Making net zero essential by greening the financial system

Mahesh Ramanujam | Updated on August 03, 2021

The financial sector has a huge role to play in mitigating the impact of climate change   -  istock.com/

Green finance is gaining momentum but more needs to be done is this area which is crucial for ushering in a green world

The strategic interplay of economics, technology and finance has the potential to address many of the world’s most pressing challenges, including the greatest existential threat of all — climate change. With levels of carbon dioxide in the environment at their highest in four million years, an urgent worldwide campaign has commenced in recent years to get countries to commit to becoming net zero by the year 2050.

Perhaps not surprisingly, opinions on this matter are divided, and there are some who believe that global carbon neutrality is the only way to keep global temperature in check in line with the Paris Agreement targets. Meanwhile, the United Nations Intergovernmental Panel on Climate Change has warned that not investing in renewables, batteries and modernisation of electric grids could have a huge negative impact, amounting to tens of trillions of dollars on global economies in the decades ahead. Against this grim backdrop, the growing trend of investments related to climate change mitigation is a positive and most welcome sign.

Shifting from fossil fuels

Some of the world’s biggest companies and investors are earmarking huge amounts of money to enable a dramatic shift away from fossil fuels.

According to Bloomberg New Energy Finance, global investments in electric vehicles (EVs) and renewable energy technology as well as other green projects exceeded $520 billion in 2020. The governments of many countries are increasing their spending on addressing environmental issues and instituting new regulations on carbon emissions.

Meanwhile, many central banks are including climate change policies into their mandates. This is quite understandable as the economic impact of the devastation caused by climate change-based calamities such as rising sea levels, wildfires and storms can easily spur inflation. The banks are therefore trying to contribute to climate change mitigation by steering clear of fossil fuels as much as possible.

There are members of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) who are adjusting their policies based on climate considerations. Some of the measures they have adopted include the introduction of higher capital charges for lending to fossil fuel companies and bank stress tests that evaluate the risk of rising temperatures to loan portfolios.

In March 2021, the group suggested that central banks should consider charging higher interest rates to lenders that pledge carbon-intensive assets as collateral.

The interplay of regulations and markets is helping to drive technological innovation, especially in the spheres of clean energy and sustainable mobility. A combination of battery technologies and renewable energy solutions are disrupting the natural gas industry today, much like how natural gas disrupted the fossil fuel industry in the past. Batteries are being paired with both solar and wind farms and as technology costs fall and batteries become increasingly affordable, the market for these combinations is expected to grow strongly.

The cost competitiveness of renewable energy is encouraging more and more companies to voluntarily reduce their carbon emissions by investing in wind and solar power – a trend that is being helped by regulations to address climate change.

Focus on Green finance

Amidst these developments, green finance is finally getting the attention, if not the momentum, it fully needs and rightly deserves. The surging valuations of companies manufacturing EVs and batteries are encouraging investments in the automotive and renewable energy sectors.

Today, mutual fund managers expect companies to take concrete actions towards mitigating climate change — to care not only about profits, but also about people and the planet. Big-ticket investment companies and advisors are now more favourably inclined to supporting ESG-related (environmental, social and governance) shareholder proposals than at any time in the past.

In the coming years, the climate-related strategies of companies will come under increasing scrutiny from not just regulators and legal authorities but also shareholders, business partners and customers. If businesses and nations are to successfully overcome the challenges of the looming climate crisis, they must focus equally on several aspects at once — sustainability, health and wellness, resilience, and equity.

Green finance will strengthen all these pillars and expedite the needed transition to net zero — and one day, net-positive. Making green finance mainstream and the de facto standard for finance is one of the immediate steps we must take to not only mitigate the damage already done by the climate crisis, but also to put in place a foundation that leads to a regenerative and resilient future for all.

For this to become a reality, we know that the pace of green investments needs to accelerate and that a sizeable percentage of investments should be aimed at addressing long-standing or anticipated issues that could get in the way of project execution and end-goals.

The International Energy Agency (IEA) has said recently that global investments in energy projects – especially renewable energy and green projects – needs to more than double from their current level by the year 2030 for the world to meet its net zero emission goal by the middle of this century. Wood Mackenzie, a Verisk Analytics business which provides commercial intelligence for the world’s natural resource sector, has estimated that investments to the tune of $50 trillion will be needed to meet the goals of the Paris Agreement by the year 2050.

India can show the way

India is currently the world’s third biggest emitter of greenhouse gases. And although it hasn’t committed to net zero goals, India is well on its way to achieving – or possibly overachieving – its Paris Agreement targets. Studies indicate that India is the only G-20 country whose climate actions are aligned with the goal of keeping global temperatures from rising beyond 2°C. This is certainly something to celebrate and be proud of. Where we need to quickly accelerate, however, is in the uptake of green financing where India has tremendous room to grow and demonstrate leadership.

India has always seized opportunity when it presents itself and now is the time to act. India’s energy and real estate sector are one of the fastest growing in the world and are attracting sizeable investments. Meeting the country’s climate goals in the long run will require a proportionate increase in green investments. It is heartening that ESG investments have outpaced others over the past year and India can tap into this positive trend and establish a mechanism that allows for greater openness and fuller transparency.

As India is working hard to emerge out of Covid-19 and begins to recover from the pandemic, it should dually focus on both a Covid and green recovery to achieve sustained growth for its economy and the resilience of both its environment and people. Like it has in so many other respects, India has the opportunity to emerge as a leader from the current crisis we face. Let’s seize it.

The writer is President and CEO, USGBC and GBCI

Published on August 03, 2021

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