Climate Finance: Time to Scale-Up

While the Banking and Capital Markets sector have made significant public commitments toward climate goals, we estimate the current amount of investment generated needs to increase to $3-5 trillion per year; roughly five to eight times the current amount raised. As such, there is a need to scale-up climate finance and for public and private organizations to collaborate to mitigate the impact of climate risks.

Emergence of Carbon Pricing

Carbon pricing is going to be an integral component to scaling-up climate finance globally. Carbon pricing reflects the external costs of greenhouse gas emissions, and if not sufficiently priced into markets, it could adversely impact the competitiveness of green projects. Currently, carbon pricing is not suitably adopted in markets, and policy makers will need to develop an internationally aligned price that incentivizes investment in low-carbon technologies. While carbon pricing is not the sole means to sustainable transition, it would certainly have a positive impact on encouraging green investment.

Stronger Global Goals

While capital markets should be the primary vehicle to generate investment for the sustainable transition, the real economy and governments also need to support the financial sector’s activities to ensure meeting climate targets. For instance, new decarbonization technologies, such as green hydrogen, are not yet cost-competitive and need to benefit from economies of scale to attract more investors. Public funding could be a component used to initially scale-up the supply of new technologies to help secure greater private sector funding and longer-term capital flow.

Green Education

Many industries and corporations are still in the early stages of understanding the implications of climate change on their businesses. This includes the potential benefits of effectively navigating the sustainable transition and harnessing new commercial opportunities. While some leading organizations have already taken positive measures to incorporating climate-risk accountability on a board level, this activity needs to be reflected across more organizations and sectors. The Banking and Capital Markets sector can help corporates utilize the correct financing solutions for their sustainable needs, but organizations need to make the first step to understand their own positions and internal priorities.

Sustainability Reporting

The expansion and harmonization of sustainable reporting standards is also crucial to scaling-up climate finance. Sustainability reporting allows the activities of organizations to be measured from a climate risk perspective and inform potential investors. However, currently the uptake of new sustainable financial products is limited due to a lack of corporate Environmental, Social, and Governance (ESG) data to underpin investor decision-making. There have been ESG approaches adopted by jurisdictions to help remedy the lack of data, however these approaches are often unstandardized. This limits their comparability and applicability globally. Mandatory disclosure of corporate-specific, financially material, decision-relevant data relating to climate risks and opportunities will be an important step in generating greater amounts of ESG data. Consistent global disclosure frameworks, developed in consultation with industry participants and with adequate runway for implementation, should help strengthen the transparency and comparability of climate risk data.

As 2020 draws to a close, the key message for both authorities and market participants is that to bring about unprecedented levels of sustainable funding, unprecedented global action will also be required. If climate finance is to scale-up to the $3-5 trillion+ per year levels necessary to combat climate risk, public and private institutions need to work together to remove barriers to the sector’s growth.

To learn more about climate finance market structure, access our latest report: Climate Finance Markets and the Real Economy.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also chief executive officer of the Global Financial Markets Association (GFMA).