23 May Funding the global transition to low carbon
As part of Climate Finance Day (Friday 22 May 2015) the University of Cambridge Institute for Sustainability Leadership has produced a ten point action plan for businesses on how to finance the low carbon transition in collaboration with leading finance sector experts as part of the Finance Advisory Council to the Green Growth Platform.
Action 1-Mobilise funds managed by institutional investors
Nearly $71 trillion in assets are managed by institutional investors in OECD countries at present. Invested across a range of asset classes, this could be more effectively mobilised behind low carbon goals, backed by an appropriate policy framework.
Action 2-Enable investors to easily distinguish between high and low carbon assets
Investors require education as to their carbon risk and full cycle carbon impact exposure. Government requirements for information disclosure would assist investors to understand their risks and respond appropriately.
Action 3-Financial regulators should recognise and respond to the risks that the economy’s structural bias towards high carbon infrastructure poses
By adapting established stress testing regimes that regulators use to better understand the exposure risks posed by such a bias towards high carbon infrastructure, this would give regulators an enhanced ability to define their capital requirements.
Action 4-Require state-owned finance institutions to demonstrate their strategies for investment are consistent with national INDC and climate pledges
Government enabled mechanisms to attract alternative finance for infrastructure investment such as the European Long Term Investment Funds (ELTIF) should be mandated to support the transition to a low carbon economy and prioritise low carbon assets.
Action 5-Provide choice and incentives for people to invest in a low carbon future
Current tax breaks are not specifically linked to low carbon policy objectives. Governments could implement a number of initiatives including:
-require financial intermediaries to provide greener alternatives to the typical retail finance products
-incentivise the uptake of greener alternatives through improved return characteristics or other incentives that recognise the utility of such products
-facilitate the smooth implementation of regulations that affect investment products and ensure clean energy investment funds can grow.
Action 6-Provide clarity on the infrastructure investment pipeline and a long term stable policy framework that makes low carbon infrastructure investment attractive
Policy should focus on making low carbon industries and projects more attractive to investors than the high carbon alternatives. Governments need to agree on long term stable policy conditions that don’t compromise the economics of projects. Structural reforms such as the following will be necessary:
-phasing out fossil fuel subsidies and other subsidies for price competitive mature technologies to provide a level playing field and ensure a fully functional energy market with robust supply and demand side management
-if a level playing field doesn’t exist between conventional and non-conventional energy sources, properly designed subsidy schemes such as feed in tariffs should be put in place
-a carbon price that can move investment towards low carbon industries and projects should be implemented.
Action 7-Collaborate with the finance industry to improve and help standardise new mechanisms to facilitate low carbon investment (where required)
Financial institutions should encourage and support infrastructure assets being aggregated. This may attract more potential investors and diversify risk across projects with a range of risk profiles which is critical for the renewable energy sector where projects tend to be smaller.
The green bond market is rapidly growing, so working with the market to develop transparent standards could facilitate further growth.
Action 8-Introduce mechanisms to share the risks between the public and private sector
Public guarantees and “first loss” finance in areas of policy risk are important measures that will increase the flow of capital.
Action 9-Use procurement and planning policies to support investment in low carbon infrastructure and innovation
Given that the public sector is the most significant purchaser in the economy, it can be a driver of low carbon deployment and innovation (such as retrofitting buildings) where planning problems can cause projects to grind to a halt.
Action 10-Reassure the private sector that Governments intend to work systematically to build a green economy
Current policy signals are misaligned with this goal including the presence of incentives for carbon intensive activities and financial regulation that doesn’t encourage or inhibits long term low carbon investment.
Once again we see a strongly emerging theme of the cleantech/green energy sector requiring support in order to give them a seat at the energy table. Of course, this makes sense given that many of these projects tend to be small and the business case can be marginal through no fault of their own. Having said that, the sheer weight of finances that is starting to flow into these projects around the world shows that Governments are beginning to get the message.