Banks present ways to turn finance green

26 April 2021

Finance must be mobilised at "an absolutely unprecedented level" if a net-zero economy is to be created as rapidly as required, US Special Presidential Envoy for Climate John Kerry said at the Leaders Summit on Climate last week. The magnitude of this challenge means that governments alone "cannot possibly" find all the necessary investment, he added.

Special Presidential Envoy for Climate John Kerry speaking to participants in the Leaders Summit on Climate on 22 April

Kerry moderated the session Investing in Climate Solutions, which included the heads of the US Treasury, the World Bank Group, the International Monetary Fund, the Green Climate Fund, Citigroup, the European Council and the African Development Bank, among others.

"There's no government in the world that has enough in their budgets to be able to provide what we need to make this transition," Kerry said. "Ultimately, how governments, international financial institutions and private providers of capital work together is really going to determine the outcome of this challenge."

Political choices

US Treasury Secretary Janet Yellen said that finance - public and private - will require economic and political choices.

"Multilateral institutions are invaluable partners to the pursuit of sustainable, inclusive and resilient development," she said. "For these reasons, we have requested USD1.25 billion for the Green Climate Fund to, in part, make good on our USD2 billion outstanding pledge, USD485 million to support other multilateral climate initiatives, and increased support for the multilateral development banks in our 2022 Budget. And, looking ahead, we will consider requesting funds for additional new contributions to the Green Climate Fund and other initiatives."

The US Treasury is providing technical assistance to foreign counterparts that helps attract private sector investment in clean energy and sustainable infrastructure projects, she said. It is also working with the G20 and co-chairing a sustainable finance working group that will establish a sustainable finance roadmap and improve the information that private investors need to make investment decisions.

Promoting innovation

The Green Climate Fund (GCF) has four approaches to promoting innovation, its executive director, Yannick Glemarec, said. These are: a dedicated grant-funded readiness programme to support developing countries' efforts "to incubate novel ideas"; piloting innovative ideas to establish a proof of concept; "crowding-in" private finance by establishing a commercial track record for new climate solutions; and, strengthening the capacity of domestic financial institutions and entrepreneurs to accelerate the widespread adoption of commercially attractive climate innovation.

GCF promotes innovation in new technologies, business models and financing instruments throughout its USD30 billion climate portfolio, which is split equally between adaptation and mitigation projects.

"Plain vanilla projects are a luxury we cannot afford," Glemarec said. "We must make every dollar count in the fight against climate change."

Civilisational challenge

Charles Michel, president of the European Council, described the task as a "civilisational challenge".

"Human beings have always shown a unique ability to adapt. Adapting from agrarian communities to industrial nations, dependent on fossil fuels. Today we understand this is not sustainable and we must once again adapt, to fossil-free economies. This is now the third industrial revolution," he said.

In December 2019, EU Leaders committed to climate neutrality by 2050 - the first major economy to do so - and on 21 April it enshrined its climate goals into European Climate Law.

The EU and its Member States remain the largest contributor of public climate finance to developing countries, he said, and urged all developed countries to increase their own contributions, which would "send a strong signal" in the run-up to COP 26 in November.

The EU budget and recovery package will dedicate around EUR600 billion for its green transition. "We need to use our public funding intelligently, to create buy-in from the private sector," he said. "The green transition is our prosperity strategy."

The euro is "by far" the leading currency for green bonds, he said. Some 30% of the EU's recovery package will be funded this way and the bloc will soon establish a European Green Bond Standard. "But we need to create the right global regulatory framework," he said. "Let’s provide greater certainty for private investors, everywhere in the world."

In 2019, the EU set up the International Platform on Sustainable Finance, which now represents 55% of global greenhouse gas emissions. He encouraged more countries to join.

As of this year, the European Investment Bank has aligned all its financing activities with the goals of the Paris Agreement, he said. It will dedicate at least 50% of annual financing to green investment by 2025 and will support EUR1 trillion in investments for green projects this decade. And the European Central Bank is also working on the implication of climate change for monetary policy and financial stability.

A global approach to carbon pricing is paramount to promoting green investment, he said. To ensure a global level playing field, the EU intends to introduce a carbon border adjustment mechanism, which must be compatible with World Trade Organisation rules, he added.

Robust carbon price

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said "a robust price on carbon" is one of three areas where "the right policies" can make a significant difference in accelerating the transition to the new climate economy. The other two are a green taxonomy and standardised reporting of climate related financial risks, and financial support for developing countries.

IMF's analysis shows that a mix of steadily rising carbon prices and green infrastructure investment could increase global GDP by more than 0.7% per year over the next 15 years, and create millions of new jobs.

"Carbon pricing is gaining momentum. Many businesses now use a shadow carbon price in their models. Over 60 pricing schemes have been implemented. But the average global price is currently USD2 a tonne, and needs to rise to USD75 a tonne by 2030 to curb emissions in line with the goals of the Paris Agreement," she said. "Because of the urgency to act we propose an international carbon price floor among large emitters, such as the G20. Focus on a minimum carbon price among a small group of large emitters could facilitate an agreement, covering up to 80% of global emissions."

A recent survey of major investors showed that more than half cited the poor quality or availability of data as the biggest barrier to sustainable investing, she said, and so the IMF is working with on data quality and disclosure, as well as on financial sector stress testing for climate-related risks.

Developing countries offer many of the lowest-cost opportunities, she said, and so "it’s in everyone’s interest" to meet the commitment of USD100 billion a year in climate finance for the developing world. Combining technology transfer and policy support will make it possible to decouple growth and carbon emissions, she said.

Ground zero

Citing IMF data, African Development Bank President Akinwumi Adesina said the continent loses USD7-15 billion each year to climate change, and this will rise to USD50 billion per year by 2040.

"Africa is not at net zero. Africa is at ground zero," he said. "We must therefore give Africa a lift to get a chance of adapting to what it did not cause."

The bank has committed USD25 billion to climate finance over the next four years and its share of financing devoted to the climate rose from 9% in 2016 to 35% in 2019, and will reach 40% in 2021.

It is the only multilateral development bank to meet and exceed the 50% parity for climate adaptation and resilience, he said. It dedicated 50% of its climate finance to climate adaptation in 2018 and this rose to 63% last year.

With the Global Centre on Adaptation, the bank launched the Africa Adaptation Acceleration Program, which aims to mobilise USD25 billion for climate adaptation by 2025.

Félix Tshisekedi, president of the Democratic Republic of the Congo and the current chair of the African Union, said: "It is important that the summit accelerates the mobilisation of additional financial resources, and this should be substantial. This also requires simplifying the procedures for accessing financing for the least developed countries, the majority of which are in Africa."

Spend more

David Malpass, president of the World Bank Group - the largest provider of multilateral funding and finance for developing countries - announced the publication of the summary of its upcoming 2021-2025 Climate Change Action Plan.

"The core of the plan is to spend more - in fact, record amounts - in ways that get the most results," he said. "That means helping the biggest emitters flatten the greenhouse gas emissions curve and accelerate the downtrend. And it also means record spending on adaptation - that's at least 50% of our climate finance - to help countries prepare for and adapt to climate change." The plan includes "active private sector mobilisation", he said, through the bank's International Finance Corporation and its Multilateral Investment Guarantee Agency.

The bank is actively engaged with developing countries on their nationally determined contributions and long-term strategies, he said, and it will be introducing new in-depth Country Climate and Development Reports.

Earlier this month, the bank launched an early twentieth replenishment process of the International Development Association - its fund for the world’s poorest countries. This aims to support countries in their recovery from the COVID-19 crisis and transition to green, resilient and inclusive development, he said. Middle income countries will also need additional support, he added, and green bonds, blue bonds and financial innovation "will all play a role".

"What we know is that poverty, inequality and climate change are the defining challenges of our time and increasingly they go hand-in-hand. For the World Bank Group, our goal - and my goal - is to provide support, and take prompt action, in ways that create the most positive impact toward green, resilient, and inclusive development."

Pragmatism and partnership

Citigroup has been helping lead the industry’s drive to sustainability for many years, said its newly appointed CEO, Jane Fraser. Citi helped create the Equator Principles in 2003 and the Green Bond Principles in 2014, both establishing important industry standards, she said. In 2018, it became the first US bank to report on its efforts to implement the Taskforce on Climate-related Financial Disclosures framework, which Fraser said provided transparency about the impact climate change has from a risk management perspective.

It recently committed to financing USD500 billion in environmental projects and activities by 2030, which is a tenfold increase over its first commitment, made in 2007. Combined with this, it has committed a total of USD1 trillion to advance the UN's Sustainable Development Goals.

"Some think that confronting climate change and creating jobs and economic inclusion are in conflict. But we believe we will only be successful in tackling our global challenges if these agendas are working together. Solving climate change must be a driver of jobs and economic prosperity," she said.

The bank aims to end emissions from its own operations by 2030 and those produced by its client portfolio by 2050, she said, and it recently helped launch the Net Zero Banking Alliance to establish "a common industry framework for net zero".

Achieving this will require three things, she said: measuring its financed emissions; "having tough conversations" with its clients on their net-zero plans (or lack of); and, accelerating technology development.

"We are acting with urgency, and we are excited about the road ahead. But I want to underscore that this is not going to be easy," she said. "So we will all need pragmatism and partnership."

Researched and written by World Nuclear News