The Future of Climate Finance: Mobilize Trillions for the Low-Carbon Economy

Today, the Paris agreement officially entered into force. The international climate accord calls for limiting global temperature rise to "well below" 2 degrees Celsius. And experts say we'll need around $17 trillion worth of investment by 2030 to make it happen.

"That number looks large," conceded Gireesh Shrimali, director of climate finance for the Climate Policy Initiative, at BSR 2016 this week. "But when you compare it to the size of [the global financial and capital markets] — around $300 trillion — it’s not that large ... It’s pretty clear that we have the science, but we have to scale up investment and we have to scale it quickly."

Luckily, change is already brewing. Around $400 billion was invested in climate technologies last year, $57 billion of which went to developing countries, Shrimali said. "That’s a very interesting number because there is an agreement that $100 billion must flow to developing countries [for climate mitigation by 2020]," he said. "So we are on the way to that target."

That $400 billion in climate finance is a surge compared to prior years. And that's largely because renewable energy makes better business sense with every passing day.

"Renewables are today the best solution to provide fast energy in the best way and at a low cost," said Andrea Valcalda, head of sustainability for Italian multinational utility Enel. "From a utility perspective, we are in the middle of an energy transition. It is a great challenge but also a great opportunity if you are brave enough to see the new model and to rethink completely and drastically your plan and the way you invest."

For its part, Enel did a 180 on its business model in order to support renewables and reduce carbon intensity. The company plans to invest 9 billion euros over the next five years to expand renewable energy deployment, and it will deliver at least 60 renewable energy projects over the next two years. Meanwhile, it will soon decommission over 20 fossil fuel power plants.

Of course, not all utilities are so forward-thinking, which can put the financial community in a tough spot.

"The theory is that banks have a choice about the funds in the energy sector they’d like to support. But in real life it doesn’t happen like this," said Laurence Pessez, head of corporate social responsibility for French multinational bank BNP Paribas. "I wish all of our clients could be like Enel," she said with a laugh. "It would be very simple. But unfortunately we have lots of clients who have many kinds of energy strategies which are not always compatible with our broader goals."

At COP21 in Paris, BNP Paribas committed to significantly alter its business model in response to these realities -- by financing the energy sector in accordance with a 2-degree scenario. So, for example, 40 percent of the world's energy now comes from coal. That number must be cut in half in 20 years to stay within 2 degrees, so BNP plans to reduce its funding of coal by 50 percent over the same time period. The same is true for renewable energy financing, which the bank committed to double to $15 billion by 2020.

"It’s a new way of engaging dialogue with our clients in the energy sector," Pessez said. "It’s not always welcome everywhere. But we think that we have an active role to play in this transition, to use our leverage with our clients and help them move forward."

"We’re seeing a lot of mechanisms that are out there to finance [clean technology] infrastructure, and corporations are looking to participate in the shift in enterprise from a climate perspective," added Hilary Irby, head of the Investing with Impact program at Morgan Stanley. "I feel optimistic about the role that capital markets can play. But I think many of these other aspects — in particular the policy environment — really need to make progress in order for us to be more successful in delivering solutions."

What we need to move forward

BNP, Morgan Stanley and over a dozen other multinational banks found themselves in hot water this fall, as American consumers discovered their backing of the controversial Dakota Access Pipeline.

Indeed there's no argument that the financial services sector is still heavily entrenched in fossil fuel interests. The same is true, by and large, for the utility industry. But the sustainability heads of these sometimes embattled companies offered solutions that could help them turn the corner -- and they'd probably know better than anyone else. These three items topped their wish list:

An international carbon price: "A carbon price is something that was massively asked by businesses at COP21 and still hasn’t happened," said Pessez of BNP Paribas.

Shrimali of the Climate Policy Initiative agreed: "In [global] markets, we have a negative externality with carbon: We are not pricing carbon appropriately, and carbon pricing is a very simple solution which hasn’t happened. So work needs to be done on that."

Public-private partnerships: We already know the government commitments made under the Paris agreement will not bring us close to the 2-degree target. In fact, the best-case scenario under those commitments is closer to 3.5 or 4 degrees. That's a huge gap, and expecting the private sector to fill it alone isn't exactly reasonable.

"These investments are usually long-term investments," Pessez said of renewable energy finance. "They are risky. Sometimes they rely on public policies which are subject to change. And being able to partner with a [governing body] would give us in private finance some comfort." Valcalda agreed, saying simply: "For sure, we need more partnerships."

Bringing ESG into the business context: One of Morgan Stanley's most significant climate-related undertakings as of late, Irby said, is beginning to integrate environmental, social and governance (ESG) metrics into its equity research model.

Over the past few years, the bank often heard from execs who made strides to improve ESG at their companies, only to be discouraged because financial analysts never asked about it. "For all of us, what’s important is to keep talking about it and to keep putting it in a business context," she said.

The bottom line

"The 2-degree challenge is not just a natural challenge," said Emilie Prattico, who heads up BSR's climate change work in Europe, Africa and the Middle East. "Perhaps the survival of the species was one of your concerns, but now there’s a new concern: a regulatory one. We don’t really have a choice at this point ... We have to do this, and we have to do this fast. And I surmise we have to do this together."

Whether or not it's really feasible to move upwards of $1 trillion a year into climate mitigation and sustainable development remains to be seen. But hopes are running high heading into COP22 in Morocco -- where the conversation moves from theory to implementation -- so there's surely cause for cautious optimism.

Image courtesy of the author