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The $6.3 trillion dollar question for mobilising private capital in the fight against climate change

This year’s OECD Forum on Green Finance and Investment Co-operation focused on the vital need for financial collaboration, and how to engender it.

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At this year’s OECD Forum on Green Finance and Investment in Paris on November 13/14, where I was the Conference Animator, Angel Gurría, OECD Secretary-General, re-iterated the challenge in his opening keynote. The latest IPCC report, he said, warned on the need to keep warming below 1.5 degrees to avoid multiple dire consequences such as 10 million people exposed to dangerous sea level rises or the disappearance of the world’s coral reefs. In line with the conference theme, he pointed to the clear role of the financial sector to solve the problem: “The OECD estimates that around USD$6.3 trillion of investment in infrastructure is required annually until 2030 in order to meet global development needs. Making these investments “climate-compatible” is not significantly more expensive; our estimate is approximately 10%. However, it does require a systemic shift of investments away from carbon-intensive infrastructure to low-emissions, climate-resilient forms. To mobilise green finance and investment at sufficient scale and speed, we need to improve co-operation between public and private stakeholders, better align policies and take more ambitious action.”
As he noted to the 600 high-level participants from 69 countries, that’s what the OECD’s Centre for Green Finance and Investment does.
The $6.3 trillion dollar question though is how much large-scale, institutional private capital is backing the green transition? And conversely, how much are those same powerful investors invested in ways that are thwarting it?Michael Liebreich, Chairman and Chief Executive, Liebreich Associates, gave the good and bad news. The positive story is that $350bn every year is being invested into renewables, energy efficiency, power storage, smart grids and the like, representing $1 of every $6 spent on energy. And institutional investors are key allocators. But, the negative headlines, he said, are that while CO2 emissions have been flat for a few years, the Paris Agreement requires their elimination by 2050 and reduction by 45% by 2030 for a 50% chance of 1.5 degrees warming. He noted: “Disrupting the brown is what is necessary! Adding a green to a brown economy is not enough. Are we choking off the brown pipeline enough for a green economy to succeed fast enough?”
Green markets, he said, could grow quickly in a 7-year business cycle; for example LED now represents 40% of light bulb purchases, and electric vehicle sales in Norway have gone to 50% in a similar time-frame. But, he noted that there are only 2 cycles left for zero carbon budget: “Investors need to be asking themselves what assets they will be owning when there is no carbon budget and policies are clearer, and what they can do to adjust today?”
Certainly, major policy is moving.
Olivier Guersent, Director-General at the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) at the European Commission, gave his own recap of the infrastructure stats: currently responsible for 40% of global GHGs, and with the EU plotting €180-200bn per annum of additional investment between now and 2030: “This is a huge need. We know the EU should be putting a quarter of its budget towards climate issues, and that there is a large need for private investment because public finance
will not be enough.” Part of its response is the Action Plan on Sustainable Finance, a ten-point roadmap to boost private funding of sustainable and green projects by changing incentives and culture along the investment chain. Readers of Responsible Investor will be up to date with its progress, which we have covered closely: click here for the archive of RI’s EU Action Plan articles
A main plank is an EU-wide classification system for ‘green’ actions to reward environmentally beneficial economic activities and avoid greenwashing: “Some have said we should have a brown taxonomy, but we need to prioritise,” said Guersent. Long term, he said, the Commission will create a public-private platform bringing together experts, market participants and public bodies to develop the classification system and monitor sustainable investment flows. The Commission is also evaluating mandatory reporting requirements to make sure companies provide the right information to investors enabling them to assess their long-term value creation potential and sustainability risk management rigour.
Central banks and finance regulators are also following suit.
Nathalie Aufauvre, Director-General, Financial Stability and Operations at Banque de France, the country’s central bank, pointed to the work of the new Central Banks and Supervisors Network for Greening the Financial System (NGFS). See RI article
She said the French Prudential Supervision and Resolution Authority (ACPR) is currently surveying French banks and insurers on how they integrate climaterisk in their activities, for a report in January 2019: “The finance sector will need to measure and mitigate its own exposure to climate risk. That includes us. We will publish in the near future our own TCFD-related reporting to be as compliant as possible for a central bank.”
As RI has reported, the Swiss government will repeat in 2020 a revelatory survey of the country’s pension funds and insurers first carried out in 2017 examining their alignment with a 2°C climate scenario, after results from the initial study showed average alignment of their investments was closer to a 4-6° warming scenario. Switzerland is also looking to roll out the tests internationally as part of its commitment to the 2015 Paris Climate Change Agreement.
However, private ‘investment’ is also contingent on supply-side incentives. The key barriers raised at the conference to building a sustainability ‘pipeline’ (perhaps a more suitable word could be found!) were the quantity, quality and terms of investable projects; aka their ‘bankability’. Timothy Meaney, Principal Infrastructure Finance Specialist at the Asian Development Bank said ‘demand’ in the region didn’t seem to be an issue: “There is a wall of capital awaiting an investment home, according to an institutional investor I met recently. But there are multiple reasons such as an absence of potential projects and empowering regulatory/legal frameworks that make for sub-optimal risk/credit outlooks for long-term investors.” And he warned against an over-emphasis on sustainable ‘impact’ effects: “The outputs must be objective, measurable and
achievable. We don’t need to be too prescriptive and propose excessive management costs or burdens on investors. We want to nurture and engage investors, not create a negative regime that is more of a threat.” Marcus Svedberg, Investment Strategist at AP4, the large Swedish pensions buffer fund, backed up Meaney’s assertion of keen buyers: “We are very active in the market, but we need deals and funds to be large, liquid and scalable.”
Mafalda Duarte, Head, Climate Investment Funds, which deploys $8bn in capital via the world’s Multilateral Development Banks (MDBs) to support renewable energy, low carbon technologies, energy efficiency, and clean transport in middle-income countries, with a mission to unlock more than 9 times its own asset volume in complimentary private capital, said an “enabling regulatory framework to unlock private capital” was key: “There is an on-going process of strengthening the environment for investments. Governments are crucial in this process, especially in strong collaboration with stakeholders. A strategic planning process is key to ensure policy can respond to needed innovation.“She noted that the point was well highlighted in a new OECD report called Developing Robust Project Pipelines for Low Carbon Infrastructure
Writing in Responsible Investor recently, Masamichi Kono, OECD Deputy Secretary-General, outlined what policy makers should do to shift existing finance flows from brown to green: Link to article
Rachel Kyte, Chief Executive, Sustainable Energy for All, launched by former UN Secretary-General Ban Ki-moon to mobilize universal energy access, improve energy efficiency and increase the use of renewables, backed this up by pointing out that some of the MDBs could also significantly help leverage private development and climate capital by changing the sustainability goals and internal scorecards they are working to: “The MDBs should focus on the leverage rate and we need to hold them accountable for it. Some of the bilateral development funds are already doing this. We are 12 years away from needing to halve emissions and we must decarbonise the economy by mid-century!”

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