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Finance to play central role in transition to greener economy as climate fight rages

By Paul Mackintosh   
October 4, 2021

As the battle against climate change takes on greater urgency, finance will play a central role in the transition to a greener economy, which will likely cost trillions of dollars, according to market participants.

Signatories to the Paris climate accord in 2015 pledged to keep global warming during the 21st century well below 2 degrees Celsius above pre-industrial levels, and if possible, below 1.5 degrees Celsius, and achieve net zero greenhouse gas emissions by 2050.

Their commitments will come under close scrutiny at the upcoming United Nations Climate Change Conference of the Parties or COP26.

Last month, Asia Asset Management (AAM) reported that the Manila-based Asian Development Bank is preparing a feasibility study on a joint venture scheme with some top global financial institutions, aimed at bringing the elusive goals to limit carbon emissions within reach and in time to save the planet.

The aim of the scheme, known as the Energy Transition Mechanism or ETM, is to help certain developing countries in Asia that are among the world's biggest emitters of greenhouse gases to shut down coal-fired power plants within a limited timeframe, and to replace the lost output with renewable energy. It will be launched by early 2022.

Vishal Hindocha, global head of sustainability strategy at MFS Investment Management tells AAM that “finance will play a pivotal role” in the fight against climate change. He highlights the powers of lenders to withhold financing from projects and companies that “clearly exacerbate climate change”.

Mervyn Tang, head of sustainability strategy Asia Pacific at Schroders, is concerned that investment is “not increasing enough” to meet governments’ pledges, citing estimates of US$120 trillion of investments required across the energy value chain to meet current climate targets.

Eoin Murray, head of investment at the international business of Federated Hermes, believes that financial initiatives to meet the sectorial targets for net zero have only a “limited chance” of success, with the US being a major culprit.

In his view, the green bond market will be the most practical and effective financial area to address the climate funding shortfall, “in particular the sustainable or performance-linked bond and loan market”.

Murray expects “some creative repurposing” from multilateral lenders like the International Monetary Fund and the World Bank to achieve net zero targets.

He points to debt-for-nature swaps – debt forgiveness mechanisms to incentivise developing countries to invest in biodiversity and other environmentally positive measures – as “a perfect example” of what is needed.

Note: A longer version of this article appears in the October issue of AAM.