As the reality of the economics drive banks to accelerate in green finance, more solid steps need to be taken to close the financial gap between the pledges and actions to generate the much-need annual $6.2 trillion investment to limit global warming below 2 degrees Celcius.
Tim Buckley, the director of energy finance studies at the Institute of Energy Economics and Financial Analysis (IEEFA), brought to light the gap between pledges and actions even though green financing is gaining momentum globally with a growing number of banks and institutions announcing new net-zero pledges along with the world's biggest economies in an exclusive interview with Anadolu Agency.
He attributed the gap in pledges and action as historical for banks that have made major investments in fossil fuels “on an ongoing basis.”
However, Buckley noted that the motivation for these institutions is not merely altruistic but profit-driven to generate the maximum risk-adjusted returns for their investors and shareholders.
"So, ultimately they will do what is economically viable and the economics have moved dramatically towards clean energy and net-zero technologies,” he said.
He maintains that delivering on the Paris Agreement outcome today is quite foreseeable and realistic compared to a year ago when it “was beyond the realms of reasonable probability."
“There is actually every chance to limit the global climate change below 2 degrees Celsius,” he said.
Buckley explained that clean technology and energy costs, which have significantly fallen over the last year with a drop in solar tariffs of around 20%, are the driving force behind the energy transition.
"The economics have moved decisively in the last 12 months and the banks will end up doing what they are pledging to do because it is the economic reality. We have now got 34 globally significant financial institutions, including banks, insurers and asset managers announcing new or improving coal power policies in 2021. That run rate is up 33% on last year," he said.
According to Energy Policy Tracker and Big Shift Global, the world's leading multilateral development banks channeled investment finance of $12 billion in clean energy with $3 billion in fossil fuels since the beginning of the COVID-19 pandemic.
For the first time in 2020, these banks did not finance coal. Finance for fossil fuels declined by 40% between 2018 and 2020 compared to the 2015-2017 period.
Additionally, the size of sustainable debt markets has reached a record $1.9 trillion by the end of last year while green bonds hit $1 trillion.
Although there is no global standard defining green finance, the EU is working on a proposal to define green finance as anything provided to projects with 100 grams per kilowatt-hour of CO2 emissions or equivalent to 100 grams.
"Now, there is not a gas plant in the world that has emissions of less than 100 grams per kilowatt-hour. So, it seems that EU taxonomy excludes LNG as well as coal. This taxonomy is so important because China and I think America will probably end up adopting the same taxonomy," Buckley said.
- Is fossil finance over?
Although 124 countries, representing 52% of the world’s population and 68% of gross domestic product (GDP) had net-zero emissions, the world's 60 biggest banks have channeled $3.8 trillion to fossil fuels since the Paris Agreement was signed in 2015, according to a recent report entitled Banking Climate Chaos by Rainforest Action Network.
The US bank JP Morgan ranked first with $317 billion in fossil fuel financing, followed by Citi with $237 billion, Wells Fargo with $223 billion and the Bank of America with $198 billion during this period.
The report showed that Canadian-based RBC, Japan's MUFG, Barclays, Mizuho, BNP Paribas, TD, Scotiabank and Morgan Stanley are among the 12 "dirtiest" financial institutions.
London-based Positive Money's report on the central banks of G20 countries also showed that although the central banks are aware of the risks of the climate crisis against financial stability, they are slow at taking efficient and solid steps towards sustainable finance.
"US President Joe Biden's number one objective seems to drive the climate ambition of America to restore American credibility globally and to drive consensus," Buckley said, adding that he expects a fundamental change in the US in terms of banks and financial institutions.
- Emerging markets are most in need of sustainable finance
Following on from Biden's trillion-dollar investment package, he said that banks would act because the capital markets are moving with an unprecedented stimulus and emphasis on net-zero emission technologies.
"The banks want to play in that game as the weight of money is flowing inevitably into low emissions and new technology industries of the future. So you do not make money investing in dinosaurs when the economics is only going in one direction," Buckley underlined.
The overall investment in the energy sector, particularly in clean energy, is expected to increase further. He stated that around $2 trillion is invested annually in the global energy sector, with $500 billion in renewables and $500 billion in grid infrastructure while the remaining half is designated for fossil fuels.
"Half of this increased investment will go into emerging markets every year. So we need to scale up dramatically and I think the capacity build will happen very quickly," he said.
The United Nation's 2030 Agenda for Sustainable Development says that protecting the planet and ensuring prosperity requires overcoming a financing gap of $5-7 trillion per year of which $2.5 trillion is needed for emerging countries.
By Nuran Erkul Kaya