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Executive Perspectives

EXECUTIVE PERSPECTIVE: Climate Finance – Shifting from the opportunistic to the Strategic

Erik Solheim

14 Dec 2017

The world has moved on since the triumph at Paris in 2015, when the world united around a pledge to limit global warming to less than two degrees Celsius, against a current trajectory of a four to five degree-rise by the end of the century.

Meeting this target will require a restructuring of the global economy, to limit and then reduce the global emissions of greenhouse gases. This will include upgrading inefficient and climate vulnerable infrastructure, scaling up renewable energy generation, improving energy efficiency in industry and buildings, and shifting to new forms of agricultural practice and land-use management.

The scale of this challenge is truly extraordinary. The International Energy Agency estimates that between 2015 and 2030, investment in the order of USD 16 trillion is required to realign the global energy system with a two-degree limit. In the same period the demand for new, sustainable infrastructure to cater for a growing global population could exceed USD 90 trillion.

Ensuring this infrastructure does not lock-in a higher emissions trajectory but instead supports the transition to a low-carbon economy is estimated to have an additional cost of around USD 4 trillion. In the buildings sector alone, meeting the Paris commitments will require in the region of USD 300 billion annually by 2020 for financing energy efficiency retrofits.

But where will this capital come from?

At the 2009 Climate Conference in Copenhagen, developed countries pledged to mobilise USD 100 billion each year in climate finance for developing countries by 2020. It is quite obvious that even if this figure is met, it falls painfully short of the requirement.

As fiscal budgets are tightening around the globe, the expectation therefore falls on the private sector.

The investment sector has already responded and is making significant contributions, as well as pledges to realign portfolios with a 2-degree economy. Initiatives such as UNEP Finance Initiative’s Portfolio Decarbonisation Coalition have worked with investors to provide a platform for these activities. Since 2015, ABP, the Dutch pension fund, has reduced the CO2 footprint of their listed equity portfolio by 16 percent.

The pension fund has also pledged to invest an additional EUR 600 million in renewable energy and is aiming to invest a further EUR 2.2 billion to meet a total target of EUR5 billion. Similarly, the Swedish Pension fund AP4 has pledged to increase its investment in low–carbon strategies from 24 percent of its total equity portfolio to 30 percent by the end of this year.

The UK pension fund EAPF has announced plans to decarbonise their equity portfolio, reducing their exposure to “future emissions” by 90 percent for coal and 50 percent for oil and gas by 2020, compared to a 2015 benchmark. Finally, this year Zurich, the global insurer and investor, achieved a multi-year goal of investing USD 2 billion in green bonds.

Its next step is to increase the size of its impact investing portfolio from USD 2.5 billion to USD 5 billion. To achieve this, Zurich will invest in a variety of impact investments across asset classes and around the globe, with the aim of avoiding the 5 million tons of CO2 emissions annually, while achieving benefits for five million people per year.

Since the Paris Agreement, we have also seen a number of promising developments in the banking sector. Only two months ago BNP Paribas announced that it would no longer do business with companies focused on oil and gas from shale or tar sands operations.

It also announced it will cease to finance exploration in the Arctic region, expanding on previous measures to reduce its support for coal mines and coal-fired power generation and to increase its total financing for renewable energy to EUR 15 billion by 2020. Similarly, after Paris, Citi Group announced a goal of USD 100 billion for environmental finance.

Since then, the global bank has begun to make good progress towards this goal; in 2015 they recorded their highest annual volumes of sustainable finance activity, USD 47.6 billion, followed by USD 26.3 billion in transactions in 2016. In 2016, Société Générale committed to doubling its financing for the renewable energy sector, accompanied by a goal to mobilise up to EUR 10 billion in finance by 2020. It also ceased all new financing for coal-fired thermal power plant projects.

While these activities are very promising, more is still needed. In the afterglow of Paris, finance aimed at mitigating the effects of climate change reached a record high of USD 437 billion, USD 299 billion of which was recorded from the private sector. Since then we have seen a decline; 2016 saw a 12% drop of total climate finance with private financial investment falling to USD 242 billion.

Regaining the momentum from Paris is paramount. Finance leaders must move beyond seeing climate change as simply an opportunity, and more as business imperative – a shift from the opportunistic to the strategic and aligning themselves with the UN’s 2030 Agenda and the 2-degree economy. This is not just about scaling up the green, but also turning down the brown and having the leadership, products and the full value chain needed to gradually but decisively ‘turn the ship’.

This won’t be easy, and will involve reallocating billions of dollars in investments, without destabilising the underlying portfolios and risking pensions and savings. So to help facilitate this transition we must put into place, clear and investable climate change policy, supported by regulations that engender confidence in climate-smart investments.

The Task Force on Climate-related Financial Disclosures recommendations to the Financial Stability Board, which state that we must measure and disclose climate risk in corporate financial disclosures, therefore made a promising addition to the financial landscape. Firstly, it’s the first time that financial regulators have acknowledged the financial implications of an environmental issue.

Secondly, in asking that banks, insurers and investors also disclose financial information, the recommendations are driving a virtuous circle of improved climate related disclosure; motivating the financial sector to ensure the information provided to them is robust and of sufficient quality.

The financial sector has made significant strides in climate finance, but there is still a long road ahead before we achieve the low-carbon economy that is desperately needed. UN Environment’s Finance Initiative is working with its membership of financial institutions to help equip them to be both resilient to the effects of climate change, as well as to provide the finance needed to make the transition to the low-carbon economy.

The 25 year-old initiative counts in its membership just over 200 banks, insurers and investors, but if we are still serious about meeting the climate goals set in Paris it is the responsibility of the whole industry to make similar commitments.

In the words of Henri de Castries, former Chairman & CEO of the insurance group AXA, “A 2°C world might be insurable (but) a 4°C world certainly would not be.”



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