ENVIRONMENT

FINANCING A GREEN FUTURE

As rich governments fail to adequately fi nance green initiatives worldwide, private and institutional investors are being sought to pick up the slack.

SYNERGIA FOUNDATION

RESEARCH TEAM

It will be recalled that at the 2009 UN Climate Summit in Copenhagen, rich countries had made promises to fund developing countries in their transition to green processes that reduced greenhouse admissions. By 20102012, this assistance was to be to the tune of US $30 billion and was to increase exponentially to US $ 100 billion by the next decade. In a 2020 report, the UN had concluded that the 100 billion target was ‘out of reach’. This has seriously jeopardised eff orts to meet the 2015 Paris agreement goal of restricting global warming to “well below” 2 °C, if not 1.5 °C, above pre-industrial temperatures.

UNREALISTIC PLEDGES

International pledges and agreements have not kept up to the original intent. The US$100 billion a year commitment left many unanswered questions. There was no agreement on how to measure the pledges of individual countries. The Organisation for Economic Co-operation and Development (OECD) estimates that countries contributed $80 billion in climate fi nance to developing countries in 2019, up from $78 billion in 2018. The pandemic has ushered in a new era of uncertainty. Investments are now prioritised in areas such as public health, challenging the wider universe of climate fi nance. The true measure of success or failure, analysts point out, will be whether climate fi nance pledges are translated into actual projects. Others criticise that even these suggested numbers are vastly infl ated. Oxfam estimated public climate fi nancing at only $19 billion–$22.5 billion in 2017–18, around onethird of the OECD’s estimate. The diff erence is attributed to the scope of projects assessed as well as accrued value from development loans. They argue that only the ‘benefi t accrued from lending at below-market rates should be counted’ and not the full value of the loan itself. Similarly, it would be incorrect, they argue, to assess aid projects as ‘climate relevant’ when they do not target climate action primarily. Without a common methodology for allocation of resources and assessment of projects’ eff ectiveness, divergent estimates are bound to fl ourish.

Thus far, much of climate fi nance has gone towards projects to reduce greenhouse gas emissions, despite the Paris agreement calling for a balance between these ‘mitigation’ projects and those that help people ‘adapt’ to the eff ects of climate change. These mitigation projects clearly fi nd favour with donors since the impact is measurable, whereas it is less easy to defi ne successful adaptation. Private fi nance, in particular, has consistently favoured mitigation projects which generate quantifi able returns on investment, such as solar farms and electric cars. The expectations from rich countries have risen since. “By the time we get to Glasgow, if they haven’t given us another $100 billion [for 2021], then

Much of climate fi nance has gone towards projects to reduce greenhouse gas emissions, despite the Paris agreement calling for a balance between these ‘mitigation’ projects and those that help people ‘adapt’ to the eff ects of climate change

they are completely unable to meet their obligations,” says Saleemul Huq, director of the International Centre for Climate Change and Development in Dhaka. In the midst of climate financing falling short on its promise, new deals have been pouring in. In the G7 meeting held last June, Canada, Japan and Germany announced their renewed commitment to contribute $100 billion annually through to 2025. The EU pledged an extra $5 billion by 2027, and U.S. committed to providing $11.4 billion in annual financing by 2024, making it the largest single climate-finance contributor.

GREEN MONEY

Finance will play a major role in making the shift towards a green future. Credible climate action needs dependable and sustainable financial sources, and therefore, climate finance by private investors, long a buzzword, is now appearing to be a life saviour if it gains widespread favour. Shifting the economy from fossil fuels to clean sources of energy requires a vast reallocation of capital. The European Union has devised a new labelling system, or taxonomy, which helps categorise activities it deems as environmentally sustainable. This is expected to assist funds and firms to disclose what share of their activities qualify as green, and that clarity will further boost capital inflow. The EU system has put together a ‘Green Deal’ for sustainable finance, but even this is not foolproof. It results in an elaborate taxonomy that covers 70 activities and educates investors on what is green and what is not, with an aim to make it easier for investors to track the carbon footprint of their investment deals.

The financial sector has a crucial role in fighting climate change, but a far more rigorous approach is needed to agree on measurable and quantifiable indicators. A green boom is underway, as shown by the rise of Tesla and the explosion of shares in electric vehicle makers. The private sector is enthused as many other industries have also taken to boasting about their green credentials. This global effort to ensure sustainability is not without hiccups. ‘Greenwashing’ has become a point of concern as U.S. companies and ESG funds have invested in questionable industries, including ‘alcohol, gambling and tobacco and fossil-fuel producers. Limited success thus far has got critics exclaiming that green finance suffers from ‘woolly thinking, marketing guff and bad data’. There is a new class of climate savvy asset owners, asset managers, banks and insurers who see a future in green projects such as the Glasgow Financial Alliance for Net Zero (gfanz). The alliance, which represents $9trn in assets, consists of leading financial institutions that are committed to an accelerated pace of decarbonisation of the global economy. In this context, the ‘role of green banks and local development finance institutions’ gain critical importance.

The green bank model has proven effective in using limited public funds to mobilise large amounts of private capital. The green banks have provided a tested method to ‘derisk projects, provide patient capital, create new financial instruments, build local capacity and help demonstrate new technology’. NRDC estimates that “members of the Green Bank Network have invested or committed US$50.4 billion in climate projects since the first green bank was founded in 2012, leveraging private investment in projects valued at US$134.7 billion”.

Joe Phelan is the Director of the World Business Council for Sustainable Development, India.

Climate finance projects have mainly been targeted at mitigation projects as opposed to those that help people adapt to the effects of climate change. Lack of a common methodology for allocation of resources and assessment of projects’ effectiveness has led to divergent estimates which do not help the cause. So how can we better measure the effectiveness and impact of climate finance projects?

Climate-related risk needs to be brought into the heart of all financial decision-making. Existing enterprise-risk management principles and approaches can be applied but they must evolve. WBCSD has worked with the Committee of Sponsoring of the Treadway Commission (COSO) to develop guidance on understanding and managing ESG risk. We also supported the Task Force on Climate-Related Financial Disclosures (TCFD) in the development of their guidance on risk management integration and disclosure. Clear, consistent, comparable and decision-useful information is also required as limited data and clarity on transition pathways hinders action. The TCFD recommendations provide a valuable basis especially for the advancement of strategy and risk disclosures. The new TCFD guidance will also aid the development of communication related to metrics, targets and transition planning. Those recommendations and guidance must then be standardized under the direction of the financial standard setters (IFRS, ISSB) with considerations given to the connections with financial accounting and reporting standards. Investing in nature-based solutions can be a way to integrate mitigation of climate change, with resilience to climate change, as well as promoting health and sustainable livelihoods, maximizing co-benefits and avoiding the trade-offs of mitigation vs adaptation.

Assessment

Amidst the deluge of fuzzy statistics and contestable figures provided by individual countries, the goals of climate change has suffered a big blow. Global climate action needs trusted financial data in order to meet its objectives and indeed to assess progress made by member countries in meeting their stated pledges.

Green banks act as important mediators in facilitating and scaling-up financing for the environment. It is equally important to invest in projects that help communities to ‘mitigate’ as well as ‘adapt’ to the perils of climate change.