OVERCOMING THE BARRIERS TO PRIVATE SECTOR INVESTMENT
COP21 in Paris last year was an historic turning point in the fight against climate change. The job of financing the change is as unprecedented as the agreement itself, with the G20 Finance Ministers’ July Communiqué emphasizing the development of green finance.
Over the next 15 years, 90 trillion US dollars of investment is needed to achieve the commitments made in Paris.This equates to around RMB2 trillion over the next 5 years for China alone to deliver its environmental targets.
China’s commitment to reduce its own emissions has been instrumental both to the constructive tone of the talks and the successful outcome of COP21 and itsG20 Presidency. As the world’s largest developing country, leading industrial power and biggest trading nation, China will continue to play a central role in the implementation of the climate agreement in years to come.
What is already clear is that no one sector of the economy can deliver the investment alone. For its part, the private sector will need to stump up most of the capital – perhaps as much as 85per cent. But the public sector also has a vital role to play, both by directing the resources at its disposal and by creating the conditions that will unlock private sector investment. This is evident when we consider the basic barriers to private sector investment in sustainable projects.
The first barrier is policy uncertainty:Sending clear and unequivocal sign also policy direction gives investors the assurances they need that projects will have long-term political support.It also enables investors to become increasingly activist in demanding change, which in turn forces companies to respond by allocating capital to cleaner, greener operations, and away from carbon-intensive activities.
The second barrier is a lack of transparency and disclosure: Investors need access to good quality information and transparency to help them make investment decisions. At the moment,information is at worst unavailable and at best not standardised, meaning investors are unable to make accurate comparisons. The publication of the FSB taskforce report at the end of this year will be a critical milestone towards an agreed standard on disclosure, which will help investors put a price on climate risk. Formalising the nature of that disclosure will go a long way to providing a concrete point of comparison.
Creating the right incentive framework is the third barrier to unlocking private sector investment: At the present moment, green finance is more expensive than conventional finance because of the rigorous disclosure requirements imposed to enable investors to track where their capital is being invested and ensure green criteria is being met.
Of course it is important that investors do have this information. The amount of additional work it requires should be reduced as we move towards more standardised disclosure. But the costs it incurs still need to be offset in other ways if we want the market to grow at the rate we need.
There has been some good progress made. There appears to be wide spread agreement that carbon pricing is an important incentive for sustainable investment and a means to raise revenue for low-carbon funding. By assigning a specific cost to greenhouse gas emissions, green energy can be priced more efficiently compared to other sources of energy. But carbon pricing is an area where reaching agreement has proved far from straightforward.
The current impasse makes it all the more urgent that we make progress on other incentives. A potential area to consider is whether risk weights should be eased for green lending or other green investments – or whether risk weighting should be increased on activities that clearly have no long-term,sustainable future.
In the past few years, the global green bond market has continued to grow strongly. We’ve just had USD 30.3 billion of green bonds issued in 1H2016, up 60%versus USD 19.0 billion in 1H2015. China has been responsible for much of this growth with its green bond market has gone from nowhere in 2015 to accounting for roughly half of global issuance today The challenge of financing the transition to a low-carbon world is significant.But huge progress has been made,and China has been at the forefront.The barriers to investment are now lower, the recognition of the need to act is now clearer and the willingness to change is now evident. The focus is how that change is made to happen.The G20 has a vital role to play.