By Khalil Janbek
What relates investments in renewable energy to the “green bonds” market, to the billions raised throughout the world for poor countries to be climate-resilient, or to the carbon tax? The answer is simple: each of these are different aspects of what the UNFCCC (United Nations Framework Convention for Climate Change) calls ‘Climate Finance’.
Climate Finance refers to “any kind of investment carried out towards a low-carbon economy” (according to the World Resource Institute). On the eve of the 21st session of the Conference of the Parties to the United Nation Framework on Climate Change (COP21) this December, which aims at achieving an international agreement to meet the objective of keeping global warming below 2°C, Climate Finance may be the clincher for reaching this necessary global agreement.
The main issue to be discussed by political representatives this December is how necessary funds for implementing global climate protection policies will be raised. While NGOs point out the problem of “how much” — Ceres (NGO) claims that a total of 1000 billion dollars are needed to “re-green” our planet — and while political elites raised the question of “how” at Lima’s COP20, Climate Finance might be the most successful answer to these two questions.
The question of “how” to collect the necessary funds has been discussed in depth at Lima’s COP20 summit in 2014. Political representatives reached an agreement in implementing the Green Climate Fund, an institution through which developed countries would annually provide 100 billion dollars to the poorest States to finance their transition towards climate-resilient economies. While NGOs recommended that this envelope should be at least 50% composed of public funds, political representatives highlighted the difficulty of raising such a sum only with public funds. This is when Climate Finance began to come up as the solution.
Indeed, the private sector plays a pivotal role in Climate Finance. While Development Banks have pledged last year to commit 15 billion dollars annually to climate investment, an additional annual 62 billion dollars have been secured by the private financial sector through leverage effect in barely eight months. This is proof that the fundraising power of the financial sector is an effective tool for policymakers. In December, political representatives can rely on this aspect of Climate Finance, which has proven its ability to play a significant role in supporting efforts made towards climate protection.
The action of the financial sector and ‘Climate Finance’ extends far beyond the sole aim of raising these 100 billion dollars: this sector is currently undertaking reforms aiming at supporting the world’s transition towards a global energy-smarter economy.
On the 8th October 2015, the United Nations Environment Program (UNEP) issued a report detailing how the World financial system should be reformed, so as to align its activity on sustainable development principles. The interesting point is the following: this report highlights that many of these measures have already been implemented by financial sector’s decision-makers. The financial sector has therefore initiated a very significant change, which shows the success of Climate Finance.
Indeed, Ban Ki-Moon details the key-factors of the success of Climate Finance in the private sector in his report Trends in ‘Private sector Climate Finance’ (2015). As he puts it, “the finance community is emerging as a partner in the challenge of responding to climate change”, especially in the aftermath of the 2014 Climate Summit. This report sums up the main features proving the deep shift in the global financial sector towards Climate Finance.
More than the fundraising of 60 billion dollars by the financial sector to the Green Climate Fund, capital markets witnessed the expansion of the ‘Green bonds’ market, whose issuance has reached 70 billion dollars in 2015. Investors are also said to express “increasing concern around the activities of carbon-intensive assets and companies”: initiatives such as the Portfolio Decarbonization Coalition — a group of investors whose aim is to reduce the assets of carbon-intensive industries in their portfolio — prove that Climate Finance is definitely gathering momentum. Finally, companies are increasingly using internal carbon prices (their number was multiplied by three in 2014), and Standard & Poor’s expects roughly a thousand multinational firms to introduce an internal carbon price within two years.
According to the London-based NGO E3G, a 90 trillion dollar investment in infrastructures is to be deployed throughout the world by 2030. Undoubtedly, this global momentum called “Shifting the trillions” has been engaged: investment in sustainable development infrastructures has been significantly rising over the past five years. Bloomberg New Energy Finance data show that global “clean energy investment” reached 310 billion dollars in 2014: investment in solar technology grew 25% since 2013, 11% for investment in wind since 2013 and electrified transport rose from 10% since 2013. This success proves one point: it makes no doubt that Climate Finance can be an indispensable tool for supporting subsequent climate protection policies.
Finally, carbon pricing measures have already been tested, and have proven to be effective: the Republic of Ireland, having implemented the Carbon Tax in 2009, succeeded in reducing 15% of its carbon emission, while experiencing a strong economic growth over the past decade — thereby enabling it to collect and reinvest one billion euros over the past three years. Hence, it is empirically correct to claim that Carbon Tax is more of a help than a hindrance for economic growth.
It makes therefore no doubt that decision-makers can rely on ‘Climate Finance’ to support the global Climate Protection policies, as its astonishing success, both at a private and public level, has proven that it can play a significant role in that matter. In this sense, ‘Climate Finance’ may be the decisive factor for the World leaders to reach the historic universal climate agreement this December.
Credit of Featured Picture: United Nations Photo, CC Flickr. License can be found here.