“Green finance” still a long way from the Paris Agreement

The concept of green fin­ance has been around for about 20 years, but it only became main­stream in 2015 with the adop­tion of the Par­is Cli­mate Agree­ment. Its rise sym­bol­ises the moment when fin­an­cial insti­tu­tions woke up to the exist­ence of cli­mate risks; an event that has been strongly attrib­uted to former Bank of Eng­land Gov­ernor Mark Car­ney’s ‘Tragedy of the Hori­zons’ speech. Since then, reg­u­lat­ors have pushed fin­an­cial insti­tu­tions to recog­nise the cli­mate risks borne by their asset port­fo­li­os and to com­mu­nic­ate this to investors. It happened first in France, with Art­icle 173 of the Energy Trans­ition Act of 17 August 2015, and then on a glob­al level with the recom­mend­a­tions of the Task Force on Cli­mate-Related Fin­an­cial Dis­clos­ures (TCFD) cre­ated by the Fin­an­cial Sta­bil­ity Board – which includes 26 major cent­ral banks and inter­na­tion­al institutions.

In prin­ciple, the primary object­ive of green fin­ance is to align fin­an­cial flows with cli­mate object­ives by min­im­ising the neg­at­ive impacts and max­im­ising the pos­it­ive impacts of invest­ments. To do this, there is a body of dif­fer­ent tools: spe­cif­ic fin­an­cial products such as green bonds, indices, the fam­ous ‘Par­is-aligned index’ and engage­ment policies with com­pan­ies and policies to exclude com­pan­ies that are harm­ful to the cli­mate and biod­iversity issues in their port­fo­li­os. Finally, there are spe­cif­ic mar­kets: the mar­ket for CO₂ emis­sions or the mar­ket for off­sets of neg­at­ive extern­al­it­ies, for example.

The second object­ive is to meas­ure and mit­ig­ate the fin­an­cial risks posed by cli­mate change on the one hand and by the energy trans­ition itself on the oth­er. The former are called phys­ic­al risks such as storms or forest fires, and the lat­ter trans­ition risks. Trans­ition risks are caused by reg­u­lat­ory changes aimed at mit­ig­at­ing the scale and impact of cli­mate change. For example, a coal-fired power plant or coal mine could become unvi­able due to the high price of car­bon price or a change in con­sumer preference.

Over the past 5 years, a pos­it­ive dynam­ic has been set in motion but, apart from a pause due to Cov­id, the glob­al emis­sions curve is not yet show­ing any sign of slow­ing down. Invest­ments in renew­able ener­gies are insuf­fi­cient to reverse the trend and the com­mit­ments made by States in the frame­work of the Par­is Agree­ment are insuf­fi­cient to achieve the object­ive of this agree­ment. Glob­al invest­ment in renew­able energy was $322bn 2018 (com­pared to $933bn inves­ted in fossil fuels the same year)¹. Mean­while to pre­vent warm­ing about 1.5°C by 2100 requires invest­ment of $797bn each year between 2016 and 2050.

The res­ults of green fin­ance are not yet sat­is­fact­ory des­pite the impress­ive fig­ures. This is partly due to the lack of invest­ment in renew­able energy, espe­cially in devel­op­ing coun­tries, which are still con­sidered risky by private investors. Fur­ther­more, the com­mit­ments made by indi­vidu­al investors or groups of investors are cur­rently insuf­fi­cient to trig­ger a trans­ition dynam­ic and are also dif­fi­cult to eval­u­ate and compare.

Europe is ahead of the game with some mod­el coun­tries in terms of reg­u­la­tion such as France, the UK and the Neth­er­lands. In the US, even though the exit from the Par­is cli­mate agree­ment had a sig­ni­fic­ant neg­at­ive media effect, the pres­ence of a cli­mate-den­ier as in the White House for four years has not quite reversed the estab­lished momentum. This is because the time for invest­ment is long, and many ini­ti­at­ives are tak­ing place at the cor­por­ate and state level. In par­tic­u­lar, des­pite Pres­id­ent Don­ald Trump’s efforts to sup­port the tra­di­tion­al industry, 2019 saw a record num­ber (after 2015) of coal plant clos­ures. 15 GW were replaced by renew­ables and gas. It should be noted that the use of gas-fired power plants, even if it does not allow car­bon neut­ral­ity and will even­tu­ally have to be aban­doned, is a quick way to reduce emis­sions as coal emits almost 3 times more car­bon diox­ide than meth­ane for the same amount of energy produced.

China, while still the largest emit­ter of green­house gases and with emis­sions still rising, is also the coun­try that is invest­ing the most in renew­able energy. It is com­mit­ted to achiev­ing net zero by 2060 and is at the fore­front of green fin­ance both in terms of mar­ket devel­op­ment (“green bonds”) and par­ti­cip­a­tion in inter­na­tion­al ini­ti­at­ives (NGFS etc.).

Con­sumers also play a key role in the energy trans­ition as they are the ones who ulti­mately make the decision to switch to elec­tric cars or ren­ov­ate their homes. Green fin­ance can help fin­ance these pro­jects, and this con­cerns both pub­lic and private play­ers, par­tic­u­larly banks.  But also, to have an impact on the real eco­nomy, investors need to dis­en­gage them­selves from assets that are harm­ful to the cli­mate. As long as this is not the case, we can­not con­clude pos­it­ively on the real impact of green finance.

Interview by Clément Boulle