FINANCING THE TRANSITION TO A LOW (OR NO) CARBON ECONOMY: FINANCE LEADERS HAVE A HUGE ROLE TO PLAY!

In its 2016 New Climate Economy report, The Global Commission on the Economy and Climate stated that a huge US$4.1 trillion of net incremental infrastructure investment would be required to finance a low-carbon transition up to 2030.

Finance leaders have a substantial role to play in shaping this transition to a low (or no carbon) economy and some may even argue a duty to do so. Indeed, they are best placed to influence the channelling of funds into green projects around the world.

But who are these finance leaders? Some may think that investment management companies are the main actors within the financial community to do so. However, investment management companies do not make the financial community on their own and there are many other actors who can influence the integration of environmental factors into the investment decision-making.

The Prince’s Accounting for Sustainability project identified the a number of stakeholders as having a unique position to influence the transition to a low (or no) carbon economy. 

CFOs and their finance teams are the ones who can influence the allocation of funds within their organisations and drive the incorporation of more sustainable practices into their business models.

 

 

Asset owners such as pension funds and sovereign wealth funds handle vast amounts of money. In its report “Sovereign Investors 2020: A growing force”, PWC estimates sovereign wealth funds’ total assets under management to reach USD 15tn by 2020. Imagine the impact this would have on the transition to a low carbon economy if most of these funds were invested in “low carbon emission” projects? 

McKinsey (2009) identified four broad ways in which investment banks can both contribute to and profit from the shift to a low carbon economy i.e. promote carbon transparency, drive innovation amongst the issuers to whom they provide financing as well as industrialise the market for carbon and financing the low-carbon economy.

Insurance companies can also influence a transition to a low carbon economy through climate-linked catastrophe bonds and innovative insurance products such as the Carbon Capture and Sequestration Liability Insurance, recently launched by Zurich.

Financial exchanges have already launched a number of low carbon products such as Certified Emission Reduction (CER) future contracts as well as low carbon indices.

Credit Risk agencies have a role to play in developing more comparable and transparent metrics which would help investors make better informed decisions when investing in so called low carbon emission projects.

The accounting community and more particularly accounting bodies can support the transition to a low (or no) carbon economy by incorporating environmental considerations into their courses’ syllabi and so can business schools and universities whose many students are the finance leaders of tomorrow. 

Governments, regulators and policy-makers will also have a substantial role to play in driving this change by enabling a supportive regulatory environment.

In short, investment management companies are not the only actors of the financial community spectrum who can contribute to a shift towards a low (or no) carbon economy and it is through a concerted effort that all the above actors will make a difference.

 

  

 

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8 thoughts on “FINANCING THE TRANSITION TO A LOW (OR NO) CARBON ECONOMY: FINANCE LEADERS HAVE A HUGE ROLE TO PLAY!

  1. On SO MANY levels, we are indeed lucky it’s not just investment management people who will be the main actors in allocating resources towards green projects! I like the tone of your post as it clearly looks into green projects as business opportunities, rather then the omnipresent treehugging declaratives saying „green is the only option, save the environment, we will all die“ – while both perspectives are important, just like industrial innovation was spurred by available finance and vice-versa, it is the hard numbers that will push along any transition, including the one to „green“.
    I think you identify the main actors really well, and in that light it might be interesting to remember the multi-stakeholder partnerships chapter that we were exposed to prior to W2 – it outlined also all the communicational challenges that occur when people are on the same page – when there are tensions (i.e. private vs public sector vs NGOs), the degree of complexity just increases.
    Monetizing benefits and environmental costs and using business value proposition as a communicational tool for me is especially important for me as I actively drive this in my work in developing the awesome place Dubai is and will yet become. So looking forward to your further examinations on the topic!

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  2. Great post – I too agree with Luka in regards to being thankful that its more than finance people in charge of how we get to an improved state ! The challenge though is that often the finance folk are more organized than NGO’s who can be seen to be on ‘the edge’ and hence not gain as much mainstream support as someone from a major financial institution may. So perhaps is how do we help the NGO’s present themselves as more main stream whilst still recognizing their passion ?

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    1. That’s a good point indeed. NGOs do have a role to play too and it would actually be very interesting to explore the influence which they can exert over this agenda and the power of advocacy in general as part of the master’s programme.

      Liked by 1 person

      1. I’m really hoping we begin to cover this in the September workshop. Sometimes NGO’s are their own worst enemy – their passion sees them set up an off shoot organization because they can’t agree to disagree on an area which then splits the overall support base. This is not the time for splitting of resources – we need a consolidated position to move forward.

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  3. Thank you so much for sharing this very thorough and insightful stakeholder analysis! As an investment banker past two decades with professional accounting qualification, I can fully appreciate your point of view.

    To maximize efficiency in facilitating the transition towards a sustainable “low carbon” economy (also giving due consideration to the 20/80 rules and lower-hanging fruits), perhaps can we PRIORITIZE megacities around the world plus to PRIORITIZE the top three industries that contribute towards carbon emission.

    Cities with more than 10 million inhabitants are often termed “megacities”. In 2016, there were 31 megacities globally and their number is projected to rise to 41 by 2030 (United Nations, 2016, p.2).

    According to the Global Platform for Sustainable Cities (2016), cities are responsible for approximately two-thirds of the world’s overall energy consumption and an estimated 70% of all carbon emissions. Megacities are hampered by mounting challenges in areas like water supply and sanitation, waste management, transport infrastructure and services, energy supply, as well as climate change. The two major sectors for reducing energy consumption in megacities are buildings and transportation. According to UNEP Sustainable Buildings and Climate Initiative (2015), buildings account for 40% of the world’s energy consumption and two-thirds of annual carbon emissions. The transport sector is the second-largest contributor of carbon emissions after power generation (International Energy Agency, 2015, p.122).

    I have analyzed the Shanghai Municipality City in the context of Sustainable Development Goal 11 (Sustainable City). As a reference, Shanghai Environmental Bureau (2015) reported Shanghai air pollution was primarily caused by: (a) car/ship/air transportation emissions: 29.2% (b) factory emissions: 28.9% (c) coal-fired power stations: 13.5% (d) dust from construction sites: 13.4%.

    Therefore, senior government leaders around the world may want to focus on green real estate and green transportation (for example, mass transportation system) to expedite the transition towards sustainable “low carbon economy while maximizing the impact in near-to-mid term.

    Like

  4. Thank you so much for sharing this very thorough and insightful stakeholder analysis! As an investment banker past two decades with professional accounting qualification, I can fully appreciate your point of view.

    To maximize efficiency in facilitating the transition towards a sustainable “low carbon” economy (also giving due consideration to the 20/80 rules and lower-hanging fruits), perhaps can we PRIORITIZE megacities around the world plus to PRIORITIZE the top three industries that contribute towards carbon emission.

    Cities with more than 10 million inhabitants are often termed “megacities”. In 2016, there were 31 megacities globally and their number is projected to rise to 41 by 2030 (United Nations, 2016, p.2).

    According to the Global Platform for Sustainable Cities (2016), cities are responsible for approximately two-thirds of the world’s overall energy consumption and an estimated 70% of all carbon emissions. Megacities are hampered by mounting challenges in areas like water supply and sanitation, waste management, transport infrastructure and services, energy supply, as well as climate change. The two major sectors for reducing energy consumption in megacities are buildings and transportation. According to UNEP Sustainable Buildings and Climate Initiative (2015), buildings account for 40% of the world’s energy consumption and two-thirds of annual carbon emissions. The transport sector is the second-largest contributor of carbon emissions after power generation (International Energy Agency, 2015, p.122).

    I have analyzed the Shanghai Municipality City in the context of Sustainable Development Goal 11 (Sustainable City). As a reference, Shanghai Environmental Bureau (2015) reported Shanghai air pollution was primarily caused by: (a) car/ship/air transportation emissions: 29.2% (b) factory emissions: 28.9% (c) coal-fired power stations: 13.5% (d) dust from construction sites: 13.4%.

    Therefore, senior government leaders around the world may want to focus on green real estate and green transportation (for example, mass transportation system) to expedite the transition towards sustainable “low carbon economy while maximizing the impact in near-to-mid term.

    Like

  5. You’re right, as always « team work makes dream work » !
    “Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results.” – Andrew Carnegie

    The task that you are addressing, financing a low-carbon transition up to 2030, is enormous and without cooperation, success is impossible.

    This was part of my PhD thesis. I tried to find out how we can sustainably exploit marine mineral and energy resources. In my conclusion, I presented three financial mechanisms that can help us transit to a low-carbon economy.

    The first one is the UN REDD + mechanism (Reducing emissions from deforestation and forest degradation). It was created to encourage developing countries to protect and restore their forests. The principle of REDD + is that developed countries provide financial compensation to developing countries that are able to reduce their emission sources at the national level. For example, large oil reserves have been discovered in the basement of Yasuní National Park in the Amazon. In order to preserve the endemic fauna and flora, the Government of Ecuador proposed in 2010 not to exploit these deposits in exchange for international compensation.
    If this system presents imperfections and difficulties, especially because developing countries need land for their agriculture, such a mechanism could be more effective if it was linked to the protection of the ocean. Indeed, developing countries that protect their marine resources (including coral and sharks, which are very important for ocean resilience) could use this money to invest in sustainable tourism or microalgae production.

    In addition, there is a mechanism for reducing the commercial debt known as unnatural debt. In the Philippines, between 1988 and 1993, the World Wide Fund-WWF negotiated four unnatural debt schemes that generated US $ 23.7 million.
    WWF bought the debts that international commercial banks held against the Philippine government. In exchange, the government has allocated the equivalent to the Philippine Environmental Foundation, who itself gave it to NGOs and local communities to take action to protect the environment, especially the marine environment.

    A third financial tool to adopt would be the green bond. A green bond is a debt obligation, issued on the market by a public entity or a company and which associates the proceeds of a loan with environmental projects.
    Green bonds are regulated by the Green Bonds Principles (GBP) launched in 2014 by major banks and international banking institutions, including the World Bank. These principles were updated in 2017. Our lovely tutor worked on their elaboration ! 🙂
    Its issuer undertakes to submit a detailed report on the investments in order to certify the use of these investments for projects related to the environment.
    However, there is no definition of green projects and reporting standards. It is therefore necessary to set up a frame of reference to avoid green washing.

    We need to create more financial tools to accelerate the transition towards a low carbon economy !

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  6. Very interesting post that highlights the role of the Agency (Giddens 1984) for transition to low (or no) carbon economy. Often emphasis is given to solutions that addresses the Structures through policy or product intervention. As suggested the CISL paper, Agency plays a role in episodes of change in that social actors can influence how, and how fast, a transition may occur. Actors can also create windows of opportunity or exploit opportunities created by pressures at meso or macro scale. Grin et al. (2010). Individual actors and their networks can influence how, and how fast, a transition occurs. Initiative taken by Prince’s Trust is transformational. Post 2008 fiscal crisis, world economy observed that co-ordinated actions from reserve bank governors, political leaders and bankers across the world helped to recover the economy. Similarly, co-ordinated actions from key financial stakeholders could help to move toward low or no carbon economy.
    To build on this, Efforts to transition to a low carbon economy must go beyond corporate and policy actors, to consider the views and priorities of consumers, civil society organisations and local communities (CISL 2018). Societal practices and consumer behaviour could help the to develop the demand and influence economic model. According to Financial times article, Millennials aren’t thinking much about retirement, but climate change is something many of them care deeply about. That’s smart, because by the time they retire, climate change and whatever humans do in the next 30 years to mitigate its effects will almost certainly have transformed the way we live; a transformation that could also have a big impact on their prospects for retirement. (FT, 2017)
    Another, build could be to extend the financial services network with other key industry bodies, such as Energy forums, Agriculture Network and Transport and Automobile network. It would be beneficial to have conference or forums that focuses on low carbon economy cross multiple sectors.

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