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Climate change

Why successful global green finance is all about the colour of private money

Deborah Lehr says amid growing alarm over the possible economic fallout of climate change, governments must find ways to draw private capital to foot the gigantic bill for environmental solutions

PUBLISHED : Sunday, 16 October, 2016, 8:04am
UPDATED : Sunday, 16 October, 2016, 5:37pm

As leaders in the global financial community gathered in Washington for the annual IMF/World Bank meetings, the hottest ticket in town was for a technical discussion on green finance. Awareness – and alarm – is growing about the potential financial impact on the international economy of risk related to climate change.

Experts from investment banks, rating agencies, central banks, finance ministries, institutions, investors and technology companies gathered for a lively discussion about how to bring green finance into the mainstream, to offset or at least prepare for these potential “climate caused” shocks to the system. In addition to being necessary to support the transition to a low-carbon economy, green finance may also be the key to stimulating moribund growth.

Others must now follow China-US climate action, or be left in the dust

At the G20 summit in Hangzhou ( 杭州 ) in September, the heads of state for the first time recognised the importance of agreeing on a set of principles for greening their financial infrastructures. While these commitments are not binding, they capped a year of growing momentum about how to harness widely available private sector capital and deploy it to promote green solutions.

Governments must create the right combination of incentives and disincentives to promote investment in green projects – in short, allow investors to make money

The governments of these leading economies have made significant progress in demonstrating the political will to address climate change, seen through commitments at the Paris climate summit. And enough countries have now ratified the treaty to ensure it takes effect. But even the wealthiest of nations will not have the necessary public capital to pay for the fulfilling of these commitments.

The challenge lies in how to develop a financial architecture that puts public monies to best use, while attracting the available private funds into green investing.

This will require leadership by government, combined with innovative thinking. Governments must create the right combination of incentives and disincentives to promote investment in green projects – in short, allow investors to make money. And they must capitalise on growing social awareness of environmental challenges to turn “being green” from a fad into a way of life, including the way business is done.

Pilot projects that might provide the platform for this transition are springing up around the globe. Many of these are starting in the developing countries that see the transition to low-carbon growth as a potential competitive advantage, creating new jobs. One minister at the green finance meeting in Washington noted that, in Nigeria, with 70 per cent of the population under 30, the transition to green industries can help provide jobs and opportunities for the youth – and keep them away from militant Islamist group Boko Haram.

Green finance is key to sustainable growth in China, and elsewhere

Kenya’s central bank has identified development of a green finance agenda as a means to help the capital Nairobi become the financial capital of Africa. The bet is that the development of innovative financing mechanisms, such as a robust green bond market, will attract private capital, which will, in turn, help stimulate investment in infrastructure and promote economic growth.

Certainly, China’s ambitious green finance agenda, encompassing the launch of green bonds, insurance, and indices, combined with mandatory disclosure requirements and the launch of a nationwide carbon market, will make it the world’s leader in “green finance”.

This effort, combined with the establishment of a large number of sustainable infrastructure projects, could help ensure that it continues to attract overseas capital for investing.

While governments must create the necessary regulatory and policy framework, the transition of green finance from a philanthropic activity to mainstream business will occur when the investment returns are significant enough to attract private capital. There is a growing social interest in investing in sustainable projects, but it is still a minuscule amount.

As much as US$90 trillion will be needed over the next 15 years to make a significant difference. And even that may not be enough

Major financial players, such as BlackRock, Goldman Sachs, and CalPers, are building out their green finance initiatives, but they are still a small part of overall investments. Goldman Sachs has announced its intention to invest US$150 billion in clean energy globally by 2025, and has made financing and investment commitments of over US$41 billion. Others are making similar types of commitments.

These are important steps, but it is estimated that as much as US$90 trillion will be needed over the next 15 years to make a significant difference. And even that may not be enough.

Today, there is a quiet revolution taking placed in green finance. A recent UN Environment Programme report, “The Financial System that We Need: From Momentum to Transformation”, has identified 217 measures taken in nearly 60 countries across the developed and developing world. But significant obstacles must still be overcome if the momentum is to continue to grow. Common definitions must be developed for green projects, companies must determine their green footprints and disclose related data, and incentives and disincentives to promote green investment and development must be built into the system.

Most important, government and industry must work together to build on the existing political will to move this revolution to the mainstream of international finance.

Deborah Lehr is a senior fellow at the Paulson Institute, a non-profit, nonpartisan “think and do” tank that works on US-China relations and advances sustainable growth and environmental protection in both countries