Policy Analysis

Here's a Policy Road Map for Sustainable, Green Finance

By Amal-Lee Amin, on August 9, 2019

France recorded its highest ever temperature (45.9°C) this summer, while India has had to endure one of the longest heat waves in recent history. 

Meanwhile, firefighters in Spain have been working around the clock to bring wildfires under control, in a struggle reminiscent of Chile’s earlier this year. 

With the impacts of climate change being seen every day around the world, concern over the climate-related financial risks is also deepening. 

The Bank of England, which recently committed to taking action to ensure the resilience of the financial system and to support the UK’s transition to a carbon-neutral economy, warns that the estimated losses from a disorderly transition to a low-carbon economy could be up to USD 20 trillion. 

Greening finance

Encouragingly, the financial sector has begun to mobilize in response to these concerns. 

Thirty-six central banks and supervisors participating in the Network for Greening the Financial System, including the Banco de México and the Superintendencia Financiera de Colombia, recently issued recommendations for how central banks, supervisors, policy-makers and financial institutions can enhance the greening of the financial system.

Industry-led initiatives are also asking how strategies and portfolios can be aligned with the low-carbon and climate-resilient development transition. 

Investors are becoming increasingly vocal in requesting companies to demonstrate their sustainability credentials, and will demand similar levels of transparency to invest more in infrastructure assets where estimates suggest that existing stock accounts for 60% of global carbon emissions.  

Governments are also starting to consider the quality and transparency of sustainable finance

Argentina’s G20 presidency in 2018 made significant progress through the Sustainable Finance Study Group to develop and assess options to help deploy financing through the creation of sustainable assets for capital markets. 

The EU’s Technical Expert Group on Sustainable Finance published recommendations including on developing a sustainable finance taxonomy and an EU green bond standard. Since 2015, China has been developing its domestic green finance system and has green credit guidelines and green bonds. 

Long, loud and legal policy incentives

To mark the inaugural London Climate Action Week, the UK launched its first Green Finance Strategy

As a joint effort of the UK’s Treasury and lead climate change department and drawing on the private sector led Green Finance Taskforce recommendations, the Strategy represents the kind of government and public-private sector collaboration needed to support the low-carbon transition.

Coming 10 years after the term “Investment Grade Policy” was first coined to focus attention on the importance of long, loud and legal policy incentives to unlock capital from typically risk-averse investors, for the Strategy to be fully implemented the underlying policy and institutional context is key. 

To achieve the UK’s legally binding commitment to reach net zero emission by 2050, the Clean Growth Strategy25 Year Environment Plan and Industrial Strategy will equally determine the extent to which green finance is scaled up. This is vital to ensure we invest enough in renewables and other climate solutions, so we avoid the looming climate catastrophe. 

For emerging markets that are also looking to scale up sustainable finance and investments, much attention has been focused on the role of blended finance to mobilize new sources of capital. 

The targeted use of public finance provided on more favourable terms or used in a “first loss” position, can help ensure a risk-return profile that is acceptable to investors whilst delivering on climate change and other sustainability benefits. Yet, availability of such resources is relatively scarce and far from sufficient to catalyze the scope and scale of transformational investments needed.   

Closing in on investments

To close the investment gap and increase confidence around a low-carbon and climate-resilient transition to net zero emissions, attention also must be focused on policy and institutional context for generating the demand for sustainable finance through projects that transform cities and support sustainable livelihoods. 

Five key steps for policy-makers:

  1. Set out a long-term vision and pathway for a net zero economy by 2050 and embed this in legislation;
  2. Build platforms for dialogue with citizens, consumers, business and the financial sector on the opportunities and challenges along this pathway;
  3. Fully integrate and mainstream sustainability criteria into upstream public policy, regulatory and procurement frameworks to align investments; 
  4. Develop domestic markets for the low-carbon and resiliency solutions that will be needed — particularly to build the community of public and private sector actors to ensure climate risks are managed and resiliency opportunities achieved; 
  5. Targeted use of public resource to incentivize and share risks with the private sector will continue to be important as the policy and institutional reforms come into force.  

In the absence of upstream policy and regulatory incentives, attempts to scale up investments needed for the low-carbon and resilient transition may prove futile. 

With less than 15 years—or roughly two business cycles—to prevent overshooting the goal of 1.5 degrees Celsius of warming, there is little doubt that the policy decisions made now will determine whether the Sustainable Development Goals and the Paris Agreement’s objectives can be achieved.