Climate change is not just an environmental challenge — it is a fundamental threat to development in our lifetime. Without immediate action targeted at emissions reductions by the international community, climate change could result in an additional 100m people living in extreme poverty by 2030 and reverse many of the development gains of the last decade. A 2007 United Nations study projected adaptation finance needs for developing countries would start at $28bn annually by 2030.
The costs for this cannot be borne by the public sector alone. There is a key role for the private sector, including the financial industry, to play in the struggle for a greener future. In fact, the private sector is the largest source of climate finance, devoting $243bn in 2014 to climate-related investments, according to the Climate Policy Initiative’s Global Landscape of Climate Finance 2015.One huge opportunity lies in green finance. Currently, green finance remains marginal to overall financial flows and inadequate for global needs.
There have been some encouraging developments over the past few years, including significant advances in mobilizing and mainstreaming green finance within financial institutions and financial markets. New and innovative financial products and services such as green bonds and green guarantees have been developed.
The green bonds market almost quadrupled between 2013 and 2015, reaching $42.4bn in 2015. The Paris climate accord re-confirmed the need to mobilize significant funding from public and private sources to finance the investment requirements outlined in the agreement. In this context, green bonds have already proven to be an important financial instrument capable of raising billions in climate finance.
Growing numbers of investors, banks, and insurers have also committed to integrating environmental and sustainable development issues into their decisions. Countries, including many G20 members, are mainstreaming sustainable development considerations into their financial market development efforts by including climate and broader environmental factors.
This includes encouraging voluntary action by financial institutions, such as the adoption of environmental management standards. Countries are also adopting policies and regulations aimed at improving information flows and capabilities through codes of conduct and disclosure requirements.
But despite this progress, green financing hasn’t reached its full potential. There is an estimated $1tn needed annually for climate-aligned investments, of which about $450bn is needed for non-OECD countries. The Climate Bond Initiative estimates that labelled green bonds issued globally in 2015 represented less than 1 per cent of total US dollar bond issuance and less than 0.2 per cent of debt securities issued globally.
The potential for scaling up the green bond market is tremendous. For green financing to realize its full potential, however, the public and private sectors need to work together. Removing fossil fuel subsidies, introducing a meaningful price for carbon and effective environmental regulations are critical, while public investment also has an important role to play.
There are a number of ways to help mobilize private capital for green investments. These include helping to enhance information flows, improving environmental risk management practices in the financial sector, eliminating market obstacles, and promoting market innovations. Providing proper incentives and ensuring policy coherence between financial and wider sustainable development policies are also vital to help the sector grow.
Responding to climate change is not only the right thing to do — it also makes good business sense.