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Financing sustainability "has gone from niche to mainstream,"
said James Alexander, chief executive, UK Sustainable Investment
and Finance Association, and it's now up to global investors to
expand their "impact on social and environmental issues."
But Alexander and other panelists at the Economist Impact
Sustainability Summit held this week said that it will take a
collaborative effort by private investors and government, and from
wealthy nations in support of developing economies, if the world is
to avoid the worst impacts of climate change.
Green finance has been one of the few good stories in the global
economy in last few years, said Daniel Hanna, global head for sustainable finance, Standard
Chartered, a London-based financial services company. More than $1
trillion in sustainable bonds were issued in 2021 for the first
time. That's a 20-fold rise from 2015, and now accounts for almost
10% of global debt markets, he said.
Lending for green and sustainability projects, including clean
energy, also surged to a new record of $700 billion in 2021, more
than triple the prior peak, he said.
More is clearly coming, such as through the Glasgow Financial Alliance for Net Zero,
announced during COP26, which has 450 financial firms from 45
countries committing over $130 trillion to net-zero
investments.
"I think we are seeing a fundamental rewriting of financial
sector," Hanna said. "The challenge of climate change … is
increasingly being embedded into how finance operates on day-to-day
basis."
Innovation, democratization,
standardization
Now, the challenge is ensuring there's enough investment, and
getting it to areas and sectors in which it can make the biggest,
quickest difference, panelists said.
"There's huge momentum, but we actually need a lot, lot more,"
Hanna said. He pegged net-zero carbon investment needs at as much
as $8 trillion annually through 2050.
This doesn't even include another $2.5 trillion per year that
the UN has identified to meet its sustainability goals, he added.
Innovation, democratization, and standardization will help
encourage more lending, the panelists said.
Innovations are coming from all sectors, such as "transition
bonds," which fund efforts by companies or governments to move on
the path to net zero. The first transition bond in aviation was
issued in 2021, for example. "Blue bonds," which commit
funds to protect and clean oceans and coastlines, were pioneered by
the Seychelles in 2020, and Belize offered $553 million of blue
bonds in 2021.
Another idea is to incorporate key performance indicators (KPIs)
in corporate bonds. "With KPIs, if someone doesn't hit their
transition target, they could be required to purchase [carbon]
offsets," Hanna said.
Democratization raises the matter of where an investment is
made, not just what the investment is.
COP26 brought the issue of inequity to the forefront, as nations
that have contributed very little to the carbon inventory are
bearing the brunt of its impacts. They successfully pushed for
wealthy nations to live up to their prior promises to devote $100 billion per year to
climate adaptation and the energy transition in developing
nations.
Panelists said the G20 can get into the act more strongly, and
they said to watch what happens as Indonesia holds the G20
presidency this year and Brazil holds it in 2023.
"You need to tackle sustainability risks at the global level,"
said Olaf Sleijpen, executive director, monetary affairs and
financial stability, De Nederlandsche Bank. "The good news is that
some non-western countries also have it high on their agenda. We
see countries like India say we are willing to do something about
our emissions, but we need some [financial] help."
Thinking geographically about how to invest in the energy
transition also brings practical benefits, Hanna pointed out. "A
single dollar invested in a solar park in India has seven times the
impact of reducing carbon emissions in France. How we mobilize
money from Lyon to Lucknow is … going to actually make a real
change to the world," Hanna said.
Democratization also means "enabling sustainable behavior" by
the general public, added Katherine Brown, vice president,
inclusion, impact & sustainability, Europe, Visa.
Through surveys, Visa has identified significant interest in
sustainability, but lack of knowledge or opportunity to act on it,
she said. In a survey of more than 30,000 people worldwide, Visa
found that 63% said climate change is important, but only 34% said
companies are helping them to be sustainable.
A consumer finance company like Visa can play its part by
offering green banking products, such as carbon offsets for
financial transactions and travel, partnership with electric
vehicle providers, and contactless payments for public
transportation, which became important during Covid-19. "We have to
bring people along on this journey," Brown said.
These are on top of Visa's own sustainability
commitments. Starting in 2020, all of Visa's global electricity
needs have been supplied by renewables. Last year, it issued a
$500-million green bond to support energy and water efficiency
projects through 2027 for its buildings, employee commuter
programs, and more.
Only doing the easy stuff
However, along with greater corporate commitment to
sustainability comes the risk of "greenwashing," according to
Lutfey Siddiqi, professor at the London School of Economics. He
said that investors and government need to distinguish between
corporate talk and action.
This is a global matter for corporations, their investors, and
government, Hanna said. "We are only doing, frankly, the easy stuff
now—powering with electricity whenever possible, and with
renewables where we can," he said. "Now we have to tackle the
hard-to-abate sectors that are completely embedded in how global
economy works. We need humility … we're just getting started."
This is where standardization of reporting on GHG emissions and
other metrics comes in, panelists said. They called on governments
to help provide consistent rules that investors can use for
weighing green and sustainable investments.
The International Financial Reporting Standards Board is taking
the lead on developing voluntary standards. Having those types of
standards written into law by the EU and applied globally would be
welcomed by investors, said Sleijpen.
On 21 March, the same day the panelists were speaking, the US Securities and Exchange
Commission released its first-ever rules to require climate
risk disclosure for public companies—another mark of a
governmental effort to drive greater consistency.
Panelists stressed the urgency of providing this common ground
for private finance for energy transition and sustainability.
"Don't let 'perfect be the enemy of the good,'" Hanna said. "It's
taken decades to harmonize tax legislation [globally]—and it's
still not done. We do not have decades … on climate change."
Government's role
One panel at the conference expanded upon the ways that
governments can support private investment for carbon reduction
concurrently with improving economic equality across the world.
Setting policies with significant carbon prices would be a
direct signal to investors, said Sleijpen. "The business case to
invest in energy transition must be better ... [and that] starts
with pricing of carbon," he said. "It … should be more profitable
to invest in green technologies," backed by government policies
that investors can be confident will remain in force.
Central banks can play a role, too, said Jim O'Neill, senior
advisor at London-based policy institute Chatham House. "Just as
central banks in many parts of the world are given an inflation
target … if governments were truly, truly committed to net-zero …
then, of course, central banks could be mandated to incorporate
that into everything they are doing," he said.
As one example, O'Neill said a large central bank could send a
"bold" message by saying that financial ratings agencies should
consider a company's contribution to fossil fuel emissions in
analyzing capital risk, though he added, "that has to be well
thought-out."
It should be noted that the idea of incorporating climate risk
into financial measures is controversial, at least in the US. Sarah
Bloom Raskin, nominee to the US central bank, the Federal Reserve,
withdrew her application earlier this month when Republicans and
one Democrat said they believed she wants to go too far in that
arena. In her resignation letter to US
President Joe Biden, Raskin said, "It was—and is—my
considered view that the perils of climate change must be added to
the list of serious risks that the Federal Reserve considers to
ensure the stability and resiliency of our economy and financial
system."
Without commenting on the US situation, O'Neill said he
understands why this is a sensitive issue.
Central banks "are finding it difficult enough … to actually
keep inflation in tow, so throwing in another target for them
[climate change] might exacerbate the challenge of achieving
anything," he said.
Inflation has even worse effects in poorer parts of the world,
where food consumes larger parts of a household's budget, and thus
pushes climate change further down the agenda, O'Neill said.
On the other hand, Alexander said he is "very optimistic" about
the way the private sector has stepped up its environmental
commitments and financing. "In some ways, corporates are now ahead
of governments," he said.