Fi­nanc­ing the fight against cli­mate change

Financial Mirror (Cyprus) - - FRONT PAGE -

Cli­mate change is al­ready wreak­ing havoc through­out the de­vel­op­ing world. Viet­nam, for ex­am­ple, has re­ported that nat­u­ral dis­as­ters, some of them ex­ac­er­bated by cli­mate change, have caused an­nual losses equiv­a­lent to 2% of its GDP. In agri­cul­ture-de­pen­dent coun­tries like Ethiopia, longer droughts and more fre­quent flood­ing are threat­en­ing liveli­hoods and food sup­plies.

As the in­ter­na­tional com­mu­nity gears up for the United Na­tions Cli­mate Change Con­fer­ence in Paris in De­cem­ber, iden­ti­fy­ing and stream­lin­ing sources of fi­nanc­ing for the fight against cli­mate change must be a top pri­or­ity. Devel­op­ment banks like the French Devel­op­ment Agency (AFD), where I am CEO, are well placed to con­trib­ute.

For starters, devel­op­ment banks can fi­nance projects that ben­e­fit both devel­op­ment and the en­vi­ron­ment. Global warm­ing is now a vi­tal fac­tor to con­sider when plan­ning any devel­op­ment project. For ex­am­ple, the ef­fects of cli­mate change can pose crit­i­cal risks to in­fra­struc­ture – agri­cul­tural ir­ri­ga­tion, public trans­porta­tion, or nearly any­thing else. Mean­while, ris­ing in­comes – a goal of any devel­op­ment ef­fort – nearly al­ways means in­creased con­sump­tion of nat­u­ral re­sources and en­ergy, re­sult­ing in more emis­sions and fur­ther warm­ing.

Such in­ter­lock­ing re­la­tion­ships be­tween global warm­ing and devel­op­ment ex­plain why the French gov­ern­ment re­quires that at least 50% of the fund­ing pro­vided by the AFD be di­rected to­ward devel­op­ment projects that also have a pos­i­tive im­pact on the en­vi­ron­ment. Ex­am­ples in­clude wind farms in Ethiopia, bet­ter for­est man­age­ment in Mada­gas­car, na­tion­wide cli­mate plans in In­done­sia and Viet­nam, and clean ur­ban trans­port in Colom­bia.

Devel­op­ment banks can also play an im­por­tant role in designing fi­nan­cial tools that al­low pri­vate in­vestors to con­trib­ute to the fight against cli­mate change. But to­day’s fund­ing chal­lenge is no longer just about quan­tity. Though po­ten­tial sources for cli­mate-friendly devel­op­ment fi­nanc­ing now in­clude pen­sion funds, in­sur­ance com­pa­nies, foun­da­tions, and sovereign wealth funds, what is of­ten miss­ing are mech­a­nisms to en­sure that in­vest­ments are chan­neled into well-tar­geted and ef­fec­tive projects.

One so­lu­tion is “green” (or “cli­mate”) bonds. Th­ese in­stru­ments have all the char­ac­ter­is­tics of con­ven­tional bonds, but they are backed by in­vest­ments that con­trib­ute to sus­tain­able devel­op­ment or the fight against cli­mate change.

Un­til re­cently, only a few or­gan­i­sa­tions or gov­ern­ments, in­clud­ing the World Bank, the Amer­i­can state of Mas­sachusetts, and the French re­gion of Ile de France, is­sued green bonds, and gen­er­ally the amounts in­volved were mod­est. But in the past two years, other play­ers have en­tered the mar­ket, and vol­umes have sky­rock­eted. In 2014, emis­sions of green bonds ex­ceeded the to­tal in all pre­vi­ous years com­bined.

In­deed, de­mand is out­strip­ping sup­ply. The lat­est bond of­fers were all over­sub­scribed – and the trend is likely to con­tinue. The in­sur­ance in­dus­try has com­mit­ted to dou­ble its green in­vest­ments, to $84 bln, by the end of 2015. And in Septem­ber, three ma­jor pen­sion funds from North Amer­ica and Europe an­nounced plans to in­crease their hold­ings in low-car­bon in­vest­ments by more than $31 bln by 2020.

As the mar­ket for th­ese bonds ex­pands, they must be bet­ter la­beled and cer­ti­fied. To­day, har­monised stan­dards do not ex­ist. The qual­ity of the as­sets back­ing the bonds de­pends solely on is­suers’ good­will and tech­ni­cal skills. Spe­cific guide­lines and rat­ing meth­ods need to be de­vel­oped. In this con­text, the re­cent de­ci­sion by a coali­tion of in­sti­tu­tional in­vestors to mea­sure and dis­close the car­bon foot­print of at least $500 bln in in­vest­ments is a step for­ward.

In Septem­ber, the AFD is­sued EUR 1 bln ($1.2 bln) in cli­mate bonds, with one goal be­ing to con­trib­ute to the devel­op­ment of con­crete qual­ity stan­dards. With the help of a ma­jor agency that rates cor­po­rate so­cial re­spon­si­bil­ity, we were able to pro­vide in­vestors with solid in­for­ma­tion – and an ac­count­abil­ity process – about the port­fo­lio’s di­rect im­pact on green­house-gas emis­sions. In­deed, the projects fi­nanced by th­ese bonds were re­quired to meet strin­gent cri­te­ria, in­clud­ing a prior anal­y­sis of their car­bon foot­print, proof of a clear and sig­nif­i­cant im­pact on cli­mate change, and a de­sign that is aligned with the broader strate­gies be­ing pur­sued by lo­cal ac­tors and coun­tries.

Cli­mate bonds have the po­ten­tial to em­power coun­tries and in­sti­tu­tions as they move to­ward meet­ing en­force­able com­mit­ments to re­duce CO2 emis­sions. How­ever, if they are to be ef­fec­tive, they will re­quire clear guide­lines and a re­li­able frame­work for as­sess­ment. As lead­ers from coun­tries and in­sti­tu­tions from around the world pre­pare to meet in Paris in De­cem­ber, get­ting the fi­nanc­ing right should be a top pri­or­ity.

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