Financing a climate revolution

Amid flash floods, forest fires and other extreme weather events, the impact of climate change has been far reaching, affecting people all around the world in recent years. The urgent nature of the crisis was made clear when the Intergovernmental Panel on Climate Change (IPCC) issued its starkest warning yet about global warming earlier this year. 

The report by the IPCC stated that the 1.5 degrees Celsius warming limit will be reached or exceeded in the early 2030s. Today, global warming is about 1.2 deg C above pre-industrial levels, and the situation is already more serious than many had expected at this stage. 

The importance of staying below 1.5 deg C of warming cannot be overstated.  At 1.5 deg C above pre-industrial levels, scientists have warned that up to 90 per cent of coral reefs would die off worldwide, sea levels are expected to rise 48 cms, which could lead to the displacement of 46 million people, while agriculture yield is likely to fall rapidly. This is on top of more extreme storms, heat waves and droughts. 

The Role of Private Sector

One particularly heartening outcome from the recent UN Climate Change Conference (COP26) summit is the pledge of the Glasgow Financial Alliance for Net Zero (GFANZ), which is a global coalition of over 450 finance firms jointly managing US$130 trillion, to align their financing activities to achieve net zero emissions by 2050. 

Indeed, private sector participation will be key in this journey to achieving net zero. In this respect, Citi this year committed to a US$500 billion environmental finance goal, as part of its US$1 trillion sustainable finance goal by 2030.     Nearly half of the emission reductions required to achieve net zero by 2050 are from technologies which are not currently commercially available, such as hydrogen-based fuels and carbon sequestration.  To this end, the promise of a net zero future can only be realised with the large-scale adoption of these emerging technologies.  As most of these decarbonising solutions are in their early stages of development, financing them is usually perceived as a high-risk endeavor. Involving the public sector to share the risks of financing such projects is one way to overcome this key hurdle.

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Public-Private Sector Collaboration

COP26 also saw the participation of finance ministers, such as US Treasury Secretary Janet Yellen, for the first time. This is of great significance as central bankers have the power to exert pressure on financial institutions to better manage climate risk. This can help to accelerate the flow of capital as we transition to a net zero economy. 

To improve access to financing, especially to fund emerging innovative green players, a multi-stakeholder transition finance ecosystem, which includes both private and public sector finance, needs to be rolled out soon to enable risk-sharing and the mobilisation of the trillions of dollars needed to progress decarbonisation technologies towards commercial-scale deployment. 

One example of such financing is in China, where The People's Bank of China, the country’s central bank, rolled out a re-lending tool to reduce the finance cost of bank loans supporting green finance. Another example is an Asian Development Bank-led initiative that seeks to pool public and private investments to grow renewable energy.  Back home, the Monetary Authority of Singapore announced the establishment of a US$2 billion green investments programme to invest in public market investment strategies that have a strong green focus. 

The public sector needs to cultivate an enabling environment for investors to accelerate the deployment of capital at the pace and scale required, whether by creating incentives or implementing appropriate regulatory frameworks. This can include helping private green capital to de-risk through lower financing cost, providing public guarantees and currency risk hedges, as well as supporting capital flows to industries with large financing gaps.

As the stewards of the financial ecosystem, regulators are in a strong position to steer financial institutions towards net zero by supervising their management of climate-related risks and promote the reallocation of capital to support transitioning activities.

Governments also need to work with multilateral development banks, particularly in emerging countries, to improve the commercial viability of decarbonisation investment opportunities. This is particularly important as various estimates indicate that a net zero transition would require US$150 trillion of capital spending, two-thirds of it in developing economies. 

Developed Nations need to Step Up

The developed world also needs to do more to help the developing world in this net zero journey. While the mainstream media has focused on China, India and other emerging countries for being the biggest emitters of carbon, the real issue is how much greenhouse gas, especially Co2, is already in the atmosphere. As Co2 stays in the atmosphere much longer than other greenhouse gases, “cumulative Co2 emissions” will continue to increase until net emissions are cut to zero. 

In 2018, the cumulative CO2 emissions since 1750 had already exceeded 1.6 trillion tonnes, with the U.S. and the EU27 responsible for the largest shares, at 25.7 per cent and 18 per cent, respectively, compared with China’s share at 13.3 per cent. Hence, the developed world has a responsibility to help developing countries in an inclusive and just transition to net zero.  

Rich nations also need to give developing countries a much longer timeframe for them to implement their climate plans. Furthermore, they need to fulfil their pledges of financial support for these developing economies to mitigate and adapt to climate change. Unfortunately, the opposite is happening, with some US$100 billion a year in climate aid marked for poorer nations having been delayed from 2020 to 2023.  

The Role of a Global Carbon Price

One of the major achievements from COP26 is the resolution of Article 6 of the Paris Agreement. This established a robust framework for countries to exchange carbon credits through the United Nations Framework Convention on Climate Change, reaffirming that international carbon markets are an important step towards limiting temperature rise.  

However, there was no agreement on a global carbon price, which could have accelerated the decarbonisation process.  Recent studies show that global greenhouse gas (GHG) emissions can be cut by 12 per cent based on the International Monetary Fund (IMF)  proposal of an International Carbon Price Floor model. This is almost half of the Co2 and other GHG reductions required over the next decade to restrict global warming by 2 deg C.  

Institutional investors should also look at carbon markets as a risk management tool. If investors allocate even a small part of their portfolios to carbon allowances, they could improve the resilience of their investments against climate transition risks. 

Finance Sector to Lead the Way

To achieve net zero, the private sector and financial institutions will need to work closely with governments. Making finance flows consistent with a pathway towards low GHG emissions also offers financial institutions an opportunity to future-proof their businesses. As such, the finance sector should be leading in the race to net zero, and GFANZ ‘s commitment is a good start. 

The next step involves deploying sufficient capital quickly enough to achieve net zero, which will require new innovative finance solutions to catalyse capital flows to green technologies that are currently economically unviable. 

An inclusive and just green recovery is possible, but the time to act is now. Many island states in the Pacific, Indian Ocean, Caribbean and even Singapore are highly vulnerable to rising sea levels, and we have already seen the impact of this in the form of extreme storms and floods.    

If we succeed in reallocating our capital resources to drive a new green growth story for the world, the path to net zero will be remembered in history for its innovation, creativity, and efficiency. 

The writer is managing director, Citi APAC markets financial institutions sales and solutions and co-chair of Citi Singapore ESG Taskforce.