AN INTRODUCTION FORTHE SPACE INDUSTRY

FINANCESUSTAINABLE

The transition to a sustainable global economy will be the most capital-intensive transition in human history. Infrastructure investments alone will need to reach at least $6 trillion/year until 2030 to deliver on the Paris Climate Change Agreement.1 A new and resilient financial system is needed to underpin this economic transition. Getting financial markets to integrate climate change, environmental and social sustainability into decision-making will help financial institutions appropriately manage risk, reduce losses, and improve the resilience of the financial system as a whole.

More and better information is needed for financial markets, institutions, and players to efficiently allocate capital to sustainable investment alternatives. Geospatial data, including earth observation and climate data can provide key elements of the information that is needed to evaluate risks, opportunities, and impacts of (un)sustainable investment (opportunities) to deploy sustainable finance effectively.

The term ‘Sustainable Finance’ covers the range of activities, products, and stakeholders that aim to align the existing financial system with global sustainability. This can be achieved by reducing the cost or increasing the availability of capital for sustainable alternatives while increasing the cost or decreasing the availability of capital for unsustainable alternatives. It includes better risk management of environmental risks related to physical environmental change, societal responses to this change, and supports systemic changes and the adoption of sustainable practices.

The Satellite Applications Catapult’s Sustainable Finance programme aims to bridge the gap between the Sustainable Finance and the space sector by researching and demonstrating the value of geospatial data for sustainable finance purposes and building a common language.

This document is the first in a series of reports and analyses that explore how geospatial data and the UK space industry can support the growth of the sustainable finance sector. The following chapters provide a high-level description of key financial stakeholders and sustainable finance products, some trends in this field, and the need for better information. Future reports will look at the sector’s trends, value chain, and data requirements in more detail. This series aims to describe the sustainable finance sector from an outsider’s perspective with a particular focus on the role of data and information in decision making processes.

INTRODUCTION

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ASSET OWNER(e.g. pension, insurance fund)

HARD INFLUENCERS

SOFT INFLUENCERS

INVESTMENTMANAGER

(e.g. investment bank)

$ INVESTMENT

$ ROI

$

COMPANY/FINANCIAL ASSET

RISK AND PERFORMANCE INDICATORS,SUSTAINABILITY SCORES AND RATINGS

ESG DATA PROVIDERS

Laws andregulations

NGOs, frame-works, intiatives

Citizens

THE VALUE CHAIN

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The sustainable finance value chain is a complex system of stakeholders, interactions, money and information flows. Citizens and individuals can invest their savings in companies, governments, or projects with the aim of generating a return on their investment. They can invest directly in the stock markets or indirectly through banks and pension funds who pool this capital by investing citizen savings on their behalf. Investment managers invest this capital on behalf of these asset owners into the economy,

according to the risk appetite of their clients. Companies, investment managers and asset owners all report on their performance to their direct stakeholders or to the public. Laws and regulations are in place to ensure transparent and effective disclosure while specialised initiatives and frameworks provide guidance on how to disclose non-financial information. Rating agencies and specialised data providers research, score, and verify non-financial risks and performance of companies and financial products.

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ASSET OWNERS

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An asset, tangible or intangible, is anything of value that can be converted into cash. Financial assets typically include cash, stocks, bonds, or derivatives. Asset owners can be divided between individuals or institutions such as pension funds, insurance funds, sovereign wealth funds, family offices, charities, and foundations. Asset owners can actively manage their own assets or outsource this management to specialised investment managers.

Asset owners or investors are becoming increasingly aware about both the impact of their investments on the environments and societies they operate in, and the impacts that environmental and social issues have on the performance of their investments. This focus on sustainability is driven bottom-up, from millennials who want their pensions to be invested responsibly, or out of financial self-interest from investors who believe that sustainable investments will provide better financial returns in the long term. Various initiatives exist that bring together investors around sustainability concerns such as the United Nations Principles for Responsible Investment, Portfolio Decarbonisation Initiative, or the Institutional Investors Group on Climate Change (IIGCC).

An example of an institutional investor who is actively integrating responsible investment practices is the UK’s Environment Agency Pension Fund. This fund has integrated environmental, social, and governance issues throughout its funding and decision making, recognising the impact on the fund’s financial performance. Considering climate change within the fund is perceived as a legal duty and is consistent with securing the long term returns of the fund. The fund aims to contribute to a low carbon economy through selective risk-based disinvestment and engagement with investees. Greenhouse gas emission metrics (e.g. tCO2e/ £m revenue) are used to define the carbon efficiency of their portfolios and are aggregated with external partners such as Trucost. Day to day management of the fund’s assets is delegated to a number of different external fund managers.

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INVESTMENT/ASSET MANAGERS

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Asset management is the process of managing and monitoring tangible (e.g. real estate) and intangible (e.g. stocks) assets, on behalf of individual or institutional investors. An asset manager is usually a part of a financial services company (e.g. investment bank) that offers investment services that might not be available to the average individual investor. Asset management often requires investment minimums which means these services are generally restricted to high net worth individuals, governments, corporations, and financial intermediaries (e.g. pension fund).

Asset and investment managers are increasingly shifting their portfolios towards more sustainable investment alternatives driven by client requests or a fiduciary duty perspective where this duty would require investors to incorporate environmental, social, and governance (ESG) factors into decision making. Assets in US funds looking to achieve social or environmental benefits alongside financial returns has grown to $12tn.2 In parallel, regulations are increasingly coming into action which force asset managers to disclose the levels of environmental, social, or climate change risks that are inherent to their investment portfolios. In 2015, France passed a law on asset owner and investment manager reporting requirements. In early 2019, the European Commission published draft rules on how investment advisors should consider sustainability aspects while advising clients, as part of a broader Sustainable Finance Action plan.

BlackRock is the world’s largest investment manager with US$6.3 trillion worth of assets under management. At the start of 2018 its CEO, Larry Fink, wrote a letter to all the CEOs of the companies BlackRock invests in, warning them to contribute to society and deliver financial performance, or risk losing BlackRock’s support. He stated that “A company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues within our investment processes”.

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CORPORATES AND ISSUERS

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Issuers are entities such as companies and governments that develop, register, and sell securities such as stocks and bonds to finance their operations. Issuers are legally responsible for reporting financial conditions, operational activities, etc. as required by their local regulations. Companies with shares trading on public stock exchange markets have annual and quarterly reporting requirements on their operational and financial performance.

Publicly listed companies are increasingly reporting on sustainability issues, enabling them to be more transparent about the risks and opportunities they face. More than 80% of the companies listed in the S&P 500 index of the US’s largest companies publish sustainability reports, and around three quarters of 4,900 companies surveyed by KPMG issue sustainability and corporate responsibility reports.3 Different initiatives have been created to stimulate and support issuers on disclosing ESG information. The Principles for Responsible Investment’s Montreal Carbon pledge commits investors to disclose the carbon footprint of their investment portfolios. The Carbon Disclosure Project (CDP) supports companies and cities in disclosing their environmental impact with a focus on climate change, water, and forests. The Taskforce for Climate Change related Financial Disclosures (TCFD) develops voluntary disclosure guidelines for use by companies who wish to provide information on climate change risks to investors, lenders, insurers, and other stakeholders.

Unilever is a publicly listed company that is internationally recognised for its leadership around sustainability and its transparent disclosure of ESG performance, issues, and risks. Throughout their annual reports they link the financial performance of the company with the impacts on the environment and societies they operate in. They have committed to a ‘Sustainable Living Plan’ and annually report progress through a set of indicators such as direct and indirect greenhouse gas emissions, water use, sustainable sourcing, etc. Unilever is committed to implement the recommendations of the TCFD on the climate change risks and potential opportunities, and discloses information on climate, water, forests, and supplier engagement through the CDP platform.

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RATING AGENCIES AND ESG DATA PROVIDERS

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Traditionally, credit risk is a major concern for investors when deciding on which investments aligned to their risk and return preferences. Credit worthiness was and is assessed by credit rating agencies such as Moody’s, Standard and Poor’s, or Fitch who assign credit ratings to corporations or governments looking to raise money. With the increased volume and importance of sustainable investing, the environmental, social, and governance performance of public companies and financial products is being researched, analysed, and transformed into ESG scores and ratings by specialised firms such as Sustainalytics, Trucost, or eFront.

Today there are more than 150 providers of ESG data, following more than 50,000 companies. Their research and ESG ratings are all based on bespoke methodologies, data collection processes, and analyses. Currently most of this non-financial information is derived from companies’ self-reported sustainability reports or through qualitative interviews with management. This means that the quality and comparability of ESG data and ratings from different rating agencies remains a contested topic. Companies that score best in class with one agency can be a weak performer with another agency and average with yet another one. Traditional rating agencies are increasingly incorporating ESG factors into their credit scores. Fitch has reported that their credit ratings for over 1,500 corporate issuers have been impacted by ESG performance, which looks at factors such as greenhouse gas emissions, water & wastewater management, and exposure to environmental impact. Research and consulting firm Optimas estimates a total spend on ESG data of $505 million in 2018, reaching $745 million by 2020.

Sustainalytics is a company that researches and rates the sustainability of publicly listed companies on their ESG performance. They have offices in 13 countries and offer a wide range of products and services to the finance sector. To assess companies’ ESG performance they research ESG integration and risk, compliance on human rights and controversial topics. They will also provide ESG portfolio analysis and screening. They support the development and offering of sustainable financial products by developing ESG indices, licencing their ratings for capital raising activities and ESG linked loans, and providing second party opinions and verification services for green bond issuances.

© Satellite Applications Catapult, 2019

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SUSTAINABLE FINANCE PRODUCTS

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As more and more individuals and asset owners are looking for sustainable outcomes alongside a financial return, the demand for sustainable finance products is growing year on year. Financial intermediaries are developing and offering new financial products that combine the right mix of risk, return and sustainable outcomes for their clients. Most of these

products work in a similar way to their traditional counterparts: green loans link interest rates to certain sustainability thresholds; capital raised through green bonds is invested only in sustainable projects; and ESG funds will only invest in projects or company shares with high ESG or sustainability scores.

GREEN LOANS

A creditor issues a loan for a certain amount and the debtor must pay off the loan with interest after a certain duration. However, a green loan couples the interest rate with the company’s sustainability performance. A company that meets the sustainability criteria will have a lower interest rate than one that fails to reach the criteria, and the interest rate could vary over the payoff period.

The market for green loans is nascent, with the first sustainability-linked loan issued in 2017. To verify the loans, the Green Loan Principles, based on the Green Bond Principles, were developed in 2018 by the Loan Market Association.

Henkel, a German multinational, opened the first syndicated green credit facility, a type of green loan, with several banks in 2018. The interest rate on the €1.5 billion credit line is directly dependant on sustainability ratings provided by three different rating agencies Sustainalytics, EcoVadis, and ISS-oekom.

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ESG FUNDS

Investment funds group capital from various asset owners and invest it in financial products, such as shares of companies, bonds, or tangible assets such as real estate. Funds are accessible to investors in different ways, including publicly on stock exchanges or privately through platforms and intermediaries. Investment funds balance risks with potential returns on their investment portfolios, with lower risk funds generally having lower returns and vice versa. Over the past decade, there has been a large growth in the number of Environmental, Social, and Governmental (ESG) funds, which specifically invest in companies perceived to be leading in sustainability in these three areas. Different funds will have different approaches to this, from exclusively investing in companies deemed to have a positive impact on the environment, to divesting from companies perceived to be harmful.

Socially responsible investing has been around for over half a century, though the addition of environmental and governance considerations is more recent. Within the last decade, ethical and environmentally-conscious funds have become much more common. Assets under management through ESG funds have grown from $655bn in 2012 to $1.05tn in 2018, an increase of 60%.4

The Hermes Equity ESG Fund, run by Hermes Investment Management, invests in growth companies perceived to be more sustainable, including Amazon and Apple. It has over £230m in assets under management and is invested only in company stocks, as opposed to bonds. Sustainalytics have given it a sustainability score of 50.64, corresponding to above average.

The Althelia Climate Fund is a private fund that has raised €100m from high net worth individuals, investment banks, and institutional investors. This capital is being invested in projects that deliver sustainable impacts such as biodiversity protection and livelihood creation for rural communities, whilst offering investors a fair return on their investment.

© Satellite Applications Catapult, 2019

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GREEN BONDS

A bond is a financial instrument that represents a loan made by a company or government. It has an end (or maturity) date, when the full amount of the loan is repaid to the bond owner and describes interest payments (known as coupons) to be paid on the full loan value for the duration of the bond. Bonds are typically issued to finance specific projects. A sustainable bond is one that is used to fund projects focussed on sustainability. There are many different labels for bonds in this category, including green bonds, climate bonds, and Sustainable Development Goal (SDG) bonds. Green bonds are certified by external entities in accordance with the Green Bond Principles, established in 2014. Projects that could be financed by a green bond include renewable energy infrastructure, energy efficient buildings, clean transportation, and sustainable water management.

There are a number of reasons why issuers (companies or governments) and investors could prefer green bonds over regular bonds. For the issuer, green bonds allow access to investors that are looking for sustainable investment opportunities; this means attracting investors that would not typically invest in their debt, thereby increasing and diversifying the investor base. It can also improve a company’s reputation and there may be subsidies and rebates on the interest payments available. Investors are given confidence that the project is beneficial to the environment or society and therefore more likely to be beneficial to the company over the long term. There may also be income tax exemptions on the interest received from green bonds.

The first green bond was issued by the European Investment Bank (EIB) in 2007. In 2017, over $155.5bn worth of green bonds were raised, increasing from $87.2bn in 2016.5 To ensure the project is completed sustainably, the issuer should report periodically on the impact of the bond. Currently this occurs in 38% of bonds issued; this proportion is rising.

In 2017, Apple issued $1bn in green bonds to finance improvements to the company’s environmental sustainability, including using renewable energy sources, greener product materials, and improving energy efficiency.

Fiji became the first emerging market to issue a green sovereign bond in 2017, supporting climate change mitigation and adaption activities. The bond was worth $50m and was evaluated by Sustainalytics with an annual report which outlines progress towards the bond’s goals.6 Projects financed include a rainwater harvesting system and a deforestation emission reduction programme (REDD+).

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© Satellite Applications Catapult, 2019

THE GEOSPATIAL DATA OPPORTUNIT YWe have seen that sustainability is becoming increasingly important within the finance sector, with more and more investors looking for investment opportunities that marry sustainability with a fair financial return. This trend is driven by a higher perceived financial risk for ‘sustainability laggards’ in a world where climate change will impact every country and every sector, or by an ethical drive to actively reduce the negative environmental and social impacts of our current economic and financial system. Throughout the value chain we can see asset owners and investment managers with billions of dollars under management, commit to a variety of sustainable investment strategies, corporates disclosing more non-financial information, and ESG rating agencies analysing this non-financial information to inform ESG investment strategies. New financial products are created to offer investors the right mix of risk, return, and impact often based on the same data, analysis; and rating agencies’ certification services.

As the demand for ‘Sustainable Finance’ grows, and the financial industry keeps developing standards for ESG disclosure and analysis, the demand for information will continue to grow. In a competitive market, better insights and access to more and better information can offer competitive advantages in the short and the long term. Any additional information will have to be relevant and material to the financial product and underlying company or project. With most of the information that is currently available in the market being derived from self-reported and

qualitative data, standardisation and comparison are difficult. This can lead to a broad variance of conclusions and sustainability ratings for a single product or company, confusing investors and companies alike and hampering growth of the sustainable finance sector.

Geospatial data, including earth observation and climate data, can play an important role as a complementary source of information to better assess and understand a range of environmental and social risks, opportunities, and impacts. It is an objective source of information that enables quantitative, standardised, and comparative analysis across sites, companies, and portfolios to be interpreted alongside other financial and non-financial information. By monitoring factors such as greenhouse gas emissions, water availability, deforestation in supply chains etc. geospatial data could greatly enhance the transparency and quality of information available to all stakeholders.

There is a huge opportunity for the UK space sector to deliver relevant products and services into this market. An effective and tailored translation of data into information and insights that is relevant and accessible for finance practitioners will be key for commercial success.

Throughout 2019 the Catapult will be publishing blogs, user profiles, and reports on the market opportunity for geospatial data and services within Sustainable Finance. Get in touch if you would like to get involved.

1 IDB and Mercer, 2017; “Crossing the Bridge to Sustainable Infrastructure Investments: Exploring Ways To Make It Across”2 US Forum for Sustainable and Responsible Investment, 2018; “Report on US Sustainable, Responsible and Impact Investing Trends”3 KPMG, 2017; “The Road Ahead: The KPMG Survey of Responsibility Reporting”4 Financial Times, 2018; “Rising investor interest pushes ESG funds past $1tn”5 International Finance Corporation, 2018; “Perspectives: Green Bonds”6 Fiji Federal Government, 2018; “Fiji Sovereign Green Bond: Impact Report 2018”

Satellite Applications Catapult Ltd is one of a network of UK technology and innovation companies which aim to drive economic growth through the commercialisation of research. The aim of the Satellite Applications Cata-pult is to support UK industry by accelerating the growth of satellite applications and to contribute to capturing a 10% share of the global space market predicted by 2030. It aims to achieve this by exploiting the innovation potential in the UK industrial and academic communities, by being a focal point where small and medium en-terprises, large industry and end users can work together with researchers to challenge barriers, explore and

develop new ideas, and bring these to commercial reality.

The Satellite Applications Catapult’s Sustainable Finance Programme aims to explore the market opportunity for geospatial solutions within the sustainable finance industry. We do this through analysing the Sustainable Finance value chain and identifying gaps and opportunities; publishing research papers and user profiles to inform the UK Space community; raising awareness of UK geospatial capabilities within the Sustainable Finance sector and creating partnerships and programmes of work to support the commercialisation of new products

and services by the UK space community.

More information, reports and updates are available at https://sa.catapult.org.uk/sustainable-finance/