Moving the Money in Marrakech

Governments meet in Marrakech this year for the annual climate negotiations with a spring in their step. Last year's Paris Agreement has come into effect in record time and been reinforced by a domino of measures to cut greenhouse gas emissions from chemicals, aviation and shipping. Yet beneath the smiles, there remains the hard reality that current measures in place are simply inadequate to hold global warming to below 2°C and ideally to just 1.5°C above pre-industrial levels. According to UN Environment, today's commitments will reduce emissions by no more than a third of the levels required by 2030, risking warming of up to 3.4°C.

Finance is a key lever to close this gap - and one of the significant innovations of the Paris Agreement was to introduce a new international objective of 'making financial flows consistent with low-greenhouse gas emissions and climate-resilient development.' This means rethinking how the US$300 trillion of assets within the global financial system can now generate value within a limited carbon budget and an increasingly disrupted ecosystem.

At the heart of the challenge is how to mobilise far more, cheaper and better quality finance for climate action, particularly in the developing world. We now know that the transition does not require additional costs compared with the status quo. But it does involve a fundamental two-fold reallocation of finance both from high- to low-carbon assets and from vulnerable to resilient investments. Climate solutions invariably mean replacing the consumption of natural resources with human ingenuity and technology. From a financial perspective, this implies a more capital intensive system, one that is balanced by far lower operating costs, particularly in terms of energy use. This is the reason why the cost of capital is one of the key variables which will determine whether the transition will take place in time.

Across the world's financial system, positive signs of momentum can be observed. Indeed, actions that were unthinkable a few years ago are now being taken. Industrialised countries have just published a roadmap for mobilising US$100 billion in annual flows to developing countries by 2020 - a pledge that was first made in 2009. Latest estimates suggest that actual flows of climate finance into developing countries have risen from US$52 billion in 2013 to US$62 billion in 2014. The new Green Climate Fund has just taken decisions to commit US$1 billion this year to developing countries.

Over in the investment world, institutions with over US$10 trillion in assets have committed to publish a 'carbon footprint' of their portfolio - and a leading group is going further by taking action to decarbonise their portfolios across US$600 billion of assets. The 'green bond' market is booming, with issuance so far this year of US$65 billion, up from just US$11 billion in 2013. Investors want to buy green assets and countries such as China, India, Morocco and Nigeria see green bonds as offering a new tool to finance their ambitions for sustainable development. And some of the world's leading financial centres such as Hong Kong, London and Paris are now involved in a race to claim their share of the green finance prize.

Key financial actors such as central banks and regulators that were once absent from the scene are also taking action. In September, the People's Bank of China together with six other financial agencies published a 35-point set of guidelines for 'greening the financial system'. The Bank of England has undertaken the first review of the implications of climate change for the financial system - one factor that led to the establishment of a new Task Force under the Financial Stability Board to set out a roadmap for consistent climate disclosure to enable business and investors to make informed decisions. For the first time, G20 finance ministries and central banks have this year recognised the need to 'scale up green finance', identifying a set of steps to mobilise private capital. In all, UN Environment has estimated that the number of policy and regulatory measures to promote more sustainable finance has doubled to over 200 in the past five years.

This unprecedented momentum, however, is still far from ensuring that the world's financial flows become 'climate consistent'. To take one indicator: only 0.4% of the assets of the world's top 500 asset owners have been identified in low-carbon investments. The reasons for this are not a mystery. Public finance for climate action may be growing, but remains insufficient both in terms of volume and allocation: only a fraction is supporting developing countries to adapt to climate shocks, for example. In the wider financial system, the costs of carbon pollution are still not reflected in market prices - and in many countries, are actually rewarded through the continued use of fossil fuel subsidies. Currently, financial institutions are not rewarded for the climate performance of their decisions. Furthermore, the short-termism of capital markets can mean that the strategic shifts required for the climate transition appear to be always over the horizon.

The theme of the Marrakech conference is to move from the high-level commitments made in Paris to action on the ground. Across the financial system, there is now real appetite to bring together the policy frameworks and market innovation needed to drive this transformation. A key starting point is to ensure that each country's policies for financial sector development are in tune with its climate plans (known in UN language as the 'nationally determined contributions'). For developing countries, greater visibility is then needed on the steps that will be taken to deliver the precious US$100 billion to support these investment plans, particularly to withstand mounting climate shocks. For each segment of the system, the key policy levers that could scale up green finance and avoid stranded assets need to be identified and refreshed, from disclosure standards through stress test requirements to capital weights for banks and insurers. The gulf between 'high finance' and the real world facing small enterprises and households also has to be bridged. Here, fintech innovations such as peer-to-peer finance could help to substantially improve access to capital. Ultimately, a climate finance dashboard will be needed to track the climate performance of the world's capital stocks and flows so that decarbonisation and resilience become the norm. Setting in motion actions such as these would ensure that Marrakech is known for really moving the money.

This post is part of a series produced by The Huffington Post, in conjunction with the U.N.'s 22nd Conference of the Parties (COP22) in Morocco (Nov. 7-18), aka the climate-change conference. The series will put a spotlight on climate-change issues and the conference itself. To view the entire series, visit here.

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