Make net zero essential by greening the financial system


The strategic interplay of economy, 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 level in four million years, an urgent global campaign has begun in recent years to get countries to pledge to become net zero by 2050.

It is perhaps not surprising that opinions on this issue are divided, and some believe that global carbon neutrality is the only way to keep the global temperature under control in line with the goals of the Paris Agreement. Meanwhile, the United Nations Intergovernmental Panel on Climate Change has warned that failing to invest in renewables, batteries and modernization of power grids could have a huge negative impact, amounting to tens of billions of dollars in global economies in the decades to come. In this bleak context, the growing trend of investments related to climate change mitigation is a positive and most welcome sign.

Switching from fossil fuels

Some of the world’s biggest companies and investors are setting aside huge sums of money to enable a radical shift away from fossil fuels.

According to Bloomberg New Energy Finance, global investments in electric vehicles (EVs) and renewable energy technologies as well as other green projects topped $ 520 billion in 2020. Governments in many countries are increasing spending to solve the problems. environmental issues and institute new carbon regulations. emissions.

Meanwhile, many central banks include climate change policies in their mandates. This is quite understandable as the economic impact of the devastation caused by climate change-related calamities such as sea level rise, forest fires and storms can easily spur inflation. Banks are therefore trying to help mitigate climate change by avoiding fossil fuels as much as possible.

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

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

The interaction of regulations and markets helps stimulate technological innovation, particularly in the areas of clean energy and sustainable mobility. A combination of battery technologies and renewable energy solutions is disrupting the natural gas industry today, just as natural gas has disrupted the fossil fuel industry in the past. Batteries are associated with solar and wind farms, and as technology costs drop and batteries become more affordable, the market for these combinations is expected to experience strong growth.

The cost competitiveness of renewable energies is prompting more and more companies to voluntarily reduce their carbon emissions by investing in wind and solar energy, a trend fostered by regulations aimed at combating climate change.

Focus on green finance

Amid these developments, green finance is finally receiving the attention, if not the momentum, it badly needs and rightly deserves. The surge in valuations of companies manufacturing electric vehicles and batteries encourages investment in the automotive and renewable energy sectors.

Today, mutual fund managers expect companies to take concrete action to mitigate climate change, to care not only about profits, but also people and the planet. Large investment firms and advisers are now more favorably inclined to support ESG (environment, social and governance) shareholder proposals than at any time in the past.

In the years to come, climate-related corporate strategies will increasingly come under scrutiny not only by regulators and law enforcement officials, but also by shareholders, business partners and customers. If businesses and nations are to successfully overcome the challenges of the looming climate crisis, they must equally focus on several aspects at the same time: sustainability, health and well-being, resilience and equity.

Green finance will strengthen all of these pillars and accelerate the necessary transition to net zero – and one day, net positive. Integrating green finance and the de facto standard for finance is one of the immediate steps we need to take not only to mitigate the damage already caused by the climate crisis, but also to lay a foundation that leads to a regenerative future. and resilient for all.

For this to become a reality, we know that the pace of green investments must accelerate and that a significant percentage of investments must be aimed at solving long-standing or anticipated issues that could hamper project execution and end goals. .

The International Energy Agency (IEA) recently said that global investments in energy projects – especially renewables and green projects – must more than double from their current level by 2030 for the world meets its goal of net zero emissions by the middle of this century. Wood Mackenzie, a Verisk Analytics company that provides business intelligence for the global natural resources industry, has estimated that investments in the order of $ 50 trillion will be needed to meet the Paris Agreement goals of by 2050.

India can lead the way

India is currently the world’s third largest emitter of greenhouse gases. And although it has not made a commitment to meet net zero targets, India is on track to meet – or perhaps exceed – its Paris Agreement targets. Studies indicate that India is the only G-20 country whose climate actions are aligned with the goal of preventing global temperatures from rising above 2 ° C. It is definitely something to celebrate and be proud of. However, where we need to accelerate quickly is in the adoption of green finance where India has considerable leeway to grow and show leadership.

India has always seized the opportunity when it presents itself and now is the time to act. India’s energy and real estate sector is one of the fastest growing in the world and attracts significant investment. Achieving the country’s long-term climate goals will require a commensurate increase in green investments. It is encouraging to see that ESG investments have outperformed others over the past year and that India can take advantage of this positive trend and establish a mechanism for greater openness and transparency.

As India works hard to emerge from Covid-19 and begins to recover from the pandemic, it should focus on both a Covid and green recovery to achieve sustained growth for its economy and the resilience of its environment and of its population. As it has done in many other ways, India has the opportunity to emerge as a leader in the current crisis we are facing. Let’s grab it.

The author is President and CEO, USGBC and GBCI

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Don F. Davis

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