Climate finance must push net-zero emissions

Global leaders gathered at a major Climate Action Summit convened by the UN Secretary-General to raise ambition on perhaps the most pressing international crisis of our time. Their success hinges in large part on finance. 

Let us explain.

Ten years ago at the international climate talks in Copenhagen, negotiators agreed that by the year 2020, developed countries should mobilize $100 billion per year in public aid and private investment for climate action in emerging economies. For many, this pledge was the critical missing ingredient that made possible the global deal achieved in Paris several years later, which for the first time included commitments — known as nationally determined contributions — from all countries, rich and poor.

But much has changed in the decade since Copenhagen, and indeed since Paris. 

For starters, clean energy costs have plummeted, making climate mitigation more affordable than anyone anticipated in 2009, or even in 2015. In most parts of the world it is now cheaper to shut down existing coal plants and replace them with new solar and wind than it is to keep them running. Unfortunately, the mounting costs of continued inaction have become much clearer as well.  A recent analysis by the IMF found that on our current course, climate change will wipe out more than 7 percent of global GDP by 2100.

As we approach the “$100 billion by 2020” milestone set in Copenhagen, it is time for a new approach to climate finance, one that takes these developments seriously. Leaders should start by looking to the text of the Paris Agreement itself, where the world agreed to keep global warming to well below 2 degrees. To hit this temperature target, we must achieve net zero global greenhouse gas emissions by midcentury, according to the IPCC. 

This, in turn, creates a net zero finance imperative: every aspect of the world’s financial system, from corporate and municipal bonds to securities regulation and stock market listing requirements, and other levers — from fiscal stimulus to trade agreements — must be harnessed to achieve the needed transformation. It is no longer sufficient to hold climate policy apart from wider economic matters.

Smart money is already moving, and signs of the financial sector’s burgeoning climate concern are everywhere, from proliferating private equity impact funds to new networks of central banks, finance ministries and sovereign wealth funds pledging alignment with the goals of the Paris Agreement. While capital markets had little to say about the Copenhagen talks a decade ago, mainstream finance is in many ways ahead of our politicians today. 

Still, markets aren’t moving nearly fast enough to reprice risky assets and reallocate capital to the kinds of businesses and projects that will prosper in a net zero emissions future, not to mention the kinds of investments that developing country governments are most eager to attract. Why? When it comes to climate change and finance, markets are still getting mixed messages from governments.

The New York summit presents the perfect opportunity for political leaders to articulate a simple, coherent commitment to net zero finance. The rough outlines of an approach were spelled out at a conference convened by the Rockefeller Foundation earlier this year:

First, governments must do more than offer a few billion dollars in development assistance earmarked for climate. All pledges of foreign aid, along with all channels of development finance, including institutions like the IMF and World Bank, should support only those investments and activities that are aligned with a net zero emissions global economy in 2050.

Second, policymakers ought not to employ a “green” or “sustainable” financing agenda in some sectors but not others.  All financial regulation, financial standards, fiscal and trade policy should proactively promote investments to achieve a net zero emissions economy. Financial supervisors like Bank of England Governor Mark Carney are already moving on this, precisely because it is the public balance sheet that will bear the largest consequences of failing to do so.

Third, it is not nearly enough for investors and corporations to allocate a portion of their portfolios to sustainability. Whole business plans must anticipate and align with a net zero economy by 2050. First movers are already gaining market share as they do so, yet too many businesses still find themselves adrift in the often fuzzy world of reporting on a proliferating number of sustainability goals and metrics. By orienting policy with the net zero finance imperative, governments can provide much-needed clarity to the market, speeding the transition.

From 2020, so-called “climate finance” can be boiled down to a simple question: are your financial instruments, institutions or regulations on track to help achieve net zero emissions by mid-century? If not, what is your plan to get there in time?

It is time for world leaders to move beyond finance as an ancillary consideration in climate diplomacy, and embed climate change considerations into mainstream finance.

Joaquim Vieira Levy is the former finance minister of Brazil and former managing director and chief financial officer of the World Bank.  

Mats Andersson is the vice chairman of the Global Challenges Foundation and former chief executive officer of the Fourth Swedish National Pension Fund.