Delivering the transition to a low-carbon economy at pace is crucial for limiting further increases in global temperatures. The Paris Agreement of December 2015 provides a strong signal that limiting climate change is now a political imperative. It has a clear goal, which is to strengthen the global response to the threat of climate change. The role of finance to support this aim is also clear, it is to “make finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development”.1
Countries contributed to the Paris Agreement by providing plans in advance of the deal, known as nationally determined contributions, on how to reduce greenhouse gases to solve the climate problem and embed resilience to respond to warmer temperatures. These are important because they are based on the economic and social circumstances for each country, therefore providing individual roadmaps for what countries can do. The approaches vary significantly but the plans are nonetheless a useful guide. There is a catch however. Some countries expressed that they could do more to reduce emissions if they received more finance. This is a perfectly valid approach, since countries are at differing levels of economic prosperity, and it clearly makes sense to put local considerations for people first. However, it means that allocating capital for climate solutions has an extra dimension: a transparency as well as scale requirement.
Transparency on what finance is being used for in relation to energy systems and other forms of economic development, such as transport networks and buildings, is important because it allows key economic stakeholders, such as governments, investors, and corporates, to take a view on how quickly low-carbon transition is happening. In turn, this means they can prioritise capital allocation to specific needs relating to reducing emissions or building resilience.
There are signs of increased transparency about financing with a specific purpose in mind. In 2018, USD149.2 billion of green bonds came to the market, and HSBC fixed income analysts estimate that new issuance will be USD140-180 billion in 2019.2 However, this is around just 1 per cent of the total issuance of 2018. Therefore mobilising capital to deliver the scale of investment required is a key priority.
The use of blended finance is increasingly acknowledged and utilised as a way to address the risk factors that sometimes deter investment in low-carbon solutions. The imperative now is to build capacity across the globe so as to mobilise private capital at scale.
1UN Framework Convention on Climate Change, Conference of the Parties, Paris, 30 November to 11 December 2015
2Green Bond Insights, HSBC Global Research, 9 January 2019