Climate thinking vital to lessen impact of the next stocks crash

The financial industry needs to step up with innovation, so that more private-sector investment finds its way into saving the planet

The coming crash in leading stock markets, which will be triggered by upwards pressure on prices, wages and interest rates, will leave investors scrambling for cover. There is still safe ground but it involves a leap of faith from short- to long-term investment priorities.

Markets have yet to take on board the massive shift in the world’s financial needs as it grapples with the economic consequences of the Covid-19 pandemic and the climate change threat.

As José Vinals, group chairman of Standard Chartered says, “trillions of dollars of investment are needed” from public and private sources to cope with the fallout from Covid-19 and the threat of climate change. But it will require a financing revolution to meet that demand.

Vinals was speaking at the recent Asian Development Bank (ADB) virtual annual meeting in Manila, which attracted politicians, government officials and financial experts from across and beyond Asia, where they reached a remarkable consensus on the urgency of achieving financing reforms.

John Kerry, the climate tsar of US President Joe Biden and a panellist at the Manila meetings, said Asian governments and the ADB should “raise their ambition” in dealing with the biggest threat to humanity ever encountered.

But that is easier said than done. Heavily indebted governments have already poured US$20 trillion of fiscal support into dealing with the economic consequences of Covid-19 and they cannot afford to simply raise their ambition.

The private sector is where the money is, rather than the public sector. Gross private-sector financial assets amount to US$200 trillion, according to the Allianz Global Wealth Report, the UN and other estimates. But how to attract these to long-term public investments?

The financial industry needs to step up with innovation, so that more private investment from Asia and elsewhere does not find its way into greatly overvalued Western stock markets.

The financial industry’s current approach to saving the planet can best be described as fragmented. At its centre is the much-hyped concept of ESG (environment, social and governance) investing, which is all about encouraging good corporate behaviour.

The movement claims to have attracted some US$30 trillion of investment to date but this is invested indirectly (via mutual funds, etc) in the shares of companies that meet ESG criteria rather than directly in specific climate change alleviation and other socio-economic projects.

Bond investments have a more direct impact, but while the green bond market has reached nearly US$1 trillion, that is still small compared to the trillions of dollars needed in areas like climate change and infrastructure.

As Vinals suggested, what is needed is not just green or blue bonds (to finance marine conservation) but rainbow bonds corresponding to different areas of need, including Covid-19 bonds of the kind Standard Chartered has helped pioneer in Thailand and India.

Or, as Indonesian finance minister and former World Bank managing director Sri Mulyani Indrawati argued, governments and politicians “need to care more about the SDGs” (the UN’s 17 Sustainable Development Goals). The trouble is that it is not possible to invest directly in these goals other than via a few specialist funds.

This is precisely where radical thinking is needed and that kind of thinking seems more prevalent in China than in the market economies of the West.

Zou Jiayi, Chinese finance vice-minister and alternate governor of the ADB, got right to the point when she suggested in Manila that multilateral development banks like the ADB and World Bank are obvious intermediaries that can prepare projects and issue bonds to finance them.

By boosting the capital of the multilateral development banks, governments can kill two birds with one stone – identifying and financing climate change actions and other projects while unlocking the door to private investment.

This kind of thinking is essential if we are to achieve a new Marshall Plan for climate and other financing that Rachel Kyte, dean of the Fletcher School at Tufts University, has argued is needed. Let’s hope that such innovation comes ahead of the trauma of a stock market crash.

What is needed is not just green or blue bonds but rainbow bonds corresponding to … areas of need