Commentary series: Covid-19 and climate change
6 May 2020
The coronavirus crisis requires urgent action from all parts of the financial system, not just in the immediate health and economic emergency, but to ensure that the recovery that follows is truly sustainable.
We have a lot to build upon. Never before has so much finance been committed to climate action and responsible practices, whether in terms of pledges made by banks, investors, capital markets or indeed central banks and financial regulators.
Equally, however, never before has actual capital allocation been so misaligned with the human and planetary health. So how should we reset sustainable finance in the decade to 2030, when carbon emissions will need to be halved and the Sustainable Development Goals implemented in full?
Closing the gap between intention and implementation
I suggest five principles for the road ahead:
Finance needs to be green. Today, we have increasing focus on climate disclosure. More importantly, we also have pioneering investors committed to making their portfolios consistent with keeping global temperature rise to 1.5˚C by 2050. By 2030, all financial institutions and regulators will need to be taking action to achieve alignment with net zero.
Finance needs to be just. To date, the ‘S’ or ‘social’ dimension of ESG [Environmental, Social and Governance] has too often been silent, with human rights viewed as a risk, rather than as an imperative to be respected. The need for finance to support a just transition is now acknowledged. By 2030, all financial institutions and regulators will need to show how they are delivering positive social impact, eliminating poverty and reducing inequality.
Finance needs to be resilient. The current crisis has revealed once more just how fragile we are in the face of shocks. And these shocks are set to increase from climate change and degraded natural resources. This is not just a task for the insurance sector. By 2030, all financial institutions and regulators will need to have strategies for resilience, ensuring that they help both users and vulnerable communities to bounce back.
Finance needs to be rooted. Over the past 50 years, finance has become global. This has brought benefits. But finance is increasingly seen as a system apart, with benefits flowing to metropolitan finance hubs, to Wall Street not Main Street. By 2030, all finance institutions and regulators will need to demonstrate how they are responding to place-based needs, including via new instruments and institutions rooted in local realities (see, for example, the work of Abundance on crowdfunding for local authorities).
Finance needs to be responsive. Many are missing out on even the most basic products: about a third of people are still without a bank account. By 2030, all financial institutions and regulators will need to be responsive to over 8 billion individuals and many more institutions, notably the small businesses that prop up the global economy.
Investing a better world after COVID
These principles should now guide the way we mobilise finance to deliver a sustainable and inclusive recovery. In the words of UN Secretary General Antonio Guterres, we have the strategic responsibility to “recover better”. In the wake of the global financial crisis, I and colleagues at HSBC estimated that governments introduced ‘green stimulus’ programmes amounting to just over 16 per cent of the total public finance boost.
Governments must now take a far more comprehensive view so that 100 per cent of their Covid-19 recovery plans are aligned with the Paris Agreement, with a special focus on the needs of the most vulnerable to deliver a just transition.
What does this mean in practice?
First, recovery plans must be designed and delivered to be consistent with the Paris Agreement. Any support for high-carbon sectors must be contingent on measurable net-zero emissions plans, with programmes for involving workers and communities in their design and delivery.
Second, a sizeable proportion of recovery spending, considerably above the levels seen in 2009– 2010, should be directed to sustainable growth. A wealth of options exists, including renewable energy and energy storage, making buildings more efficient, public transport, as well as land use, climate adaptation and nature-based solutions. Many of these are cheaper and more ‘shovel ready’ than a decade ago.
Third, the recovery packages should promote a coordinated multilateral response through the UN and the G20. Special attention should be given to the needs of developing economies, where coronavirus impacts are set to be most severe and capital for the transition is in shortest supply. A portion of the recovery funds in industrialised countries must therefore be dedicated to support the transition efforts of developing countries. In this way, we could meet and exceed the longstanding pledge for $100 billion in annual North–South flows in climate finance. And we could make COP26 in 2021 the place where sustainable recovery plans are shared, upgraded and coordinated.
These recovery plans will be financed in many ways. One route is through increased government borrowing in the form of sovereign bonds. So far, around $60 billion of green sovereign bonds have been issued from 12 countries and a further ten nations have indicated that they will issue green sovereign bonds this year. A coordinated issuance of green, social and sustainable sovereign bonds in the hundreds of billions of dollars by governments over the coming year would be both a practical mechanism for paying for a sustainable recovery and a powerful signal to the market.
Alongside this, central banks will need to ensure that climate risks are incorporated into monetary operations to avoid unintended climate consequences.
Be bold and take action
As we think about the action we need to take today, we can draw inspiration from those who faced similar challenges in the past. John Maynard Keynes, the great economist (and investor), guided the world out of the Great Depression. In his Essays in Persuasion, published in 1929, he wrote: “There is no reason why we should not feel ourselves to be free to be bold, to be open, to experiment, to take action, to try the possibility of things.”
So let us be bold, be open, experiment, take action, try the possibility of things so that sustainable finance becomes the norm.
This is an edited version of Nick Robins’ keynote speech for Earth Day. Professor Nick Robins is a co-investigator for the Place-Based Climate Action Network and leads the Finance platform.
Image: India Bundled Wind, Flickr