The world is currently engulfed in a controversial debate following the decision by the United States of America to withdraw from the Paris Accord. The spirit of the Paris Accord is essentially steered towards regulating countries’ emissions levels as well as the maintenance of climate friendly policies that would ensure the future of the planet while ensuring that finance flows are consistent with an aim towards low greenhouse gas emissions and climate-resilient development.
The pullout by the United States of America came as a shock to many but is expected to offer a buffer to US heavy industry manufacturers in terms of implicit compliance costs in the medium term unless this decision is reversed.
Climate Change, a Reality
According to Just Facts, it is estimated that average global temperatures rose by 0.8ºC between the 1850s and 2000s, with significant acceleration post-1911, which correlates with the rise of the industrial age. The graph below confirms the fact that emissions have been on an upward trajectory as the world entered the industrial age.
If this trend keeps up, it is only a matter of time before the earth becomes uninhabitable; sea levels continue to rise, and the glaciers are melting away at an unprecedented pace. Humanity seems to have become comfortable with taking a 2 degree Celsius annual increase in warming which was previously deemed catastrophic. More progressive thinkers have put forward the idea of colonising other planets, which has resulted in increased space activity; but this requires a lot of investment and research whose benefits could be generations away.
As an immediate measure, there is a need to coalesce around the mantra of reduced emissions and shift towards more climate friendly manufacturing and ways of life. The only hurdle is that the laws of economics dictate that firms and consumers require incentives to shift behaviour. This leads to the important debate on green finance which has emerged to address this fundamental mismatch in incentives.
Emergence of Green Finance
The finance world has rallied in support of climate friendly initiatives with the emergence of “Green funds” in the recent past. There has emerged an ethical breed of investors who are unwilling to allocate portions of their portfolios to sectors, initiatives or corporations that are deemed to engage in activities that are perceived to have an adverse impact on the long-term sustainability of the planet.
Developed countries have also committed to mobilise funds for climate finance to the tune of $100bn by 2020 and to keep annual financing at this level at least until 2025. China published a 35 point plan to guide the roll out of green funds, and the G20 leaders have also recognised the need to scale up green finance. In 2016, issuance of green bonds stood at $81bn and is expected to exit at $206bn in 2017.
The private sector has taken the lead in this, and in June 2017 Apple raised $1bn in green bonds to finance renewable energy projects in what is the largest issuance by a corporate to date. Indeed these are positive measures that will go a long way in ensuring that global warming and greenhouse gases are contained and kept at levels deemed optimal.
For the green economy to thrive, government policy should complement and facilitate the deepening and stabilising of the markets for green financial instruments. The private sector will naturally take the lead in this, but the government also needs to step in to cover potential sectors that may be deemed too risky by the private sector but require funding to address a societal need.
Governments can also offer tax breaks, grants and credit guarantees to companies that are heavily invested in the renewable sector. Investors also need assurance that the funds they are putting at risk are utilized for the intended purposes, and this has been well catered for by the Sustainability Reports that we are seeing more and more progressive corporations publish. Standards and guidance to govern accounting for carbon credits have also been developed and published.
The future indeed looks bright for green finance given the upside inherent. Currently, less than 1% of global bond issuances are green so the scope for ramping up is massive taking into account the antecedent benefits and policy directions being adopted by governments and influential global organisations.
Green Finance Leadership
Cities are falling over themselves in an attempt to emerge as the financial hub of green finance with Hong Kong, London, Paris and Geneva launching initiatives that would position them to take advantage of this opportunity.
The critical question is what proportion of global finance will be green in the medium term and what incentives can financial market regulators and policy makers put in place to ensure this industry thrives. As long as the world’s energy needs keep growing, the future of green finance will keep soaring as this will mean more capital required to fund wind energy plants, energy efficient manufacturing plants and solar parks while chasing the twin goals of growth and sustainability.
The IEA predicts that global energy demand will increase by 40% by 2030 so when you marry this with initiatives to drive sustainability, the upside for green finance is enormous. Africa needs to position itself to benefit from this opportunity given its enormous green energy potential and existence of financial markets that can do with greater deepening.
Scientific research has proven that if we continue with our current production norms and consumption of fossil fuels, our very survival as species will be at risk. Initiatives such as the Paris accord and rise of the green economy all bode well in ensuring we stem this race to the bottom. We need to stem aside nationalistic sentiment in this very critical problem that we face and address it from a common perspective.
Ultimately the countries with larger industrial bases will pay a heavy price in the short to medium term, but this should be looked at in perspective. Politicians need to step up and offer important leadership and drive the sustainability agenda and not necessarily draw political mileage by taking divergent positions. As Barack Obama stated in his State of the Union address in 2015, “No challenge poses a greater threat to future generations than climate change.”
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