TOPSHOT - Delegates sit in the Action Zone as they attend the third day of the COP26 UN Climate ... [+]
It’s no secret that more must be done by governments and businesses if we’re to curb the detrimental effects of climate change as recent discussions at COP26 have made abundantly clear. Climate change is not only a global crisis that affects us all; it’s a global crisis that all stakeholders, from governments to businesses to individuals, can play a key part in tackling.
But this begs the question: Who is best placed to drive policy and funding around climate change? Is it governments, who can install policy, but perhaps lack key funding or sway over businesses? Is it academics, who bring ground-breaking research and an understanding of how to tackle these issues, but may struggle to persuade policy changes or reallocation of capital? Or is it businesses, who may well have the funding, but lack the incentives to divert resources to climate strategies?
Governments, which are unconcerned about profits or pleasing their stakeholders, are well positioned to lead climate initiatives, but some of them do not have the knowledge or funding to invest in climate solutions. This applies especially in lower-income countries, which are often most affected by climate change, yet have the least resources to tackle this issue.
A finance framework for a sustainable future
Global government and corporate flows are required to fund their transition to a lower carbon economy, but emerging markets haven’t received the amount of capital required. That needs to change. Local and foreign investors, as well as governments should invest in building renewable infrastructure in emerging markets, as well as investing in adaptation and mitigation strategies.
Climate finance frameworks need to evolve, barriers on foreign investment must be addressed, and bolder government policies should be adopted. All pillars and sectors of society need to come together to scale clean energy in emerging economies and to achieve a sustainable future for countries across the world.
One industry finds itself in a unique position. The financial sector has both the capital and the incentive to not only support but actively drive real change. And yet, as a whole, it is still not doing enough to reach the key targets set for tackling climate change and reversing (or halting) the devastating impact it has already had.
Often, asset managers, hedge funds and others in the financial sector seek to invest in climate solutions, but they should move beyond green or ESG labelled products as there are many decarbonization initiatives that don’t neatly fit in the green category.
To achieve this green status, often companies will spin off dirty assets and move them off their balance sheets, making it appear that they are effectively tackling climate change. However, these projects could end up with private operators who are not regulated or governed, which wouldn’t solve this issue. We need to methodically decommission certain assets and invest in green and transitional activities if we are to achieve systemic decarbonization.
Steps towards the energy transition
However, one thing that businesses, as well as governments, often lack is the knowledge of exactly how to invest in climate and transition solutions, which are most effective and how much investment is needed to make these solutions viable. This is especially true in lower-income countries where there is less data available and less evidence of the success of previous initiatives.
That is why I, alongside my colleagues at the Centre for Climate Finance & Investment (CCFI) at Imperial College Business School and the International Energy Agency (IEA) are working on clean energy pricing across listed and unlisted renewable markets. Our joint aim is to bring more transparency and provide more data that will help financial institutions and policy makers play a role in the energy transition.
Moving to a cleaner and more resilient electricity system will require the mobilisation of capital for renewable sources of generation, as well as investing in infrastructure and system flexibility. We are working with the IEA on our third study, which focuses on unlisted markets, which comprise more than half of the renewable investment universe available to institutional investors.
The financial sector is in a unique position. Financial institutions can use their bank balance sheets and investment pools to fund and invest in decarbonizing initiatives, specifically in lower-income countries. The power of financing and investing allows the financial sector to be an effective partner with governments, business and academics. To really reach our COP26 targets, the financial sector must be a driving force for these initiatives.
Mili Fomicov, Research Associate, Centre for Climate Finance & Investment at Imperial College Business School.
