Commentary

Prospects for Scaling up Green Finance: A Stocktake Across the UK and Germany

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Remarks given by Ingrid Holmes, Director of Finance and Investment at E3G, at The British Embassy Berlin and Hessian Economics Ministry-hosted panel discussion:

Prospects for Scaling up Green Finance: A Stocktake Across the UK and Germany

Deutsche Bundesbank, Regional Office in Hesse, Tuesday, 17 January 2017

E3G, for those who you who have not heard of us, is a thinktank working to accelerate the transition to a sustainable economy. l have led our work on climate finance and investment for the last 7 years – you can find it all on our website – and this has led to us being invited to join the UK Green Finance Initiative and the European Commission’s new High Level Expert Group on Sustainable Finance.

In terms of how I see our chances of “shifting the trillions” to address and manage climate change, we are moving forward but currently far from what could be considered a tipping point . Globally we still face two mega-problems: first, the debt overhang, both public debt and private households – which are a legacy from the 2007/2008 financial crisis. And second, the need to keep temperature increases below 2°C to avoid dangerous and unmanageable climate change that will lead to the permanent destruction of capital and of our way of life.

In terms of how we move forward, Mark Carney Governor of the Bank of England/Chair of the Financial Stability Board pointed the way in his Alfred Burns lecture given in Berlin last year. His speech was called “Resolving the Climate Paradox”. He notes that green finance is a major opportunity.

By ensuring that capital flows to finance long-term projects in countries where growth is most carbon intensive, he believes (and I agree) financial stability can be promoted. The theory is that by absorbing excess global savings, interest rates can be raised and macroeconomic stability enhanced. And by allocating capital to green technologies, the prospects for an environmentally sustainable recovery will increase.

Mark Carney notes that seizing this opportunity will require a comprehensive climate policy framework. It is that which is missing. As a result we are still in an era of shifting billions not trillions. The latest data from BNEF indicates new clean energy investment fell 18% last year to $287.5bn. While European investment in clean energy is up slightly (by 3%), we have seen investment cooling in other regions and so there is a still a very significant gap between where we are and where we need to be.

Why is that? In a nutshell moving forward requires an understanding that the notion of a trade off between the quantity and quality of growth is a false one. It is because we are still having that argument that we are seeing many governments reluctant to implement reforms at the scale and pace demanded by climate science. The Paris Agreement – which commits the world to a max 2°C temperature increase – clarifies actual and stretch objectives for Governments. The technology is available, as is the capital needed to finance this transition. What we need now is the political will to turn the commitments made in Paris into reality.

Political will starts with a narrative. Mark Carney has provided a very powerful narrative. He talked about building new markets in climate transition and green finance to help resolve the fix we find ourselves in. He urged action by governments and regulators to mainstream climate or green finance and turn risk into opportunity. In doing this we can take things up a gear.

There are many possible places to focus on building green finance momentum, here are my top three.

  • First, Governments need to set out national targets compatible with 1.5/2°C and deliver national capital raising plans and reforms to finance the infrastructure needed to deliver those targets. The German Energiewende is a start to that, although there are residual issues with coal. The UK is going through an energy policy reset – and we hope the new plan will be announced this quarter. 
  • Second, we need internationally aligned reforms ensure financial markets are provided with comprehensive and comparable decision-useful information on climate risk and opportunity, implementing the recommendations of FSB Taskforce on Climate-related financial disclosures
  • Third, as quasi-government institutions, we need to see national and multilateral development banks lead the way with the economic and institutional reforms needed to align their capital allocations and advice they provide to client countries with the Paris Agreement

In the UK Green Finance Initiative, we will be looking at the first two points. It’s about growing the green finance market in the UK. We think it’s key to ensuring that London remains a leading centre for innovation, and remains at the forefront of shifting the trillions which is good for the City and the UK and global economy too.

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