Investors encouraged to continue integrating climate factors into investment process.
Governments need to take “swift action” on legally-enforceable carbon pricing mechanisms if the Paris Agreement target of limiting global warming to between 1.5°C and 2°C is to be met, according to the Global Financial Markets Association (GFMA).
The finance sector lobby group made the call in ‘Climate Finance Markets and the Real Economy’, a report published in partnership with Boston Consulting Group (BCG) ahead of the GFMA’s Annual Capital Markets Conference on Sustainable Finance.
It proposes the rapid development of a Climate Finance Market Structure (CFMS), built on 12 key recommendations, formulated from interviews with over 100 capital market leaders across the financial industry through Q3 2020. Carbon pricing was listed as the number one priority.
Existing carbon pricing schemes only cover 22% of global GHG emissions, but 16% of pricing is less than US$10 per metric tonne of CO2 emissions, proving carbon prices “are not sufficiently priced into markets and the real economy”. Low-carbon alternatives are therefore less competitive with legacy high-carbon activities that benefit from government subsidies.
The report said carbon pricing mechanisms should include an “explicit forward-looking direction on price levels, implemented in a way that respects a ‘just transition’, minimising social and economic costs for those least able to bear them”.
The High-Level Commission on Carbon Prices has suggested a 2020 carbon price in the range of US$40 to US$80 per metric tonne, rising to US$50 to US$100 by 2030.
“[Establishing] a sufficiently high and internationally-aligned carbon price in the short-term and increases in future carbon price levels [will] incentivise investment in low-carbon technologies today,” the report added.
This follows calls by the UN-backed Principles for Responsible Investment’s (PRI) Head of US policy for President-elect Biden to consider carbon pricing (around US$40 per metric tonne) or carbon border adjustments when he assumes the Presidency next year.
Investors need to keep calm and carry on
The GFMA urged investors to continue integrating climate factors into their investment processes, but acknowledged that restrictions around levels of disclosure and data availability have hampered progress.
Non-financial reporting guidelines released by the likes of the Taskforce on Climate-related Financial Disclosures (TCFD) have begun to instigate change in these areas, but the report outlined the importance of investors being proactive by maintaining and improving “engagement and stewardship with their portfolio companies”.
“By deepening the integration of climate-related risks into investment decisions and investor stewardship priorities, investors – particularly asset owners – play a key role in influencing both the risk-adjusted costs of capital and availability of capital, especially for carbon-intensive sectors and assets,” the report added.
The cost of a low carbon economy
The GFMA and BCG report estimated that US$100 to US$150 trillion of climate-related investment will be required over the next three decades to transition to a low carbon economy. This equates to US$3 to US$5 trillion a year, five to eight times higher than current levels of investment.
Asia will account for US$66 trillion of investment, the report said, driven by the scale and pace of the region’s economic growth, specifically its increasing population, urbanisation and industrialisation levels.
“The banking and capital markets sectors play a critical role in the CFMS transformation as an intermediary between the supply and demand for capital – as a lender, arranger and investor,” said Roy Choudhury, Managing Director and Partner at BCG.
The CFMS will be focused on generating capital from loans (44%), “green equity” (35%) and bonds (21%).
“Innovation will be critical to scale climate finance, more specifically, financial products, to mobilise capital across a broad range of investors and promote climate finance awareness and literacy,” Choudhury said.
Public sector pathways to net zero
In order to incentivise private sector capital injections into climate finance, Steve Ashley, Nomura’s Head of Wholesale Division and Chairman of GFMA, said support needs to come from governments.
“While the banking and capital markets sector stands ready to facilitate change, we need the support of policymakers and the wider private sector to create the incentives to make this work,” he explained.
Today, the UK government pledged to reduce the country’s carbon emissions by at least 68% relative to the 1990s by 2030. The announcement comes ahead of the Climate Ambition Summit on December 12, which will coincide with the fifth anniversary of the Paris Agreement.
In November, the UK government released its ‘The Ten Point Plan for a Green Industrial Revolution’, which outlined the country’s commitments to mitigating climate risk ahead of the COP26 meeting held in Glasgow next year. The report reiterated commitments to making TCFD-aligned disclosures mandatory and implementing a green taxonomy, but also indicated the possibility of “a clear carbon price as [the UK] leaves the EU Emissions Trading System”.
Separately, management consultants McKinsey published a report outlining its proposal for the most cost-effective path for the European Union to achieve net-zero emissions by 2050, highlighting a range of economic benefits from decarbonisation, including GDP growth, cost-of-living reduction and job creation.