In the green

Financial markets can align with our climate goals

January 24, 2021
Making finance green will be crucial to encourage and develop a net-zero economy © Photo by Riccardo Bresciani from Pexels
Making finance green will be crucial to encourage and develop a net-zero economy © Photo by Riccardo Bresciani from Pexels

The Covid-19 crisis has tragically demonstrated that health, economic well-being and the environment are inextricably connected. As we look beyond the pandemic, we have an unprecedented opportunity to build an inclusive, net zero and resilient economy.

Governments globally have already announced $13 trillion of stimulus packages as an immediate response. However, according to the Greenness of Stimulus Index, the UK is one of only six G20 countries to date to have a stimulus package with a net positive contribution to the environment. As longer term recovery measures are put in place worldwide, we must not miss this once-in-a-generation opportunity for governments to align their dual missions of economic recovery and meeting their commitments under the Paris Agreement.

While government has a foundational job to do in providing public finance, the public purse alone will not be enough. Governments also need to play an enabling role, creating the conditions to mobilise private capital towards sustainable goals, supporting the creation and rapid scalability of new and existing markets, and unblocking barriers.

This involves both “greening finance” at the systems level, ensuring our financial system is aligned with global and national sustainable goals, and “financing green,” supporting the investment and financing of companies and projects that achieve net zero and nature-positive outcomes.

On greening finance, some important progress is already being made. The UK and New Zealand, for example, have both announced they will be mandating recommendations made by the international Taskforce for Climate-related Financial Disclosures (TCFD), ensuring financial institutions and corporates identify and report on their exposure to climate risk. Such reporting informs assessment and decision-making across the value chain and encourages behavioural change at a systems level.

This year will also see the launch of the Taskforce for Nature-related Financial Disclosures (TNFD) that will develop a framework for corporates and financial institutions to assess, manage and report on their dependencies and impacts on nature. The TNFD is designed to bring a similar robustness to the appraisal of nature-related risks as the TCFD has done for climate, and should help redirect global financial flows towards nature-positive outcomes.

There is more that governments can do, however, such as considering where national policies may be preventing the alignment of private capital to sustainable goals. The reallocation of fossil fuel subsidies, for example, could finance the clean energy transition, delivering social, economic as well as environment benefits as part of the green recovery.

Decarbonising our economies will provide significant investment opportunities. Harnessing these—“financing green”—will require the creation and rapid scaling of new and existing financial mechanisms and markets.

The establishment of the green bond market over a decade ago has enabled companies and governments to raise finance earmarked for green projects and informed the development of sustainability-linked loans and bonds. In 2020, cumulative global green bond issuance alone surpassed $1 trillion.

There are, however, solutions and technologies crucial to our transition to net zero that do not match the investment profiles of the financial sector. In these cases, the public sector will be required to act as a catalyst for private finance by investing in research and development, providing guarantees and loans, or acting as a co-investor.

Green banks can also be instrumental. The UK government’s Green Investment Bank successfully raised £2.50 of private capital for every £1 it invested, and is credited with driving the growth and success of the UK’s offshore wind sector. The UK’s new National Infrastructure Bank, which commences this spring, and Scotland’s new National Investment Bank, have the potential to play a similar catalytic role. Meanwhile, finance structures blending both public and private finance have the potential to mobilise considerable investment towards both domestic and international sustainability objectives.

Unlocking an ocean of private capital in order to finance green and green the finance system will need public sector support, and ultimately the support of the public, so that governments will be empowered to build back better, improving the long-term health of our economies, ecosystems and citizens.

This article features in Prospect’s new “Green Recovery” report, published in partnership with SNC Lavalin, Atkins, Ricardo and the Aerospace Technology Institute. Read the full report PDF here.