Globally, green investments are on the rise. Even the G20 embarked on a mission to harness the finance sector’s potential in support of a global shift to sustainable and low-carbon economies. On December 1st, Germany takes over the G20 presidency from China. What steps can the German presidency take to foster global finance that is more geared towards the needs of sustainable, climate-friendly development?
In its article 2.1c, the Paris Climate Agreement spells out the remarkable goal to make global financial flows consistent with the long-term climate goals. This is one of the reasons why "Green Finance" has gained centre stage in international debates. The global transformation towards a climate resilient, low-carbon future requires vast capital flows. Based on data of the International Energy Agency, the Allianz Climate and Energy Monitor estimates that the necessary investments between 2020 and 2035 for clean electricity production and grid infrastructure amount to about 2.3 trillion US-Dollars in the G20 countries alone - half of that sum flowing into the emerging economies, China, Brazil, Indonesia, India and South Africa. A recent New Climate Economy report puts the global investment gap for infrastructure at almost 90 trillion US-Dollars until 2030 - plus 4 trillion additional costs if the infrastructure built is energy-efficient and climate-neutral. Such large sums can only be raised by shifting funds from conventional to green and climate-friendly projects and investments, and to a large extent by mobilizing private capital.
A key instrument for this purpose are green bonds, standard government or corporate bonds dedicated to fund projects or activities with positive environmental and/or climate benefits. Green bonds enable institutional investors to indirectly invest a larger share of the more than 100 trillion US-Dollar they manage into infrastructure projects. While direct investments are often not compatible with the fiduciary duty, green bonds reside in a different risk-class, are structured and tradeable financial products and therefore more readily accessible to the deep pockets of insurers, pension and sovereign wealth funds. The green bond market is growing very fast: from just 3 billion US-Dollar issued in 2012 to 42 billion USD in 2015; with more than 80 billion USD expected by the end of 2016. China is the world-leader for green bonds: in 2015, it was the first country to publish official green bond guidelines, holding a large share in the green bond market. In the third quarter of 2016, more than 40% of green bonds issued worldwide came from China.
Apart from the absolute amount of capital raised for green purposes, the ecological effectiveness depends on the environmental integrity of the projects; and first of all on what is actually considered to be green? For example, the Chinese green bond catalogue include the "clean use of coal", highlighting possible conflicts of interest between local, shorter term environmental measures (such as air pollution control through retrofitting coal-fired power stations with exhaust scrubbers) and long-term climate action. To meet the obligations of article 2.1c of the Paris Agreement, stricter forward looking standards need to be applied. For Paris-compatible projects it is not sufficient to provide incremental improvements over the status quo. They also have to be consistent with the requirements of long-term 1.5°-2°C compatible scenarios. Hence, clear criteria with a long-term orientation are needed.
Marc Carney, chairman of the Financial Stability Board, recently recommended for the G20 to address standardization and independent certification of green bonds in order to scale-up issuance and distribution. Carney underlines the macroeconomic opportunity provided by long-term, sustainable infrastructure investments in the current low-interest environment: by absorbing excess global savings and consequently raising interest rates, they could contribute to economic stability beyond providing incentives for sustainable growth.
These considerations may well have underpinned the Chinese G20-presidency’s move to initiate the “green finance study group” (GFSG) as a dedicated forum within the G20. The GFSGs first report was endorsed by the finance ministers and central bank governors as well as by the heads of states in the Hangzhou summit communiqué. It is now at the hands of the German presidency to sustain that momentum, and turn the GFSG’s insights into action.
National and multilateral development banks can play a central role here: they are in a perfect position to tie the funding they disburse to stringent environmental criteria and to exclude certain sectors or activities that are not consistent with the Paris climate goals. Transparency is key to ensure that criteria are really met across the board and to prevent mere greenwashing.
Businesses have to develop decarbonisation strategies and disclose their emission data and projections as well as such long-term climate plans based on clear and mandatory rules. Disclosure should happen in a way that allows financial analysts and civil society to critically assess a company’s climate performance. Disclosure is a central prerequisite for robust risk assessment and responsible investor behaviour – divestment and re-investment relies on solid information to differentiate between “companies in transition” and those that are still stuck in the old, fossil business model.
A common global definition of “green” or Paris compatible finance might not emerge any time soon. However the development of unified reporting standards and a mandatory disclosure of climate related risks, data and plans would constitute a huge step into the right direction. Building upon the phase II report of the FSB Task Force for Climate Related Risk Disclosure (due early 2017), the German presidency should move this forward.
Global financial system reform towards a sustainable economy is a formidable task that goes way beyond issuing green bonds and introducing stricter reporting standards. The fact that the G20 finance track, with its traditional focus on financial market stability and economic growth is now dealing with green finance might be a sign for a much needed paradigm shift – an opportunity the German G20 Presidency should seize.
Hongyu Guo, Greenovation Hub
Dr. Gerrit Hansen, Germanwatch