Fi­nanc­ing the cli­mate-change tran­si­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Un­less the world re­duces green­house gas emis­sions rapidly, hu­man­ity is likely to en­ter an era of un­prece­dented cli­mate risks. Dev­as­tat­ing ex­treme-weather events are al­ready in­creas­ing in frequency, but much of the worst cli­mate-re­lated dam­age, such as a sus­tained rise in sea lev­els, will be recog­nised only once it is too late to act.

Clearly, the cli­mate sys­tem’s time hori­zon does not align well with the world’s much shorter po­lit­i­cal and eco­nomic cy­cles. Listed com­pa­nies re­port on a quar­terly ba­sis, and re­cent reg­u­la­tory changes, such as those man­dat­ing in­creased use of mark-to-mar­ket ac­count­ing, limit long-term think­ing.

Gov­ern­ments usu­ally have leg­isla­tive cy­cles of no more than four years, and they must also re­spond to im­me­di­ate de­vel­op­ments. Yet sta­bil­is­ing the cli­mate re­quires sus­tained and con­sis­tent ac­tion over an ex­tended pe­riod. AXA and UBS, to­gether with the Pots­dam In­sti­tute for Cli­mate Im­pact Re­search, CDP (for­merly the Car­bon Dis­clo­sure Project), and the EU’s Cli­mateKIC (Knowl­edge and In­for­ma­tion Com­mu­nity) re­cently or­gan­ised a con­fer­ence in Ber­lin. There, they dis­cussed with lead­ing ex­perts in green in­vest­ments and fos­sil-fuel di­vest­ment how fi­nan­cial in­ter­me­di­aries can help to ad­dress cli­mate risks.

The fi­nan­cial in­dus­try’s ac­tive in­volve­ment is ur­gently needed. In the Paris cli­mate agree­ment reached last De­cem­ber, coun­tries world­wide agreed to limit global warm­ing to well be­low 2 de­grees Cel­sius, thereby defin­ing the track on which the world must progress rapidly. Over the next 15 years, an es­ti­mated $93 tril­lion will be needed for in­vest­ments in low-car­bon in­fra­struc­ture. Govern­ment fund­ing alone can­not meet this de­mand, so the fi­nan­cial sec­tor must help fill the gap.

But fi­nanc­ing change re­quires chang­ing fi­nance. And this process is al­ready un­der­way. De­vel­op­ment in­sti­tu­tions such as the World Bank are re­con­sid­er­ing their investment poli­cies. And, in the pri­vate sec­tor, there is grow­ing en­thu­si­asm for “green” bonds, loans, in­dices, and in­fra­struc­ture in­vest­ments.

Still, as the Euro­pean Com­mis­sion notes, less than 1% of institutional as­sets world­wide are in­vested in en­vi­ron­men­tally friendly in­fra­struc­ture as­sets. Given his­tor­i­cally low in­ter­est rates and the gen­eral lack of at­trac­tive investment op­tions, this is an ideal moment to tap into in­vestors’ grow­ing ap­petite for green fi­nan­cial prod­ucts.

Many large fi­nan­cial in­sti­tu­tions have re­cently joined a global ini­tia­tive pro­mot­ing fos­sil-fuel di­vest­ment. Re­search find­ings in­di­cate that global CO2 emis­sions must be re­stricted to less than one tril­lion met­ric tons be­tween 2010 and the end of the cen­tury to com­ply with the Paris agree­ment and limit global warm­ing to be­low 2C. This means that most avail­able coal, oil, and gas re­serves must stay in the ground.

As a re­sult, in­vest­ments in fos­sil-fuel en­ergy sources will con­tinue to lose value over time, even­tu­ally be­com­ing stranded. Thus, the fi­nan­cial sec­tor’s reval­u­a­tion of such hold­ings not only helps to sta­bilise the cli­mate, but also bet­ter pro­tects its clients’ in­vest­ments, and, by pre­vent­ing the cre­ation of a “car­bon bub­ble,” helps to sta­bilise economies. But sell­ing off th­ese hold­ings will not suf­fice; the freed-up as­sets must also be redi­rected to more sus­tain­able busi­nesses. For fi­nan­cial in­sti­tu­tions and in­vestors to their part, they ur­gently need a bet­ter

do un­der­stand­ing of the rel­e­vant cli­mate-re­lated investment risks, which the Fi­nan­cial Sta­bil­ity Board (FSB) has di­vided into three cat­e­gories: phys­i­cal, tran­si­tional, and li­a­bil­ity. In­formed investment de­ci­sions will re­quire sound, sci­en­tif­i­cally grounded data and uni­form stan­dards to as­sess th­ese risks, and to quan­tify op­por­tu­ni­ties against them.

Ef­fec­tive dis­clo­sure will hence be a key part of any new frame­work. An FSB task­force – com­pris­ing rep­re­sen­ta­tives from banks, in­sur­ers, institutional in­vestors, rat­ing agen­cies, con­sul­tants and au­di­tors – is cur­rently shap­ing vol­un­tary stan­dards, so that com­pa­nies pro­vide con­sis­tent and com­pa­ra­ble cli­mate-re­lated fi­nan­cial dis­clo­sures to their stake­hold­ers, whether in­vestors or lenders. This will also al­low com­pa­nies to gain valu­able in­sights into their own po­ten­tial for change, re­flect­ing a time-hon­ored prin­ci­ple: what gets mea­sured, gets man­aged.

This is no easy task. For ex­am­ple, car­bon foot­prints on their own will not steer in­vest­ments in the right di­rec­tion. In­stead of iden­ti­fy­ing the cham­pi­ons of en­vi­ron­men­tally friendly so­lu­tions, th­ese fig­ures merely re­veal which com­pa­nies cur­rently emit the most green­house gases. Mean­ing­ful dis­clo­sure stan­dards must take ac­count of sec­tor-spe­cific in­for­ma­tion and the im­pact on busi­ness strate­gies of the tran­si­tion to­ward a low-car­bon econ­omy.

All the gov­ern­ments that signed the Paris agree­ment can now be ex­pected to adopt a range of mea­sures to en­able them to im­ple­ment their de-car­bon­i­sa­tion strate­gies. In this con­text, car­bon pric­ing will be an es­sen­tial part of the pol­icy tool­box. Some gov­ern­ments have al­ready taken steps to pro­mote the de­vel­op­ment of green prod­ucts, via tax or mar­ket in­cen­tives. Over­all, such changes to le­gal frame­works must sup­port, not im­pede, the pri­vate fi­nan­cial sec­tor’s ef­forts to tackle cli­mate change.

Fi­nanc­ing the in­fra­struc­ture projects that are too ex­pen­sive for some na­tional gov­ern­ments to fi­nance on their own, but that are es­sen­tial to the trans­for­ma­tion of our en­ergy sys­tem – such as wind farms and long-dis­tance power lines – will re­quire a new class of global in­fra­struc­ture bonds. In the past, gov­ern­ments have en­cour­aged investment in govern­ment bonds. Now, in or­der to in­crease pri­vate investment in build­ing up clean in­fra­struc­ture, in­vestor­pro­tec­tion mea­sures and dis­pute-res­o­lu­tion mech­a­nisms must be con­sid­ered.

The fi­nan­cial sec­tor is ready to spear­head the shift to sus­tain­abil­ity. When Ger­many takes over the G20 pres­i­dency next year, it will have the op­por­tu­nity to con­vince its part­ners to cre­ate an ad­e­quate frame­work to en­cour­age change in the fi­nan­cial sec­tor that en­sures a smooth ad­just­ment to a low­car­bon econ­omy. For both pub­lic and pri­vate ac­tors, the time to act is now.

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