Policy Shift participated in the 2nd edition of the Innovate4Climate Summit organized by the World Bank Group in Frankfurt from May 22nd to May 24th 2018, which aimed to discuss the global themes of climate finance, sustainable development, carbon pricing and markets. It gathered over 1,100 people from 70 countries. The summit objectives focused on developing innovative financial instruments and approaches to support low-carbon transition, mobilize private investment in climate action and support developing countries in their Nationally Determined Contributions implementation.
The summit was organized around a series of panels, each one of them discussing a specific theme related to climate finance. All panels gathered representatives[i] from the World Bank Group (World Bank, International Financial Corporation, Multilateral Investment Guarantee Agency), national governments, academics and business representatives from the financial sector (rating agencies, banks and stock exchanges).
The financial sector and transformative climate-smart investment
Two years after the Paris Agreement, signed in December 2015, it is clear that the financial sector has a crucial role to play in mitigating climate change. To do so, the financial sector should contribute to:
Filling the green investment gap;
Aligning financial flows with low greenhouse gas and climate-resilient development (under Article 2 of the Paris Agreement); and
Supporting the implementation of the Nationally Determined Contributions (NDCs). At the heart of the Paris Agreement, NDCs embody efforts by each country to reduce national emissions and adapt its policies to the impacts of climate change. Article 4 of the Paris Agreement requires each country to prepare, communicate and maintain successive NDCs that it intends to achieve as well as to pursue domestic mitigation measures with the aim of achieving the objectives of such contributions.
However, to accomplish this, investors will need to set targets for the reallocation of capital from investments in fossil production to investments in climate solutions for mitigation[i] and adaptation[ii].
In this context, panel representatives pointed out key issues the financial sector and policymakers should take into account:
Coordination between international partners in the implementation of NDCs is key. Governments need to send positive climate policy signals to businesses so climate-driven investments are effectively made. The role of multilateral development banks is therefore critical. Having committed to over 160 billion USD between 2011-2016, they enable countries to finance sustainable infrastructure and energy systems and work to increase climate investments from public and private sectors. Because of this, international forums including the World Bank Group, the International Monetary Fund and the Financial Stability Board, need to remain closely engaged with national governments and businesses.
Stimulating demand and creating an attractive investment environment is needed. First, national governments and regional organizations should create a positive policy environment to encourage financial actors to invest in green projects and climate solutions. Second, multilateral organizations, such as the European Commission and the Financial Stability Board, should continue their efforts developing a strong regulatory framework. Third, actors should develop mechanisms for lower risk investment in climate solutions, for example via reinforced contract stability and the use of first-loss provisions and risk guarantees.
The role of financial regulation is decisive to mobilize private capital to help meet the Paris Agreement’s targets. One of the greatest challenges for green investment is the tension between short-term profit seeking behavior and the need for long-term investment for environmental, social and governance targets. A climate-oriented regulatory framework for all financial institutions and infrastructures will help to bring more and more institutional investors on board, expand green bonds and ensure that corporations substantially invest away from fossil energies. To meet these goals, the European Commission in March 2018 developed an Action Plan which emphasized the need to ensure a level-playing field between all financial sectors as well as to streamline existing voluntary initiatives in terms of risk disclosure and management. Concretely, they recommend establishing a common language for sustainable finance with a classification system; reinforcing the existing green bonds documentation; and ensuring common appropriate governance at the level of the green bond issuer.
First panel on transformative investments in the context of climate change
The role of blockchain in transforming finance for climate adaptation
Experts in this panel highlighted the fact that even though cryptocurrencies are notoriously energy-intensive due to their mining activities, blockchain technology could give a substantial boost to environmental markets as well as to climate finance.
Blockchain-based contracts would ease the processing and settlement of financial transactions, notably catastrophe bonds and swaps, thanks to an increased reliability, auditability and speed. With regards to catastrophe bonds, the payout process would be automated thanks to blockchain-based smart contracts (i.e. strings of code that execute automatically when given conditions are met). Blockchain could therefore be used to authenticate all kinds of transactions while reducing costs and increasing the market. Climate-driven financial transactions would also be more widely traceable and ensure the assessment of low-carbon investments, thanks to the “chain of custody” information contained in the distributed ledger. Additionally, and beyond financial transactions, panel representatives stressed the role that blockchain would play in the renewable energy economy and other environmental applications (energy storage; forestry protection; carbon credits).
Innovative and Sustainable Climate Risk Insurance Products in Emerging Countries
Existential threats are indeed posed to the insurance industry by climate change. If the costs of natural disasters are unchecked, the industry would rapidly become unsustainable. According to the Swiss reinsurer Swiss Re, in 2017 only, total economic losses from natural and man-made disasters were estimated to be 300 billion USD, and global insured losses from catastrophes were estimated to be 136 billion USD[i]. Although the United States was the hardest hit, emerging economies are widely exposed to climate risks, while facing limited access to insurance. Responding to this protection gap, the InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions (“InsuResilience”) was launched at the 2017 UN Climate Conference in Bonn, Germany. It aims to offer insurance against climate risks to an additional 400 million poor and vulnerable people in developing countries by 2020.
The Head of the InsuResilience Secretariat, Astrid Swick, highlighted the need to tailor the regulatory framework to climate risk insurance products with supervising authorities and with local governments. In particular, she recommended that they work closely on issues related to distribution channels of risk insurance products and consumer protection. She then presented the InsuResilience Solutions Fund, a new facility set up by the German government and the German government-owned development bank (KfW). Its objective is to provide partial grant-funding and expertise for the development of new climate risk insurance products for governments, SME businesses, private households and non-governmental organizations.
Source: InsuResilience Solutions Fund website (https://www.insuresilience-solutions-fund.org/content/downloads/flyer-insuresilience-solutions-fund.pdf)
One of the main takeaways of this summit was that filling the green investment gap in order to achieve the targets set by the Paris Agreement involves greater cooperation between the public and private sectors. There is a need to rethink the existing regulatory framework to tailor it to new and innovative financial solutions to “shift the trillions”. In addition, new technologies, such as blockchain, can contribute to transforming finance for climate adaptation and mitigation. Next year’s summit will serve as an opportunity to take stock of the results of current initiatives, notably the European Commission’s Action Plan for Sustainable Finance, the InsuResilience Partnership and the follow-up of the work led by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure. Ultimately, the financial sector has a clear role to play to contribute to the global community’s achievement of the UN Sustainable Development Goals.
For more information on the Innovate4Climate summit, you can visit their webpage: http://www.innovate4climate.com/fr/
[i] Swiss Re, 20 December 2017, “Preliminary sigma estimates for 2017: global insured losses of USD 136 billion are third highest on sigma records”. Available online.
[ii] Climate change mitigation means the process of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and limiting the temperature increase to 1.5°C above pre-industrial levels.
[iii] Climate change adaptation means the process of adjustment to actual and expected climate and its effects.
[iv] Hartwig Schafer, Vice-president of the World Bank Group; Tim Christophersen, Head of Freshwater, Land and Climate at UNEP, John Roome, Senior Director of Climate Change at the World Bank Group; Hans Peter Lankes, Vice-president of the IFC; Merli Baroudi, Director of Economics and Sustainability at MIGA; Matthias Hellstern, Managing Director at Moody’s; Marie-Laure Bourat, Impact-Based Finance at Société Générale and Graham Smith, Director of Sustainable Finance at HSBC.