Hugh Wheelan: The politics is still like treacle, but the regulatory and economic blender of green finance is whirring

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I was the Master of Ceremonies for the 6th OECD Forum on Green Finance & Investment last week in Paris. It’s a good event that attracts policy makers, national and multilateral development banks and investors. The conference was opened by vigorous keynote calls to action by Ángel Gurría, OECD Secretary General and Brune Poirson, France’s Secretary of State to the Minister for the Ecological and Inclusive Transition. Poirson said the Paris Agreement must be made “irreversible” and warned against ‘collapsologues’ vaunting inaction and lack of hope towards environmental breakdown “as if this was an option”. She said that we need to change the transition dialogue to an “advantage and growth story”.
But after years of hearing similar analysis of the problem, and the ‘billions to trillions’ wishlist…..how?
Well, surprising as it may seem for one of the world’s unsexiest words, the EU’s green ‘taxonomy’ (one of the key pillars of the EU’s Action Plan on Sustainable Finance) is starting to focus minds and put a much-needed policy floor under the necessary regulatory alignment and information requirements that could hasten the economic change needed. During the conference, the OECD was hosting a so-called Sherpa meeting on how to progress the International Platform on Sustainable Finance (IPSF), the EU’s attempt to export the green taxonomy to other regions and harmonize rules on what is sustainable, or “green” investment; although we are seeing resistance – more of which later.
Poirson said France – a leader in ESG and climate reporting under its comply-or-explain Article 173 regulation – would adopt a taxonomy based on the EU’swork by the year end in a bid for policy coherence across ministries. And finance ministers are stepping up. Leena Mörttinen, Director General (Financial Markets Department) at the Finnish Ministry of Finance noted that the Coalition of Finance Ministers for Climate Change was gaining momentum and could have a key role in pushing the private sector. It kicked off officially in April with 40 signatories, but already has 50+ members and aims to respond to climate change with concrete actions in tax and fiscal green budgetary planning. On the green ‘taxonomy’, Mario Nava, Director, Horizontal Policies at DG FISMA (the EU Directorate for Financial Stability, Financial Services and Capital Markets), said the EU’s Action Plan on Sustainable Finance is in the final stage of political negotiations – the ‘trilogues’ between the European Commission, Parliament and the European Council (Member States) – where key wrangling points include whether nuclear power should be included, and if it should come into force next year – as originally proposed by the European Commission – or in 2022 as some EU Member States are now trying to push it back to. The Technical Expert Group (TEG) that has evolved the Action Plan is now wading through some 800 responses to the final consultation, according to Nathan Fabian, TEG member and Director at the Principles for Responsible Investment. Fabian said 25 asset owners were already trialling use of the taxonomy. Nava said the volition in the EU for the Action Plan was down to popular and political support backed up by the EU Green New Deal of new EC President, Ursula von der Leyen, which is expected to include a number of pillars, including sustainable finance. But, Nava noted that Europe was only 8.98% of world CO2 emissions, and even with the 28 EU countries, plus 7 other large, supporting nations it only reached 44%.
As RI wrote recently, and looked at through a series
of deep-dive webinars on the Action Plan EU policymakers will be busy this Autumn with progress on MIFID, ESG data, ‘fitness check’, fiduciary duties and a “gear shift” on the Action Plan. But a lot will depend on how the politics at the EU level progresses. An informative, short article on Politico outlines the high-level political manoeuvres. And, as mentioned earlier, international pushback to the EU’s Action Plan ‘internationalisation’ plans is growing, or splintering as countries look to create their own taxonomies.
Satoshi Ikeda, Chief Sustainable Finance Officer at Japan’s Financial Services Agency, said a recent report by the Keidanren Japanese business federation had raised concerns about a taxonomy “stifling disruption” and not reflecting a necessary energy ‘transition’, but instead putting a “darkest of green” labels on the economy. RI has reported the Keidanren opposition.
Sean Kidney, Chief Executive Officer of the Climate Bonds Initiative, said the Keidanren report had been written by the Japanese steel federation so it was hardly surprising it was so negative.
The politics is still like treacle, but the regulatory and economic blender of green finance is finally whirring. At the supranational regulatory level, the Sustainable Finance Network of the International Organization of Securities Commissions (IOSCO) will deliver an assessment to the EU before the year-end on the direction of its regulatory travel and the shorter-term pressures it may face, according to Ana Martínez-Pina, Vice-President of the National Securities Market Commission at the Bank of Spain. And central banks within the Network for Greening the Financial System (NGFS), have been upping their game on ‘walk’ not just ‘talk’ with more than 25 of them now integrating sustainability factors into the management of their own investment portfolios. Satoru Moroshita, Vice Minister, Global Environmental Affairs at Japan’s Ministry for the Environment, said Japan had produced a practical guide for scenario analysis, and that for green bond issuance it was starting to offer financial assistance for any additional costs to issuers.And in the banking sector, the OECD released its first guidance for environmental and social risk management for corporate lending and underwriting activity, in a report titled: Due Diligence for Responsible Corporate Lending and Securities Underwriting. All of these initiatives will be important as we approach COP26 in 2020, which will be the first five-year reporting tranche for the Nationally Determined Contributions (NDCs) for governments of the Paris Agreement. As Simon Zadek, Principal, Project Catalyst at the United Nations Development Programme, said: “Every financial institution that is licensed should be tracking towards these long-term goals.” Daniel Klier, Group Head, Strategy, and Global Head Sustainable Finance at HSBC gave a clear précis of what is working right now, and what is not, as we approach that post Paris 5-year marker. On the plus side, he cited the success of the green bond market at $250bn and the number of actors now talking ESG, including potent bodies like the NGFS and international regulators. But, he pointed to the funding gap to keep below 2 degrees: “We need $6-8 trillion of finance every year, and we have $1 trillion at the moment. He also noted the increasing “fragmentation of climate initiatives”. “This was very clear at the recent New York Climate Week, and we are long past the point that this is helpful.” Klier lamented that “we talk about the same barriers every year: lack of information and disclosure,” and said the sustainable finance field had to face up to some hard truths: “Take-up of the TCFD recommendations has stalled and the quality of the information is not good enough given the time left to mobilise. We also have to be honest that ESG integration hasn’t mobilised much green finance, and that we have a lack of experience out there for the right kind of financing: very few people have worked in hydrogen development or complex green infrastructure in Vietnam. Then, we have that old supply/demand problem: investors say there are not enough projects to invest in, but at the same time they also want US dollar de-risked projects with no political frighteners. We can’t seem to bridge this.” Klier said there was an urgent need
for common sustainability standards and impact measurement: “We need frameworks at scale and developed countries’ pensions money earning returns from green investment in the developing world where the money is needed. But we are also stuck in a ‘very green’ or ‘very brown’ debate, when actually 95% of the market lies in between. We also need a proper discussion again on a carbon price.”
Laurence Boone, Chief Economist at the OECD, noted that we are still far from the carbon price reiterated by the Stiglitz/Stern High Commision on Carbon Prices, which concludes that the explicit carbon-price level consistent with achieving the Paris temperature target was at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030.
And Jorge Moreira da Silva, Director of the Development Co-operation Directorate at the OECD, noted that $3.9bn of concessional finance every year was still subsidising fossil fuels, which if it could be shifted to climate compatibility would make a huge difference.
One of the major boosts of the OECD conference was the number of excellent presentations by emergingmarkets countries – Vietnam, Indonesia, Thailand, South Africa, Rwanda, Brazil – on clear renewable energy systems, tarifs and targets that are growing green power capacity exponentially. The details are too much for elaboration here, but the panels can be watched on the OECD event webcast.
However, as Tim Gould, co-head of the World Energy Outlook series at the Paris-based International Energy Agency, warned the conference, renewables investment, for example, in South East Asia represented just one third of the current total energy financing, and had flatlined and will be dissipated by population growth and consumption unless it grows again quickly.
And as the UNDP’s Zadek reminded everyone, there are megatrends that will dwarf any low-carbon shift if it isn’t global and wholesale. Unless China’s Belt & Road initiative, he said, rapidly develops under a green infra banner then its CO2 emissions over the next 20 years will be twice that of China today: “And you have to remember that the 20-year+ cycle of infra/carbon lock-in happens in the first 5-7 years of design phase! We need to start joining the dots much more rapidly.”