Clean and Green Finance
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- Authors: MARK CARNEY
- Published: September 2, 2021
Paris innovations and the Net Zero organizing principle
- Three key innovations from the Paris Agreement:
- Setting the clear objective of less than 2 degrees Celsius warming, with the stretch objective of 1.5 degrees.
- The innovation of voluntary country plans (NDCs) that were then objectively added up to assess what would happen if countries met their commitments.
- The involvement of the private sector and non-state actors, so that solutions to this enormous problem are bottom up as well as top down.
- Net Zero, Paris Aligned, and a 1.5 degree target have moved into the mainstream; Net zero is now an organizing principle cascading from the global to the country and the company level.
- Current trajectory concerns:
- Last year it was estimated that the world’s temperature would rise above 3 degrees Celsius by the end of the century.
- Emissions need to fall by 7 percent a year over the course of this decade.
- Many countries met this 7 percent reduction last year largely because large swaths of the economy were shut down.
Financial system foundations: disclosure and standards
- Markets require information to operate effectively.
- Task Force on Climate-related Financial Disclosures (TCFD):
- Final TCFD recommendations were delivered to Group of Twenty (G20) leaders three years after Hamburg.
- Today, virtually the entire financial sector demands TCFD disclosures, and over 2,000 major companies around the world are responding.
- Coverage is still limited and reporting incomplete, particularly of critical forward-looking metrics.
- Policy recommendation: Governments should make TCFD disclosures mandatory and support the International Financial Reporting Standards Foundation’s intention to establish a new International Sustainability Standards Board to produce a climate disclosure standard based on the TCFD.
- Momentum noted with strong support at recent Group of Seven (G7) and G20 meetings.
Risk management, supervisory action, and stress testing
- The central banks and supervisors’ Network for Greening the Financial System:
- Has grown from its eight founding members to more than 90 authorities.
- Covers over 80 percent of global emissions.
- Central banks in countries with 50 percent of global emissions are beginning to conduct climate stress tests of their financial systems.
- COP26 priorities for authorities:
- Embed supervisory expectations for climate risk management.
- Ramp up climate stress testing.
Commitment, alignment, and engagement in the financial sector
- Commitments:
- Net zero objectives of countries advanced from 30 percent of emissions when the UK and Italy assumed the COP presidency to over 70 percent today.
- The Glasgow Financial Alliance for Net Zero (GFANZ) was created to meet enormous investment needs that could total over $100 trillion over the next three decades.
- GFANZ brings together over 250 financial institutions responsible for $80 trillion in assets and is anchored in COP’s Race to Zero.
- By Glasgow, all major financial firms should decide whether they will be part of GFANZ; GFANZ is described as a "big tent" that "will be the only tent in Glasgow."
- Alignment:
- Defining best practice net zero plans for companies and financial institutions.
- Robust assessments of portfolios of financial institutions relative to net zero pathways.
- Central banks (notably the European Central Bank and the Bank of England) examining how to revise monetary policy operations to be more consistent with legislated climate objectives and policies.
- TCFD has conducted an extensive review of methodologies to assess metrics that measure how aligned portfolios are with the net zero transition.
- Expected outcome: The combination of forward-looking climate disclosure, net zero plans, and portfolio alignment metrics will pull forward investment, especially if credible and predictable climate policies (like carbon pricing) are in place.
Developing economies: mobilizing finance at scale
- Investment need:
- Most estimates suggest that over a trillion dollars in additional investment annually for decades will be needed to build green energy in emerging market and developing economies.
- Challenge: Turn billions in public capital into trillions in private capital by scaling blended finance, catalyzing stand-alone private capital flows, and building new markets.
- Multilateral development banks:
- Uniquely placed to mobilize private finance.
- Thus far results have been modest, with only $11 billion mobilized in 2018.
- Four initiatives required to orchestrate a step change in financing capacity:
- Private commitments: A GFANZ working group will build on initiatives to secure commitments of significant private financing capacity for projects to advance the net zero transition in emerging market and developing economies.
- Public facilities: Multilateral development banks should identify and be prepared to dramatically scale up blended finance vehicles, instruments, and facilities that support significant mobilization of private capital.
- Country platforms: Public and private sectors are building country platforms (through initiatives such as Global Investors for Sustainable Development and the Climate Finance Leadership Initiative) to address specific needs and broader challenges; country platforms must integrate Paris-aligned NDCs to attract capital at scale.
- High-integrity market for carbon credits (see next section).
Carbon credits and voluntary carbon markets
- Role of carbon credits:
- Generated by projects that reduce or remove emissions (e.g., afforestation).
- Allow buyers to compensate for or neutralize continuing emissions while moving to net zero.
- Corporate practice:
- Companies’ primary responsibility is to reduce absolute emissions.
- While on the trajectory to net zero, companies should use high-integrity credits to compensate for their emissions.
- Current market characteristics:
- At present, the market for carbon credits is small, fragmented, and of uneven quality.
- Over 1,600 companies have committed to science-based targets.
- The carbon credit market could grow to over $150 billion a year and facilitate major cross-border capital flows, as the vast majority of high-emission-reduction projects will be in emerging market and developing economies.
- Potential co-benefits for biodiversity and other UN Sustainable Development Goals.
- Governance and initiatives:
- The private sector Taskforce on Scaling Voluntary Carbon Markets, comprising 250 organizations and led by Bill Winters and Annette Nazareth, published final recommendations to develop and rapidly scale a professional, global carbon market with the highest integrity, transparency, and credibility.
- The taskforce is working alongside other endeavors, like the Voluntary Carbon Markets (VCM) Integrity Initiative, to ensure the VCM finances meaningful, additional climate action.
- Market implementation:
- Two of the world’s largest financial centers—London and Singapore—are already stepping up to implement the recommendations and to maximize the very limited carbon budget.
Conclusion: from blueprint to build
- A new sustainable financial system built on disclosure, risk management, commitments, alignment, engagement, and scaled finance for developing economies can align the trillions of dollars of capital needed for companies and projects across all economies to secure a net zero future for the world.
Mark Carney, "Clean and Green Finance", F&D Magazine, September 2021.
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