Private sector green finance best way to fight climate change
Anew decade should be a time for optimism, but it is hard to shake the sense of frustration over the slow action on climate change.
In 2015 the 21st conference of parties (Cop 21), the UN’s annual climate change conference, produced the Paris Agreement, recognising the urgent need to drastically cut emissions by 2030 to keep the global temperature rise below 1.5°C. Each Cop since has renewed the commitment to that goal. But so far we’re failing to achieve it, and failing badly.
A recent UN report revealed the still-growing gap between carbon reduction targets and actual emissions. Every year that emissions rise makes it harder to meet 2030 targets. Harder to protect our natural environment. Harder to ease the economic pain of climate change.
Injecting new urgency into the actions of governments and businesses should be the priority, especially in emerging markets. In these countries, decisions are being made now that will shape entire economic structures for decades to come. If these are not made on a sustainable, low-carbon basis, we’ll be locking in high emissions for the foreseeable future.
Climate change can at times feel like an impossibly huge problem to tackle. But the solution can perhaps be summed up in one word: investment. Governments and other state entities have their part to play, but only the private sector can marshal the sum of money required. That means boosting the green finance market. Investor appetite for green products is growing. An HSBC survey in 2019 showed that 63% of investor clients said they will enter or expand their presence in green finance over the next two years.
However, the market is still subscale, held back by a lack of investible projects. Looking at green bonds alone, issuance in the first three quarters of 2019 was almost $190bn, a big leap from the about $115bn in the same period last year. But this is a small dent in the trillions of dollars required by 2030. Worse still, only 26% of issuance in 2019 was attached to emerging market projects, far below what is required to guarantee long-term sustainable economic growth in those countries.
Targeted changes can make a difference, though. The first is encouraging better disclosure of climate risks. When investors have a clear idea of which businesses and sectors are most exposed to the effects of temperatures rising, they can make better decisions with their money. Wide adoption of standardised disclosure principles, such as those published by the Task Force on Climate-related
Financial Disclosures, will increase the number of viable projects for investors and help with the second change, driving more green finance activity in the real economy.
So far, green finance issuance has been dominated by national governments and financial entities. That cannot continue. Green finance participation is particularly important in high-carbon sectors, such as energy generation and heavy manufacturing. Here, transitioning to lower emissions is fraught with risk, but will provide huge opportunities for those firms that are successful. The right kind of financing at the right time will be crucial.
Recently we’ve seen the formation of industry bodies, such as Responsible Steel, that push for lower emissions in specific sectors. The longer businesses take to adjust to a low-carbon mindset the more likely they are to suffer blowback from climate aware consumers and investors.
GREEN FINANCE ISSUANCE HAS BEEN DOMINATED BY NATIONAL GOVERNMENTS AND ENTITIES. THAT CANNOT CONTINUE
The third change is making sustainable infrastructure an asset class in its own right. A number of studies show there is a global infrastructure investment deficit of between $40-trillion and $70-trillion. We simply don’t spend enough money on big ticket items such as roads, railways and power generation. Bridging this gap sustainably is vital. A separate asset class would allow products to become more standardised, more transparent and properly impact-linked.
Cities generate more than 70% of global carbon emissions, but most cities do not have direct capital markets access and cannot easily invest money to reduce this figure. That’s why the fourth change on the wish list is greater product innovation. This will provide more investment avenues to help turn promising, small-scale climate policies or products into mass-effect solutions. Many cities, for example, have pioneered projects that reduce the carbon emissions of waste disposal, or increase funding for greener buildings. Also encouraging is the developing “blue bonds” market, where investor returns are linked to the preservation of specific ecosystems.
Cop 26, to be held in Glasgow in November, will be crucial for the immediate and long-term future of our planet. We hope that it can point to more concrete achievements.