6.9 trillion USD per year.
That’s how much the Organisation for Economic Co-operation and Development (OECD) estimates will be needed up to 2030 to meet climate and development objectives. For perspective, in 2021, the GDP of Germany was about 4.2 trillion USD.
And that’s just the net-zero financing requirement for infrastructure. (Current building, transport, energy and water infrastructure make up over 60% of global greenhouse gas emissions.)
This will only partly solve the problem. However, it is a crucial step towards living in a sustainable world.
In the transition to net zero, financial institutions will play a leading role. To maximize opportunities, these institutions will have to make fundamental changes across organizations and portfolios.
What Does the Transition to Net Zero Mean?
“Net zero” refers to balancing the amount of greenhouse gases released into the atmosphere and the greenhouse gases removed from the atmosphere. It is the state at which global warming halts.
In a practical sense, net zero refers to reducing emissions to the most possible extent, and balancing remaining emissions that cannot be reduced, by 2050.
And in order for net zero to be effective, it must be permanent. That means no going back to the way we do things now. In permanent net zero, removed greenhouse gases do not return to the atmosphere through, for example, deforestation or improper carbon storage.
To reduce the chances of putting humanity through the most disastrous impacts of climate change, it is necessary that we limit the rise of the earth’s temperature to a maximum of 1.5 degrees Celsius.
It is worth bearing in mind that not all this spending will be counted as a cost. Many investments related to net zero already provide economic returns. As the net zero transition matures, more investments are likely to do the same.
Financing Net Zero: The Work Underway
Financial institutions, as facilitators of economic activity, are major contributors to climate efforts. Through providing the right finance, investors and banks can support scaling, drive innovation, and help avoid a bumpy transition to net zero.
However, there may be risks involved in net zero financing, considering the trillions of dollars required. Hence, as preventive action, financial institutions should establish systems, guardrails and processes to protect themselves as well as stakeholders.
In the near term, investment in clean power is needed to decarbonize buildings and run electric vehicles (EVs). Furthermore, emerging markets and developing economies (EMDEs) require committed financing to make sure that the net zero transition remains a global effort.
That being said, the journey to net zero has begun. Take these two examples:
The Race to Zero campaign, launched by the United Nations in June 2020. Almost 1,700 companies signed up, committing to halving emissions by 2030 and achieving net zero by 2050. These companies include some of the largest emitters in the world.
The initiative of Financing the Transition to a Net-Zero Future (FTT), by the World Economic Forum and Oliver Wyman. The goal is to accelerate capital mobilization for breakthrough tech.
Net Zero Financing: A Multi-Pronged Approach
Let’s take a look at environmental, social and governance (ESG) investing.
A common refrain from organizations used to be – and in many cases still is – that making the shift to greener products, services and processes is too expensive. However, in many sectors, this is no longer the case.
Many options conducive to the net zero transition are as cheap or cheaper than their traditional alternatives. This has been driven by advancements in technologies, growing developer experience, and economies of scale.
Increasingly, high-carbon investments are seen by investors as higher risk. In the future, organizations with a poor ESG performance will face increased capital costs and may even find it hard to access funding options. More and more, long-term value creation is being considered over short-term profits.
Let’s take a look at some of the ways net zero financing is playing out.
Green Bonds
In 2008, the World Bank issued the world’s first green bond – a kind of fixed-income instrument earmarked to raise money for environmental and climate projects. Since then, the market has grown.
In 2020, global green bonds (again) outperformed the overall market. In 2022, green bond issuance declined, but issuance in China reached 76.25 billion USD, followed by Germany at 60.77 billion USD and the US at 49 billion USD.
Barclays Bank expects green bond issuance to grow by over 30% in 2023. However, the growth of the green bond market will depend on the recovery of the global economy.
Furthermore, the green bond market is still in its infancy in several emerging economies. For instance, the Egyptian government only recently issued its first green bond. Its first private sector green bond followed shortly after.
Collaboration
Many companies underestimate the scale – and urgency – of the net zero challenge.
It is already so complex and large that the current availability of finance and technologies is not enough. Hence, a cohesive, strategic response is required from all stakeholders. That is, not only companies, but banks, governments, investors and civil society.
Consistency of Data
Many companies publish data on sustainability, but it is both fragmented and inconsistently collated and published. This makes assessing the data challenging. For creating incentives required to drive investment, we need consistency of data.
Carbon Credits & Other Finance Tools
There are climate-smart financing opportunities emerging.
For instance, Earth Security and HSBC Australia have launched a project that aims to develop a framework for a mangrove bond. This will be used to restore and protect natural habitats. The hope is that this will create a blueprint for similar instruments that can be used globally.
Additionally, the International Finance Corporation (IFC) issued the world’s first forest bond n 2016. This channeled private funds into prevention of deforestation in developing nations. It also gave investors the option of being paid in carbon-credit coupons instead of cash.
Blue Finance
Blue finance, while traditionally considered a subset of green finance, is crucial to supporting net zero financing. The market has started to see blue finance as a specific asset class due to the need for private-sector flows to address the marine plastics crisis.
Issuance began in the private sector since the World Bank supported the Republic of Seychelles in the launch of the first sovereign blue bond in 2018. In 2020, the IFC arranged a blue loan of 300 million USD for Thailand’s Indorama Ventures, which will facilitate the recycling of 50 billion polyethylene terephthalate (PET) bottles a year by 2050.
Conclusion
The transition to net zero is not so much a national priority as an international priority. Navigating this transition in a way that is sustainable, just and equitable will require the collaboration of many stakeholders and the cessation of finger-pointing politics.
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