronomically.

Defaults on government bonds are largely to blame for this inflation.

In 2016, OPEC found that oil reserves accounted for 95% of the country’s exports, while the oil and gas extraction combined made up 25% of its GDP.

Venezuela’s overdependence on oil and lack of saving during its heyday are the leading causes of the current crisis.

Keep reading |  2 min read

Emerging Markets

The Psychology Behind Saving

 4 min read / 

saving

The idea that the poor do not save enough money just because they are simply “too poor to save” is wrong.

Gambian farmers have in the past saved in cash (wooden lockboxes with savings were smashed open in an emergency or once the savings goal was reached), stored crops, and consumer durables. Saving in livestock and jewellery enabled other farmers to convert cash into less liquid assets to prevent unwarranted and frivolous spending. A detailed household survey conducted in 13 countries found that for many people in the developing world saving may be counter-intuitive. The poor and the extremely poor, those living on less than $2 a day and on less than $1 a day, respectively, do have a significant amount of choice in regards how to spend their money.

The Developing World

The poor do not use all of their income to buy calories, but only allocate between 56% to 78% to food. Spending on tobacco and alcohol (considered non-essential and nonfood items), and festivals (weddings, funerals or religious events) plays a significant role in household budgeting. For example, the poor in rural areas of Mexico spent slightly less than half the budget on food, and 8.1% on alcohol and cigarettes. The poor and the extremely poor spend about the same on food, which suggests that the extremely poor feel no extra compulsion to purchase more calories. Instead, the remaining income is often saved across a variety of informal saving groups, including peer-to-peer banking and peer-to-peer lending.

It is often the poor, women and the rural communities who are the least banked (those without an access to formal banking services). Not surprisingly, without an access to savings accounts or other formal financial services, it is difficult for families to manage unexpected risks, like illnesses, or plan children’s education. But the desire to save and engage with financial services is still there, as shown by a large uptake in the savings plans in Kenya despite high-interest costs, high withdrawal fees, and close to negative interest rates.

Yet, inchoate financial infrastructure in the developing world cannot on its own explain undersaving. Behavioural economists argue that the poor are no different to the rich in their saving habits: both groups are subject to cognitive biases and inherent human irrationalities and face self-control problems. When it comes to saving, “present bias” (or procrastination, proverbially) occurs when people give stronger weight/preference to an earlier option or purchase that provides instant gratification, rather than setting some funds aside for emergency use. Due to income uncertainties, however, the consequences of this “live for today” behaviour are far more detrimental to the poor than on the rich.

The Developed World

Undersaving is not exclusive to the developing world. Household saving rates, the difference between disposable income and consumption, vary greatly across the world. In 2017, Switzerland and Luxembourg, closely followed by Sweden, are the three countries with the highest savings rates. However, a higher GDP per capita does not necessarily equate to a higher savings rate.

In other words, people with higher income in the developed world countries do not always save more. Consider the US with GDP per capita $57,466 and savings rate of 5.3% and the Czech Republic, GDP per capita $35,127 and a savings rate of 6.7%. Similarly, with GDP per capita of over $43,000, the UK’s household savings rate was 3.3% in 2016, the lowest level since 1963, while in Hungary ($27,008 GDP per capita) the savings rate has been on average 4.5% in the past three years.

Final Thoughts

Is it possible to fully comprehend the monetary hurdles of low-income families? Undoubtedly, consuming today might be a rational choice and a necessity to survive. But, biases deserve context. For many in the developing world saving at home still remains hard. Technological innovation in finance and growth of electronic wallets have already alleviated some of the hurdles of saving money, but technology is not the silver bullet that will address undersaving. An active and conscious commitment to saving and awareness of biases could have a strong beneficial impact on the lives of the poor.

Keep reading |  4 min read

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