Copenhagen climate summit frames investment choices

Survey of 64 developing-country financial institutions (FIs)

The upcoming Copenhagen summit on climate change comes without a moment to lose. Eleven years after the Kyoto treaty first put limits on greenhouse gas emissions, more than half of industrialized nations aren’t meeting their targets—and important players such as the United States and the developing world still haven’t set definite controls. To head off catastrophic warming, a nearly 50% increase in projected global warming emissions must be turned into a drastic reduction by 2050. The stakes are enormous, especially in developing countries where 90% of future emissions growth is expected to take place. On the one hand, these countries need affordable and sustainable forms of energy to support their rapidly growing economies. On the other, they could be devastated by weather changes that strain their agricultural systems, deplete local water supplies, flood coastal cities and cause human migration on an unprecedented scale. Climate adaptation will entail costs of tens or even hundreds of billions of dollars annually in the developing world. The local financial sector is not prepared to bear this burden yet. Nor is it ready for the torrent of investment dollars headed its way to support greenhouse gas mitigation.
Whatever else comes out of Copenhagen, financial partnerships must be forged to support the huge flow ofinvestment capital intended for the developing world. Such a helping hand won’t be a hand-out. On the contrary, industrialized nations in need of carbon offsets will turn to developing countries that offer the least-cost options in a burgeoning trading market. To complete the transition to a low-carbon economy, up to $50 trillion in renewable energy and energy efficiency investments will be required over the next 40 years, mainly in emerging markets. This puts financial institutions in developing and transition economies in a pivotal position: either they find ways to gain from these climate-friendly investment opportunities or face growing adaptation costs that sap available returns. As part of this global bargain, they stand to benefit from accelerated use of cutting-edge technologies while industrialized countries ease their transition away from carbon-based fuels. While it is not yet clear whether Copenhagen will bring this vision into reality, the German development finance institution DEG commissioned a first-of-its-kind survey that provides some hopeful signs. Conducted by RiskMetrics Group, the survey reached out to 154 commercial and development banks, investment funds and leasing institutions in Eastern Europe, Africa, Asia and Latin America. Of the 64 developing-country financial institutions (FIs) that provided complete responses:

• Nearly two-thirds recognize that climate change will affect their business, with a majority acknowledging both positive and negative impacts.
• Two-thirds have an environmental or sustainability policy to help guide their business practices, about half of which address climate change explicitly.
• Even more—82 percent—have adopted risk management procedures that embrace environmental and social factors, paving the way for even greater consideration of climate change.

On top of this solid foundation, however, more building blocks must be laid. For example:

• Only 28 percent of the surveyed FIs have had any board-level involvement or review of climate change.
• Less than one third of the respondents (mainly FIs in Eurasia and Latin America) say they are factoring climate change in their lending and investment decisions.
• Most significant, only two are looking specifically at greenhouse gas emissions as part of their financing decisions, and none are tracking emissions through their project financing.

As more nations adopt emissions caps, carbon is fast becoming a cost of doing business that affects due diligence and risk management procedures. Financial institutions identified as having best practices in our report will price this new risk appropriately and expect to thrive in a carbon-constrained world. Others that ignore this risk face the same possible fate as those who failed to account for hidden liabilities in the recent sub-prime lending crisis.With that in mind, developing-country FIs are well served to embrace the following governance objectives as they look to the Copenhagen summit and beyond:

• Support a peak in their countries’ greenhouse gas emissions so that a global cut of up to 50 percent can be achieved by 2050.
• Price carbon emissions in future energy-related financing and take advantage of burgeoning carbon trading opportunities that will benefit their domestic economies.
• Involve more board members and CEOs in the oversight of climate governance.
• Finally, seek assistance from institutions that can provide training, awareness and capital to achieve practical steps toward achieving these goals and a globally sustainable economy.

The drive toward a low-carbon global economy depends on sound climate governance practices by global financial institutions and their local development partners. Without them, momentum will falter. With them, the goal line is in view. This is a race no one can afford to lose.
Dr. Peter Thimme is head of Sustainable Development/Environment for DEG, a development finance institution from Germany. Doug Cogan is Director of Climate Risk Management for RiskMetrics Group. Their new report, Addressing Climate Risk: Financial Institutions in Emerging Markets, has been published by Ceres, the environmental investor coalition Link to report

The authors’ views do not necessarily represent those of RiskMetrics Group or its clients.