This article first appeared in the Financial Times on 9 October 2018.
Zoë Knight, Managing Director, Centre of Sustainable Finance, HSBC
On paper, solving the climate-change problem is straightforward. The global economy needs to service its energy needs more productively, as well as taking carbon out of its energy supply. Moreover, there is already a wide consensus that such action is in everyone’s best interests. The influential report of 2018 from the New Climate Economy estimated that the world will gain USD26tn of benefits by 2030 if we do take action.
So why, 28 years after the first intergovernmental scientific study on climate change, are we not getting this right? And what should we do about it?
The challenges are easy to identify. First, addressing climate change has to involve everyone, everywhere. The unfortunate reality is that the physical consequences of warmer temperatures, such as extreme floods and droughts, are often felt thousands of miles from the facilities that emit the greenhouse gases causing global warming. But increasingly, as Hurricane Florence and Typhoon Mangkhut have shown, weather catastrophes are happening in two places at once.
Climate change acts as a threat multiplier, exacerbating already precarious situations. For instance, the Earth’s atmosphere can hold 7 per cent more moisture for every 1C rise in global warming, which would cause heavier rain, at the same time as rising sea levels would make storm surges more likely. Countries with the most people affected by these extremes are generally those less able to afford measures to cope with them. The second challenge is that while the effects are felt globally, the individual standpoint of countries necessitates a local response on reducing greenhouse gases.
Fossil fuels represent 85 per cent of the global energy mix, according the most recent BP Statistical Review of World Energy. Clearly, weaning ourselves off carbon-intensive energy is an enormous task. In many places fossil fuels are still the cheapest option, so in an ideal world countries would tip the balance in favour of clean technologies by pricing carbon — charging emitters of carbon dioxide.
Removing fossil fuel subsidies would also make a difference. Neither is politically palatable. In the meantime, 13 per cent of the world’s population still lack access to electricity, according to the World Bank.
To add to the woes, we do not yet know the right answers for the optimal decarbonisation strategy in a lot of high energy use sectors. All this is too often taken as a good excuse to do nothing.
Lack of financial capacity is another hindrance to progress on low-carbon growth strategies. Countries still in the early stages of economic development need to build power and transport infrastructure, and in many places it is cheaper and easier to do this without fully thinking through the climate and pollution consequences. Attempts, such as the Green Climate Fund, which funds projects in developing countries, are valiant efforts to redistribute capital to building low-carbon, climate change-resilient infrastructure. But everyone must do more.
The scale of the transition required is huge, but it also brings new openings. We should not be too gloomy since investors have an appetite for opportunities.
The problem is that they are struggling to find the right opportunities that capture the environmental, social and governance criteria or sustainability-aligned impact investments they are looking for. Sustainable finance addresses this issue because it shines a light on capital deployment that captures these factors.
Increased transparency on sustainable capital flows allows the various stakeholders, such as governments, businesses and capital market participants, to make up their own minds on how fast or slow the transition to a low-carbon economy is happening, and make decisions accordingly. For governments, the signals these investment flows provide might mean new targets for renewable energy capacity or incentivising green transport or buildings. For businesses the decision might be to exit or acquire business lines. For investors, it is about avoiding stranded assets.
Achieving the pledge by world leaders in 2015 to limit global warming to less than 2C above pre-industrial levels means decarbonising the energy system, and fast. But the speed, scale and pathway of transition is varied and opaque, and all stakeholders need more help with identifying whether capital flows are in fact supporting the transition.
Financing growth in a way that is transparent on addressing sustainability challenges is a must for future prosperity. There is no time to lose: sustainable finance is the answer.