Opinion - 31/October/2018

No shortage of capital

The world is awash with capital, but a lack of clarity about what really is a green investment is stalling much needed investment in low carbon infrastructure. Taxonomies can offer some much needed clarity says Sean Kidney, Co-founder and CEO of the Climate Bonds Initiative

There is no lack of finance to pay for a timely energy transition, says Sean Kidney, Co-founder and CEO of the Climate Bonds Initiative. For him the real challenge is how to harness this capital for green projects. He argues that taxonomies can play a key role in making this happen

 

The Paris climate accord, signed at COP21 in 2015, formally set out an agreement to combat climate change and accelerate climate action with an emphasis on the financial sector to facilitate a low carbon and climate resilient economy. The global corporate sector and financial markets need to generate the investment required to keep the global temperature rise well below 2°C. The infrastructure investment needed to achieve the Paris goal is vast, the New Climate Economy, an independent body led by former heads of government and finance ministers, and business leaders, estimates that $90 trillion of infrastructure investment will be needed 2030.

Luckily, we have a world awash with capital and many investors are accepting low yields. Moving these large pools of capital from brown investments to green is the challenge and harnessing it is essential to achieve the ambitions set by the Paris agreement.

Debt capital markets are a natural target for sourcing this capital with institutional investors, sovereign wealth funds, global banks, insurers and, most importantly, the huge pension funds at their disposal. Debt funding for infrastructure is not new, it has long been the traditional way for both governments and the private sector to fund large long-life projects.

So, why are more low carbon, climate resilient infrastructure projects not flowing fast enough through the investment pipelines? One hurdle green finance faces repeatedly is the lack of definitions for green investment for issuers and investors, especially green investment guidelines, that are aligned with the Paris agreement.

 

 

Transparent and robust

At Climate Bonds Initiative, we have had a taxonomy of assets and projects eligible for green finance since 2013. Recently we carried out a major update to this taxonomy releasing a new version in September 2018. Based on the latest climate science and extensive expert consultation, it provides a framework for both issuers and investors to understand which projects and assets will contribute to meeting the Paris agreement and, therefore, are eligible for green financing. It helps them make transparent and robust judgements on environmental and climate related features of any medium or large-scale debt funded infrastructure investment.

Definitions need to encompass all segments of the economy and the Climate Bonds taxonomy is an effort to address that. Renewable energy, transport, water, buildings, land and marine, waste management, industry, and information and communications technology are all included. We aim at providing a complete guide for issuers and investors coming from all sectors of the economy to make a swift transition towards a low carbon future and we will continue to update the taxonomy based on emerging science, technology and further expert consultations.

A pertinent example of how necessary green definitions and taxonomies are in this space comes from the EU’s Technical Expert Group on Sustainable Finance (TEG). I have been involved in the TEG work, particularly in developing an EU sustainable finance taxonomy, since the middle of 2018.

This is another high-level initiative that will expedite mobilising the financial market and directing flows of capital to climate compatible infrastructure by satisfying the necessity for definitions and issuance guidelines. By June 2019, we shall have on hand climate mitigation and adaptation pathways as part of the EU sustainable finance taxonomy. The TEG’s work also includes developing an EU green bond standard, and low carbon indices and metrics for climate-related disclosures.

 

Opening the way

There is no question about the need for a generally accepted green taxonomy in major financial systems to open the path for significant amounts of capital. The green bond market needs to be in the trillions by the 2020s. Markets need frameworks that encourage investment at this level. In addition to helping the EU TEG build an EU sustainable finance taxonomy, the Climate Bonds taxonomy is already also being used as a guide to defining green investments in developed and developing economies where green finance is still in its nascent stages. For example, it has guided the People’s Bank of China’s green projects catalogue, the State Bank of India’s green bond framework and Japan’s green bond guidelines.

A taxonomy provides definitions. Definitions assist in developing long tail project pipelines. Well developed pipelines of green projects can gather investor commitment while managing climate risks, working with issuers, governments and policy makers and maintaining their focus on longer-term returns. It is also important to understand that we do not need to prioritise certain low carbon infrastructure to get investment first. There is enough capital looking for infrastructure investments for everyone to receive the funding they need, but investment opportunities need to come to market faster and at greater volumes to get these infrastructure projects off the ground.

The route towards achieving that is definition guidelines, disclosure of use-of-proceeds, and guarantor support from government and financial communities. The taxonomy adds to this market a high-level understanding of the investable green projects that span all major sectors of the new low carbon economy. Labels do matter, size does matter, and all these efforts ensure the corporate sector and financial markets can make their contribution, alongside policy makers and civil society to meeting our urgent climate challenge.

 

Find more information on the Climate Bonds Taxonomy here 


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  • Ray Kamada

    While their current stake in renewables falls short of 2%, Big Oil may be the largest single source of deployable capital, and, to offset its stranded assets, has the most long term incentive. Instead of enlarging proven reserves that they’ll never be able to pump, while inveigling state subsidies for fracking and shale oil that sells below production costs, they could use their annual $10 billion+ investment budget to go green.

    Yes, Shell indicates a commitment and Exxon’s recent moves may yield more than window dressing, but Big Oil remains a huge source of largely untapped capital. History opines that corporate lethargy will prevail. But if ARAMCO/Crown Prince Salman manages to lead, the other majors may be forced to follow.

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