Money makes the world go round, as the old adage goes. Unfortunately, the current investment climate is spinning the globe in the wrong, carbon-intensive, direction.
The global concentration of carbon dioxide (CO2) in the atmosphere has now surpassed 400 parts per million for the first time in millennia and global energy-related CO2 emissions reached a high of 31.6 gigatonnes (Gt) in 2012. As the United Nations Environment Programme’s 2013 Emissions Gap Report shows, inaction now in curbing greenhouse gas (GHG) emissions will require costlier interventions later to keep global temperature rise below 2̊C this century and adapt to climate change. For example, a recent UNEP report suggested that adaptation costs for Africa alone could reach $50 billion by 2050.
The international community is working on a new climate deal, which should be further articulated this December in Lima and concluded in Paris in 2015. However, large-scale public and private investment is required to finance low-carbon, climate-resilient development; the UN Secretary-General’s Climate Leadership Summit is being convened in New York this month with that goal in mind.
Clearly not enough capital is flowing into green and climate-smart investment. Research by Carbon Tracker and the London School of Economics found that over the past two years the carbon intensity of companies on the main London and New York stock exchanges climbed seven and 37 per cent respectively. The same report estimated that the 200 largest listed fossil fuel companies spent $674 billion on exploration and development in 2012. Estimates indicate that around $1 trillion of additional investment is needed annually up to 2030 to green new infrastructure in energy, transport, buildings and industry. Such an amount, reasonably modest at roughly 1.5 per cent of global GDP, is in addition to the need to mobilize $5 trillion a year for the underlying investment. Even if we meet this investment target, there are still trillions of polluting investments that need to be addressed.
Public finance is pivotal to attract investment into a low-carbon future. Institutional investment needs to be mobilized to close the funding gap for low-carbon energy and transport infrastructure, particularly in developing and emerging economies. There are signs this is happening. China has rapidly increased its efforts and now invests more than Europe; in 2013 it saw more new-build energy capacity from renewables than from gas and coal combined. Meanwhile other developing countries—including India, Brazil and South Africa—have also scaled up investment in renewables.
However, the capital markets also manage trillions of dollars that could be directed towards a green economy. Public and private institutional investors, banks and insurance companies are increasingly looking at portfolios that minimize environmental, social and governance risks, while capitalizing on emerging green technologies. Some $20 billion worth of Green bonds were issued in the first half of 2014, which nearly doubled that in the whole of 2013. This capital market shift, the evolution of market instruments such as carbon finance, and green stimulus funds established in response to the economic slowdown are opening up space for financing a low-carbon economic transformation.
We must continue to accelerate this momentum. UNEP is already working with the finance community to enhance investment in climate smart development. For example, through its Seed Capital Assistance Facility, UNEP and the Danish DI Frontier Market Energy and Carbon Fund are financing innovative renewable energy developments in Africa, including a $138 million geothermal development in Kenya and a $134 million wind farm in South Africa.
Another key tool is the UNEP Finance Initiative (UNEP FI). The platform has over 200 members in the banking, insurance and investment sectors, all of whom recognize the role financial institutions play in addressing the links between finance and environmental, social and governance challenges. The Inquiry into the Design of a Sustainable Financial System, launched earlier this year, will examine how central banks, financial regulators and other policy and law-makers can contribute to aligning financial markets to the needs of the green economy.
Part of this process may require investors to measure, disclose and reduce the carbon footprint of their portfolios. The French Public Pension Fund (ERAFP) recently disclosed the footprint of a large segment of its portfolio and Sweden’s AP4 has halved the carbon footprint of its US and emerging markets portfolios. This is only the beginning: UNEP FI and the Greenhouse Gas Protocol will next year deliver a global standard that enables investors to define and reduce the carbon footprint of their portfolios.
The need to do so is driven by business sense: a strong climate deal could focus on limiting carbon use, and, according to the 2013 UNEP FI Investor Briefing on Portfolio Carbon, the number of pieces of GHG and clean energy related legislation and regulation worldwide rose from 1 in 1990 to 490 in 2010. Civil society is demanding more transparency from institutional investors on how they address climate change challenges, as reflected by the recent divestment debates at Harvard and elsewhere. Companies who do not track their carbon footprint face growing reputational risk.
There is a long way to go, but the private sector is beginning to appreciate that its future prosperity depends on a low-carbon future. As thousands of representatives of the sector gather for the climate summit, momentum will grow—and with it a reframing of the debate from ‘burden sharing’ to unleashing the innovating force of tomorrow’s entrepreneurs.