What should policy makers do to shift existing finance flows from brown to green?
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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 green
and 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
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