Small steps can lead to big strides in climate incentives – world
The 26th United Nations Conference of the Parties on Climate Change, or COP 26, has passed. He did not unveil a treaty comparable to the 2015 Paris Agreement, but he urged countries to take action to keep the global temperature rise at 1.5 Â° C above pre-industrial levels until ‘at the end of the century.
Leaders of developing countries have requested $ 1 trillion a year over the next three decades from developed countries to help the developing world adapt and mitigate the impacts of climate change. Advanced countries, whose carbon pollution over generations has caused the problem, accepted this funding commitment with the goal of ultimately achieving net zero emissions by 2050.
Climate finance is the thorniest point of contention between developed and developing countries. Most nationally determined contributions to emission reductions are conditional on the availability of adequate financial support.
Raising $ 1 trillion every year seems like a daunting task. However, COP 26 received tremendous support from the global financial industry. The world’s biggest investors have called for a strong, transparent and fair climate deal, promising they will make money flow. And the banks have pledged to find ways to promote and funnel tens of billions of dollars into low-carbon investments.
But private funding will not flow in a vacuum. There is a close relationship between how incentives are managed and increasing climate investments. The good news is that there is no shortage of savings in the financial sector. Globally, some $ 300 trillion is represented in capital markets – just over half of commercial banks and the rest of insurance and institutional investors. In the face of this, the net $ 1 trillion seems quite modest.
But financial markets still do not have enough money to support a net zero economy. One of the reasons is that the motivation for private financing of low carbon infrastructure is not strong. While a carbon-intensive investment outperforms a clean, green alternative, investors cannot ignore the business case for making a profit. That’s why more than 300 financial institutions have urged world leaders to reach a deal on climate finance. They are willing to pay a price for carbon if it makes their investment relatively more attractive, while gradually understanding the need for a stable climate and economy for safe investments.
Moreover, most private investments for climate change mitigation in developing countries in Asia are not made by financial institutions but by large corporations. Huge economic benefits could be obtained if these are geared towards low carbon investments by fixing the price of carbon in the markets.
Although much activity takes place in financial systems, there is still a long way to go to mobilize the $ 1 trillion. One of the main reasons is that financial institutions themselves are not well structured to accelerate financial flows in the right direction. They inadvertently favor high carbon investments over low carbon ones.
The same is true for accounting standards. Even though they claim to be cautious, they do not question the value of stranded assets. The risk measures used to manage banks are retrospective and unsuitable for forecasting future climate risks. Investment institutions, which have a fiduciary duty to look after the interests of their stakeholders, often ignore the effects of climate change on the population for whom investment decisions are made. Shareholders, citizens and policymakers need to ensure that financial systems are fit for purpose of achieving net zero goals.
In short, significant and coordinated efforts are needed to force future investments in climate change mitigation and adaptation.
Some initiatives have been successful in several countries: ensure that rating agencies offer ratings that include long-term climate risks in their assessments; encourage companies to openly report on their carbon intensity and declare their improvement plans; create reporting standards for all companies that can raise funds through public exchanges; get banks and financial institutions to manage and minimize value at risk through proper screening, make them more secure and steer them away from carbon intensive activities.
In addition, trustees of investment funds could be encouraged to accept fiduciary responsibility; equity investors may be asked to incorporate climate considerations into their engagement with companies and into voting for boards of directors; and insurance companies could help identify and build climate resilience.
In addition, multilateral banks must dramatically increase their climate portfolios and step up efforts to help countries advance the net zero goals.
Each of these is just one of many small steps. But taken together, they would put the world on a very different path by mobilizing their own $ 1 trillion.
The author is Director of Research Strategy and Innovation at the Economic Research Institute for ASEAN and East Asia.