“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