Can ‘climate finance’ fund a transition to a low-carbon economy?

At the United Nations powwow of world leaders next week, environmental advocates and government officials from across the globe will present plans – not just speeches – about how to reverse global warming.

UN Secretary-General Antonio Guterres has ordered his staff to concentrate on putting into place a concrete framework agreed upon by country delegates, multilateral organisations and the private sector.

The blueprint for tangible measures to reverse climate change involves ambitious national commitments to emissions targets. But the planet’s transition towards a low-carbon economy will also require financial titans to mobilise.

“The need for climate action has never been more urgent,” said Mara Childress, Bloomberg LP’s director of global public policy and one of the authors of a report released on Wednesday by the Climate Finance Leadership Initiative (CLFI).

Childress told Al Jazeera that a key task in paying for decarbonisation is “engaging the private sector and making sure investment flows go where they need to and shifting trillions to low-carbon solutions”.

She said there has been a major increase in climate-friendly investment in the past 15 years, from $60bn in 2004 to $354bn in 2018.

“The cost of clean energy is competitive, if not cheaper, in many jurisdictions,” added Childress. “Solar farms and windmills are cheaper than a new coal plant.”

Yet despite optimism from some quarters, significant doubts remain about the ability of the private sector to make up for the public sector seemingly failing to make – and meet – stringent climate commitments.

‘Critical role to play’

The new report aims to push capital towards more sustainable investments and is a product of CFLI, which was formed at Guterres’s request by UN Special Envoy for Climate Action Michael Bloomberg.

Bloomberg’s initiative includes finance organisations that cosponsored the report: Allianz Global Investors, AXA, Enel, Goldman Sachs, Japan’s Government Pension Investment Fund, HSBC and the Macquarie Group.

Mostly comprised of banks and asset managers, the group identified business opportunities as companies and governments pursue the objectives of the Paris Agreement.

They are to present findings during the UN Climate Action Summit on Monday, and their efforts represent the first time such notable actors from across the investment chain have united around climate. The report emphasises both how to decarbonise existing investments and how to scale up funding of low-carbon projects.

“The private sector has a critical role to play in combating climate change, and mobilising the global financial system is essential to building a low-carbon future,” said Michael Bloomberg, who is also the founder of Bloomberg LP and Bloomberg Philanthropies.

“More and more business leaders recognise that economic growth and climate action are not two competing ideas – they go hand in hand,” Bloomberg said, adding that the report’s solutions “provide a road map for both reducing emissions and strengthening economies”.

The recommendations focus on investing in emerging markets and propose strategies for imposing clean energy business models.

“The financial community is getting increasingly aware of the risks related to climate change, but financial flows to low-carbon solutions are not growing at the required pace,” said Francesco Starace, CEO and General Manager of Enel, an Italian energy firm.

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by Rachel Kyte, Special Representative of the UN Secretary-General for Sustainable Energy for All

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Rachel Kyte, Special Representative of the United Nations Secretary-General for Sustainable Energy for All, said new partnerships and collaborations next week will include heads of state, city leaders and CEOs forging an appropriate response to the climate emergency.

But, she told Al Jazeera at a briefing for reporters, “The financial sector has still got a long way to go to incentivise people to do smart things, and not put more finance behind things we know will not help with the transition, and endanger human health as well”.

Anticipating a series of announcements that start to fill in the gaps, Kyte said that Monday’s summit will help “slingshot towards further agreements in climate negotiations later this year”.

However, she referred to financial institutions only being “at the tip of the spear” for a sector that may be transformed considerably.

“As we’ve seen with tobacco and other issues, there is going to be a reckoning of what companies do and what their financiers do – at the point that they understand the impact of their activities on people and the planet,” Kyte said, suggesting that international commitments will soon be “closing down the space for investing in heavily carbonised technologies”.

“Central bank governors are saying we have to understand the risk to our economies of not making the transition,” she added. “We’re starting to see passive investors asking questions and voting their shares.”

“The biggest peril we have is inertia and incumbency. How do you speed things up?” she asked, before arguing that “time is our enemy” when fossil fuel companies are paid subsidies by governments as they continue “lobbying for business as usual and short-term interests”.

‘Twice the warming limits’

Meanwhile, the research outfit Climate Action Tracker (CAT) warned in its progress update released late on Thursday that current global commitments to reduce emissions will nonetheless likely lead to the breaking – by the year 2035 – of the 1.5 degree Celsius limit enshrined in the 2015 Paris Agreement.

CAT predicts average temperatures will be two degrees higher by 2053 and that total warming will reach 3.2 degrees by the end of the century.

“We’re heading to at least twice the warming limit governments agreed [to] four years ago,” said Bill Hare, CEO of Climate Analytics, a nonprofit organisation based in Berlin. “We are inching forward, at best.”

And in its similar report from this week on climate alignment, the Transition Pathway Initiative assessing companies’ preparedness for the low-carbon economy found that fossil fuel companies are slow to implement changes. 

“Just two oil and gas companies have emissions ambitions in line with the Paris pledges made by national governments, and none are aligned with a pathway that would keep global warming to 2°C,” said the press release accompanying the report.

Helena Vines Fiestas, the Global Head of Stewardship and Policy at BNP Paribas Asset Management, said that most companies have not set 2030 emissions targets, let alone established a longer-term vision.

“We, as a major institutional investor, are concerned that transition risk – the large and growing gap between government targets and company ambitions – is a major source of investment risk,” she said.

For Anders Schelde, chief investment officer at fund manager MP Pension in Denmark, divestment from fossil fuels and impact investments in sustainability are both integral to resolving the climate crisis.

“We can actually live without [investing in] one or two sectors – without hurting our ability to create investment returns,” Schelde told Al Jazeera, explaining that his firm has excluded fossil fuel companies.

“But as CIO, I’m anxious that we don’t limit our ability to generate returns,” he added, before rattling off the other sectors rejected by socially responsible investing – arms and nuclear power, among others.

Schelde is looking ahead to the COP25 climate gathering in Chile this December to ink deals in solar and wind investments.

Shemara Wikramanayake, the CEO of Macquarie Group, an Australian investment bank that cosponsored the Climate Finance Leadership Initiative, said that one of the biggest challenges is the dearth of investible projects on the horizon.

However, despite the tall order ahead – and vocal sceptics of her industry – Wikramanayake said the finance community stands ready to assist governments in transforming economies away from carbon.

“With partners in the public and private sector – in mature and emerging markets,” she pledged to “deliver the next generation of renewable energy projects with greater scale and urgency”.