Greener Finance: A Prerequisite for a More Sustainable World

Summary

COP 21 demonstrated the urgent need to hold global warming to less than 2°C. To achieve this, States, local governments and companies will have to not only reduce their carbon footprints, but also adapt their practices to worsening extreme weather phenomena. All of these imperatives show the real need for the entire economy to “go green.” The first methods for doing so are now being introduced, with finance as the linchpin. We take a look at the issue.

12Fév.
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The International Energy Agency (IEA) estimates that $44,000 billion will need to be invested by 2050 to limit the rise in temperature to 2°C through the end of the century. This is an exorbitant amount compared with global GDP, which totaled around $70,000 billion in 2014.

Solutions for funding a changeover to a more sustainable economy are now emerging and gaining ground. For several years now, numerous players have been examining methods and tools that can be developed to establish green finance and redirect public and private investment toward more sustainable methods of production and consumption.

Green bonds: responsibility and the long-term on the markets?

Green bonds are one of the most popular solutions today. These are “debts” issued on the market to finance projects with a positive social and/or environmental impact. Bonds yield a fixed interest rate to their holders, which stays the same each year, paid by the borrower that issued them.

During the first years of their existence, these green bonds were chiefly released by development banks and local governments. “Bear in mind that most funding for the energy transition comes from private investment. Public investments are in the minority. The bulk of investments that need to be shifted into green financing are private. The battle will be won once we have developed a sufficiently sizable green debt segment to attract private investment,” said Pierre Ducret, Chairman and CEO of CDC Climat (a Caisse des Dépôts subsidiary dedicated to the economy’s energy and ecology transition), and Chairman of 14CE, at a brainstorming session.

There was good news in 2015, when, for the first time, companies took the lead on the use of green bonds. This financial instrument is constantly growing: between 2012 and 2014, the amount represented by green bonds increased from $2.4 billion to $32.9 billion. By the end of November 2015, this already totaled $44 billion, and specialist firms are predicting a figure of $100 billion in 2016. This evolution is a clear testimonial to investors’ growing interest in sustainable projects – even if there is still a long way to go, since the global bond market now stands at $100,000 billion!

This balance of power does not worry the World Bank. As Heike Reichelt, Head of Investor Relations and New Products at the World Bank, puts it, “We believe sustainable investing will become the standard way of managing a fixed-income portfolio, transforming how companies and the projects they support are managed. The next generation of portfolio managers will wonder how short-term gains could have overshadowed sustainable growth for so long.”

Putting a price on carbon: a crucial signal?

The public authorities have also decided to tackle the issue of green finance by trying to put a price on carbon. A number of States and regions have set up carbon markets. For example, the European Union instituted its market in 2005. China will be launching its own in 2017.

The concept is simple: a CO2 emissions cap is set for certain sectors such as energy, steel and transportation. Next, each facility is assigned a certain emissions quota, based on that cap. Modernized facilities (i.e. with low emissions) can then sell their excess quotas on the market.

“The goal is to attach a price to each metric ton of carbon so that, when the price is high, companies are encouraged to seek greener and more moderate production methods,” says Thomas Porcher, economist and professor at the Paris School of Business.1 “To do this, you need to allocate only a small number of quotas. And that’s where things get tricky in Europe. Having too many quotas circulating on the market has prevented us from obtaining a strong price signal.” And it’s true that the current price of a metric ton of carbon is just €8, while experts have estimated that, in order to truly influence producers, its value should be closer to €100.

« The goal is to attach a price to each metric ton of carbon so that companies are encouraged to seek greener and more moderate production methods,” says Thomas Porcher

At the European Environment Council meeting in October 2015, French Minister Ségolène Royal argued along these lines.

Some States have chosen not to wait for the market price to stabilize, opting instead to define their own. This is what France has done, for example. The “climate-energy contribution,” a carbon tax mainly applied to fuels and gas, was introduced in 2014. From the current €7 per metric ton of CO2, it will rise to €22 in 2016, €56 in 2020 and €100 in 2030. In this case, consumers will be the ones most pressurized to change their habits.

For Thomas Porcher, over and above green finance tools, the best way to lead companies toward more moderate production methods and a decarbonized economy lies in “having a State that is also a strategist. We need to set solid objectives that are stable over time. And all companies will adapt. They are the ones that innovate and produce. They are the key to this change, but the course must be set by the government.”

1 In 2015, he co-authored 20 idées reçues sur l’énergie (20 Preconceptions about Energy), published by Editions De Boeck.

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