Green Bonds, Internal Carbon Prices, and Nervous Investors – these are among five signs the United Nations identifies as proof that the private sector is rapidly adjusting to climate change, but the public sector still needs to step up if meaningful results are to be achieved.
8 October 2015 | One year after the 2014 Climate Summit in New York highlighted pledges from around the world to reduce greenhouse-gas emissions, the private sector is making significant strides toward investing in low carbon and climate resilient development, according to a new report called Trends in Private Sector Climate Finance, released today by the United Nations.
This budding relationship between the financial community and the public sector over climate finance is feeding into the momentum that is building for this year’s COP in Paris, the report says, and contributing to a much different feeling from Copenhagen six years ago.
The financial sector – asset managers, banks, pension funds and insurers – made specific commitments last year, many of which it met or is on its way to being delivered, the report says.
The report comes just weeks after analysis by Ecosystem Marketplace’s Supply Change initiative found that palm-oil companies were taking drastic action to reduce the amount of deforestation they cause.
The Five Signs
The UN report, which the Support Team on Climate Change wrote, identifies five “inflection points” that it says reveal a deep shift in the way companies are doing business.
- New Commitments to Low-Carbon Business. Financial institutions from both the developed and developing world committed hundreds of billions of dollars to support climate action. The fund will finance investment in emission reductions, which will ultimately lead to a host of other benefits like cleaner energy and air. Moreover, climate change is compelling investors to experiment with new and innovative financial approaches, report authors write. Slowly but surely, at least in leading financial institutions, climate change is becoming a mainstream driver of investment strategy, it says.
- The Rise of the Green Bond. Rapid growth of the still relatively-young green bond market is further evidence of investor involvement. Market analysts put issuances at between $USD 50 and $70 billion this year. That money will flow to climate-related projects in the water, transportation, energy and buildings sector, according to the report.
- The Use of Internal Carbon Prices. More than 15% of the Standard and Poor 500 companies factor in a price on carbon as part of their investment strategies, and CDP reports a threefold increase in the number of firms using internal carbon prices just in the last year.
- Nervous Investors. Through a series of actions, investors are sending powerful signals to companies about their desire to transition to the low-carbon economy. Divestment from fossil fuel companies is one example, although the report says that is on the extreme side. Mostly, investors are making commitments to “decarbonize investment portfolios,” developing strategies to do so, and engaging heavily with carbon-intensive businesses about implementing more sustainable practices.
- Proactive Insurance Companies. Increases in extreme weather events is reflected in the number of people moving to insure their assets from weather-related losses. And, according to this study, insurance companies have responded by developing tools to better understand climate risks and vulnerability. This includes products such as microinsurance, catastrophe bonds and index-based insurance.
The Bad News
Despite these positive signals, low-carbon investments remain insufficient to keep the world from warming 2°C. Achieving that goal requires more action from both the public and private sectors.
The public sector’s central role, the report says, is drawing out the partnership with businesses, altering policy so it aids and enhances private efforts to invest in climate action and increase the demand for low-carbon development.
The report does not address the ongoing negotiations within the UNFCCC as to what constitutes climate finance or on what should be counted towards the goal of mobilizing $100 billion a year by 2020 to address the needs of developing countries. Rather, it provides details on the progress made on the commitments and targets set by the private sector and the changes in the financial markets that are emerging.
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