Op-Ed: Masamichi Kono, OECD Deputy Secretary-General: Mobilising investment for low-emissions and resilient infrastructure
What should policy makers do to shift existing finance flows from brown to green?
This summer, we witnessed record-breaking heat and extreme weather events across the globe. Heat waves and wildfires raged across North America and Europe, as far north as the Arctic Circle. Heavy rainfall in India and Japan caused floods that killed hundreds of people, and destroyed tens of thousands of homes. The 1.5 degrees Special Report by the Intergovernmental Panel on Climate Change (IPCC) published last month reminds us that these meteorological phenomena are merely a taste of how climate change, indexed by the global mean surface temperature, will impact human wellbeing and the planet.
To address the urgent climate challenge, and meet our broader development goals, trillions of dollars need to be invested in low-emissions and resilient infrastructure. The OECD estimates that investment in infrastructure must increase to around USD 6.3 trillion of investment annually between 2016 and 2030 in order to meet global development needs alone. The good news is that making these investments “climate-compatible” – choosing renewable energy over coal-fired power – is not significantly more expensive. We estimate that the extra-cost is approximately 10%, but this is will be more than offset by annual savings in fuel costs. A further priority is to increase the resilience of infrastructure.
Shortage of globally available capital is not the problem: Institutional investors in OECD countries alone manage up to USD 84 trillion in assets.
The trillion dollar question is: What should policy makers do to shift existing finance flows from brown to greenand to mobilise additional green, sustainable finance and investment? A recent report by the OECD, Financing Climate Futures: Rethinking Infrastructure, prepared in co-operation with UN Environment and the World Bank, sets out the key components that need to be taken together to reach the low-emissions, resilient transformation that will allow us to meet the SDGs and core climate targets. These revolve around: infrastructure planning; innovation; fiscal sustainability; aligning the financial system with long-term climate risks and opportunities; rethinking development finance; and empowering sub-national and city governments.
Take infrastructure planning for instance. Governments need to strengthen actions to develop and plan “pipelines of projects” for green, sustainable infrastructure. Forthcoming OECD work shows that the lack of detailed infrastructure investment plans, and poor integration of these plans into national policy contexts, means it is not always clear what and where project investments are needed, when they should be built, how to finance them, or if they are sufficient to meet long-term climate objectives.
Another key step is for public actors to facilitate institutional investment being channelled to sustainable infrastructure assets using a variety of different tools. This can be done, for example, by raising awareness of climate risks and opportunities, by encouraging dialogue, platforms and partnerships between investors, policy makers and civil society, and by using public finance more strategically to mobilise private finance, as recommended by the OECD DAC Blended Finance Principles.
There are already encouraging signs. Green bonds have
seen year-on-year growth since 2011; last year alone, more than USD 160 billion dollars-worth were issued, up from less than USD 5 billion in 2011. Green bonds issuance over the past ten years has just passed the USD 500 million mark, to reach USD 514 billion cumulatively as of October 2018.
Leadership, such as that shown by the Financial Stability Board (FSB) Chair and Governor of the Bank of England, Mark Carney, has brought much-needed attention from investors to the risks of climate change. Investors are now increasingly recognising the potential impact of climate risks and broader environmental, social and governance (ESG) factors on portfolio performance, and are integrating them in their investment decision-making.
Earlier this year, the European Commission launched its Action Plan on Sustainable Finance, drawing on the recommendations of the EU High-Level Expert Group (HLEG) on Sustainable Finance. It also set up a Technical Expert Group on Sustainable Finance (TEG), with a view to mainstreaming sustainability in the financial sector. In a parallel development, a group of central banks and supervisors has established the Network of Central Banks and Supervisors Network for Greening the Financial System (NGFS) in order to enhance the role of the financial system in managing risks and mobilising capital for green and low-carbon investments.
The OECD is supporting these efforts, and stands ready to help policy makers, regulators and investors further integrate climate change in their decision-making, while taking into account specific national circumstances.
But much remains to be done. For example, there is a shortage of climate-aligned, sustainability benchmarks, a dearth of climate-related data on underlying assets, and a lack of clear definitions of green assets.There is also considerable scope for further developing the markets for green bonds and other sustainable financial instruments and developing bankable green projects, along with opportunities to strengthen domestic investment environments. More generally, better disclosure, better risk management, and dissemination of best practices are necessary to spur investment in low-emissions, resilient infrastructure. Climate change is one of the defining issues of our time – and the recent IPCC report shows that we are living at a critical moment. We urgently need to mobilise sustainable finance and investment at sufficient scale and pace to address the multiple challenges we face to human wellbeing. The OECD is striving to provide sound, evidence-based economic arguments to support the unprecedented climate challenge. What we need now is systemic change and ambitious action to make sure that funds are channelled to the right investments – including in infrastructure – to tackle one of the greatest threats humankind is facing.
Masamichi Kono is OECD Deputy Secretary-General
Through its Centre on Green Finance and Investment, the OECD provides a global platform for engaging policy makers, investors, businesses, and civil society on green finance and investment. The OECD stands ready to support the efforts of countries, investors, business and civil society in mobilising green finance and investment. Please join us to discuss global green finance and investment issues during our 5th OECD Forum on Green Finance and Investment, which will take place on 13-14 November 2018 at the OECD in Paris. A livestream of the event will be available via the Forum’s website.