Finance stands ready to support the net zero transition
Hundreds of financial institutions representing trillions of dollars in assets have committed to financing the transition to net zero emissions before 2050. But, as they begin the work of implementing those commitments, long-standing structural barriers are still making it hard for meaningful investment to reach many of the most at-risk countries, already being crippled by climate-fueled extreme weather, Covid-19 and mounting debt. In the meantime, geopolitical complexities are making the energy transition even harder.
This week’s spring meetings at the IMF and World Bank must be used as an opportunity for public and private finance leaders to come together and forge new approaches to removing those barriers, and to heed the call ahead of Earth Day on Friday to #InvestInOurPlanet.
The science is clear on what is needed to create a safer, healthier zero-emissions economy by 2050. We must halve greenhouse gas emissions by 2030, and at the same time end the loss of nature, and build resilience for 4 billion people from the physical and health impacts of climate change.
However, difficult issues – including indebtedness, lack of coverage and lack of proper management of climate risk and losses – are contributing to a vicious cycle that makes it even harder for public and private finance to find its way to the most vulnerable economies. This is particularly acute in places that are already experiencing the most severe impacts from climate change and are most in need of investments in resilience and adaptation.
These are problems that affect 6.5 billion people across 143 emerging markets and developing economies. Green finance is critical to these countries, and their people, for several interconnected reasons. They are increasingly at risk from the impacts of climate change – accounting for 91% of deaths from extreme weather events over the past 50 years. They are unable to deliver investments at scale through domestic resources, which hinders their ability to reduce emissions and build resilience. But they need investment in both mitigation and adaptation to support their sustainable development, including job creation, resource efficiency and health benefits such as clean air. If they don’t develop sustainably, their economies and emissions will grow rapidly in the coming years.
To break this cycle, private finance together with governments, industry and civil society needs to develop a set of public-private partnerships and innovative blended finance vehicles to allow more finance to flow. Meanwhile, new approaches to insurance and sovereign debt are required to provide the fiscal headroom for vulnerable countries.
Investment in resilience and adaptation, in particular, will turn emerging and developing markets into more attractive investment destinations overall. It will reduce their physical risks from climate change, reduce the risk of incurring debt from extreme weather events, and lead to GDP growth through greater inward investment and job creation.
A concerted effort between governments and private sector finance can help unlock investment at scale, including from institutional capital. Creating a clear scope for so-called ‘country platforms’, which specify national climate, nature and sustainable development objectives, is a critical first step to providing the transparency private investment needs. There are also challenges and needs related to de-risking mechanisms, the development of investable projects at scale, governance, and data transparency that also must be addressed.
The Glasgow Financial Alliance for Net Zero (GFANZ) is engaging with policymakers, government leaders, public finance institutions and other important stakeholders to meet these issues head-on at the international, national and project-specific level.
As it approaches its one-year anniversary on Earth Day, GFANZ now represents over 450 financial firms, all of which are committed to reaching net zero before 2050. Already, many GFANZ members have released their 2030 interim targets, representing a fair share of the 50% decarbonization required by the end of this decade.
But the window of opportunity for keeping the Paris Agreement’s 1.5C goal within reach is rapidly diminishing. As we mark another Earth Day, leaders need to keep the climate crisis at the centre of their deliberations about energy security. In doing so, we might help ensure that finance flows at the pace and scale required to where it is needed most, improving overall economic health and driving long-term sustainable development.