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Climate finance: ‘taking off like wild fire'

by Nigel Topping and Rhian-Mari Thomas

Filed under Climate Emergency / Leadership case studies

At TTU we highlight cutting edge thinking that inspires leaders to make the big changes needed on the Climate Emergency.

Here we share an energising discussion between Nigel Topping, High Level Champion for Climate Action at COP26, and Rhian-Mari Thomas, CEO of the Green Finance Institute (GFI).

Achieving Net Zero carbon emissions is generating huge new commitments from finance. Talking Green is no longer ‘hot air’. Climate risk is now widely recognised as financial risk. Boards and top executives ignore this at their peril. The ‘Race to Trillions’ is advancing fast.

This is a lightly edited version of their 15 minute conversation at GFI’s Green Horizons Perspectives on 20 April 2021

Nigel Topping and Rhian-Mari Thomas

NT: My role is to work with non-state actors - businesses, investors, local government and civil society. The overall aim is that this is the COP where we really turn the corner from negotiations to action.

So it’s really about action. Then global solidarity. That needs to happen across the three legs of the Paris Agreement - mitigation, resilience, and finance. On mitigation this needs to be the Net Zero COP. We are making really good progress on the race to zero. We have thousands of businesses, investors, cities all committing in a robust way. So short term targets as well as long term.

The areas which are more challenging - and therefore I’m starting to spend more and more time on because there’s been less progress over the years - would be resilience and finance.

They’re both messy problems. They are really complicated. They’re at the heart of the climate justice issue, which is at the heart of the geopolitics of climate change. The fact that the cause and effect have not been shared equally. Rich, well developed countries have caused climate change, and developing countries are the most at risk.

So how we address resilience, and how we make sure that private capital flows, will be the determinants of overall success.

Private capital flowing at last

R-MT: It would be remiss not to highlight the recent signing up of fund managers representing $23 trillion of assets under management who’ve joined the Net Zero initiative. We really are seeing a huge amount of momentum behind that race to zero. You did touch on the need for those longer term commitments to also be backed by robust short term milestones and targets. How optimistic do you feel about that? Those very positive conversations that we’re having as well?

NT: I think really, really optimistic. It’s worth remembering that the reorientation to Net Zero as opposed to well below two degrees and others to 1.5 degrees is relatively recent. It’s taking off like wildfire. I use an inappropriate climate analogy!

The Net Zero Asset Managers Initiative was launched in December, with asset managers like Generation and Legal and General very much at the fore. We hoped when we launched it to have a trillion dollars of assets under management committed to get to Net Zero. At launch in December - that’s only four months ago - there were $9 trillion and 30 asset managers. Just a couple of weeks ago that grew from 30 asset managers to 73. And from $9 trillion to $32 trillion - that additional $23 trillion, as you say.

Hugely, hugely positive

So hugely, hugely positive. If any CFO of a listed company didn’t notice that, then they probably be out of a job pretty quickly. That means every company is going to have to have a very clear climate story.

Your point about translating the bold, long term goals into short term is really what we need to make this COP about. We all agree we’ve got to get to zero as quickly as possible. What are we doing in the next five years?

So I think there’s a lot of work going on amongst those asset managers and in boardrooms all around the economy on the short term plan. So that’s what we really want to focus attention on : short term momentum because there’s no point in having a 2050 or 2040 target if we don’t move fast enough in the next five years.

R-MT: I agree with you that the next five years are absolutely critical, unless we actually see organisational change, ambition totally aligned to action that’s happening on the ground in the way that people are pivoting their portfolios, they’re pivoting their credit models, they’re pivoting their exposure.

Convince the cynics

Over the next few years it will just be fodder for the cynics that we’ve been here before, and that this is all hot air. And that really isn’t where we are now. I just genuinely think - I completely agree with you - I don’t think you could find the chief executive of a mainstream financial institution that could credibly say they’re not aware that climate risk is financial risk. That it’s something that needs to be part of their strategy. And that really is just incredible, the momentum over the last couple of years that we’ve got to that point.

So yes, very much channelling Christiana Figueres’ “Stubborn Optimism”, I think we’re very much part of that philosophy. I agree with her on this.

NT: That’s an entrepreneurial quality that anybody who commits to major change has to have, right? Because we can’t bring about fundamental systems change overnight. I talk a lot about the ‘S’ curve of industrial transformation. There’s 20 years of pain: of blood, sweat, and tears, in what looks like the flat bit of the ‘S’ curve. It is just gradually, gradually, gradually, very slowly building momentum. But when you finally hit the elbow as it were, it does feel like it. I think that’s where we’re at now. in five years time it will be inconceivable for any board not to have a robust climate strategy, I think. And that will be really accelerated by this recent move from the investment community.

Fastest growing area of finance

R-MT: I think that’s really exciting. As somebody who spent 20 years in finance, this is the fastest growing area of finance. This is like a sandbox for creative, innovative ideas: new mechanisms, new ways of collaborating with the policymakers, with public impact finance. Figuring out how do we entice the smartest minds in the city to be using their energies and their attention on this issue. I think that’s what the next five years has in store for us - looking for those mechanisms and looking at new ways of harnessing that ingenuity that’s in the city to find these types of mechanisms. Because they’re messy problems, very tricky problems.

Which brings me on to resilience and some of the adaptation in the global south, which I know you’re very passionate about. That’s where some of our traditional revenue and payback models don’t work as well. So we are going to need more creative solutions. Talk me through the sort of conversations that you are having at the COP level about tackling some of those challenges.

NT: Well, I think the first thing is to make sure we keep resilience on a par with mitigation, that we don’t fall into the trap. It’s a bit like GDP. We know it is a rubbish measure of quality of life. But we keep using it because we got used to it and familiar with it. We need to make sure we don’t fall into the same trap just measuring emissions reduction, so just the race to zero, because we’ve got momentum, and we know how to do it.

Race to Resilience

So that’s why we’ve launched the Race to Resilience campaign as a sibling campaign. Partly it is making sure we spend enough time thinking about it and talking about it, but also trying to ground it in reality.

It’s really about lives and livelihoods. And it’s really about three different types of community.

It’s people who live on the coasts or rivers, who are exposed to the kind of impact of coastal surges and flooding. And that’s both in the global north and global south where we have our own flooding. As [the chair of the UK Environment Agency] Emma Howard Boyd always reminds us, we’ve got big flooding issues in the UK, for example.

It’s the urban poor. There’s a billion people living in slums without access to power, water, sanitation or robust housing, who are extremely exposed to climate events. Then smallholder farmers similarly: about a billion people who rely on that.

We think it’s 4 billion people worldwide that need to have the resilience of their lives and livelihoods significantly improved in the next 10 years. They basically know what to do. That’s another thing we are trying to change it. They’re not sitting around waiting for people to help them. They are some of the most resourceful, dignified people in the world who happen to live in extremely challenging situations because of climate change.

Creative new thinking

So this is where I think this idea of global solidarity comes in, but also the need for creative financial solutions as you say.

The World Bank’s latest figure is that $4 trillion a year are needed to invest in mitigation and resilience measures in the developing and emerging economies.

That’s a huge amount of money. And that’s only going to flow if, as you say, we get the most creative financial minds working on solving those problems.

R-MT: It’s interesting what you say. Some of those solutions are domestic. They are local solutions. So part of this challenge is how do we channel global capital towards local solutions.

Some of the work that we’ve been doing at the Green Finance Institute has been with African investors and African financial experts, particularly in South Africa. We conducted a number of roundtables to understand how blended finance solutions - using concessionary finance - could best serve their local markets to finance green infrastructure, resilient infrastructure.

We got some quite interesting feedback. In a middle income country like South Africa, there are deep pockets of pension funds and institutional investment that could be mobilised domestically towards this agenda. But currently it is finding it difficult to do that. These types of projects don’t meet their investment grade criteria. The solution in that particular instance isn’t that we need to de-risk those development projects so that more institutional capital from the west floods that market. It’s actually using institutional capital and using concessionary capital - deploying that not as aid, not as technical assistance - that bit fortunately has been done - but as guarantees.

So ranging banks in South Africa, for example, can amend their credit models through the use of these guarantees. They can actually support and finance for those infrastructure projects, and syndicate that financing out to the pension funds and the institutional investors domestically. So we are actually creating and mobilising capital in country, creating green finance markets domestically. Which I just think that shows that some of the solutions are already there domestically. [The challenge is] how do we help catalyse them? And how do we help mobilise? I’m really excited about that particular project.

£100 billion: but much more needed

NT: For me that’s why we need to distinguish the $100 billion which has captured all the attention in the negotiations - which is crucial, because it’s a legal commitment as part of an international treaty from the global north and global south - so it has to be met - from the $4 trillion, which is the problem that has to be solved.

It’s not either or. $100 billion is necessary but not sufficient. So I think we need to be talking much more about the leverage and maturity of green markets. Because otherwise we could take the 100 billion to 200 billion and still not get anywhere near the 4 trillion.

I was in Kenya recently, and particularly struck by the fact that as you say that there is both local and international private capital to be leveraged. But people are not asking for aid in those countries.

Okay, there is a least developed country which maybe still requires direct aid. But also we need to make sure that the international public finance that is available is being leveraged. I’m sure we’ve all heard examples of where it’s actually crowding out private finance, rather than leveraging in. So I think some of the issues around maturity of green markets need to be more what we’re focusing on. Then we can accelerate the transition in those middle income countries in particular.

R-MT: Kenya is a really interesting case in point. There’s something like £8.6 billion equivalent of pension assets in Kenya. Almost half of it is being invested in government securities.

NT: American government securities right – T-Bills - not even in Kenya.

R-MT: But you also have a thriving renewables market in Kenya. How do we mobilise that capital? These are the real questions and real problems that are seeking real structured answers. I think there’s just a really exciting opportunity for us to work against this backdrop of the race to resilience, the race to net zero. We’ve created that expectation. Everyone knows why we need to do this now. For me, it just feels like: let’s all work together and figure out how. Is that something like a new sibling?

Unlocking huge amounts of capital

NT: Well, there is a compelling logic to that given that Paris is a three legged stool with mitigation, resilience and finance. As well as delivering on the promised 100 billion and all of that work - which is the negotiations between nation states - we also need to recognise that the real challenge is getting to trillions.

So whether we actually launch a formal campaign called The Race to Trillions or not, I think that is becoming clearly an important part of that work for the next 10 years. And I do think you’re absolutely right. It’s about changing the narrative. It’s classic, isn’t it? It is trade, not aid basically. It’s how do we better we develop mature markets, which can bootstrap and grow themselves? Rather than only focusing on the front of pipes.

So I think you need both right? But I think we need to balance that a bit. I think that the private sector is really ready for that conversation now. And the fact that we’re seeing the asset owners and the asset managers launched their own Net Zero clubs … I’m very confident that we will soon have a robust club for banks, and insurers as well.! So have every sub sector of the finance community, thinking about how they can. Then we need to start saying: and how much of that is going to be to the global south? Because that then starts to add to that narrative.

Figuring out new innnovations

And if a company commits to investing in the global south, then they have to work with us to figure out the innovations that will make that possible, right? Because it will be trade, not aid. These will not be philanthropic dollars, they’ll be invested or let on commercial terms. So once people make these bold commitments, they then have a vested interest in advocating for the kind of changing policy environment to make those commitments feasible for them.

R-MT: Absolutely. We’re very much looking forward to a successful conference and an accelerated race to zero and race to resilience. Thank you.

NT: Very welcome. And I agree. Let’s look forward to making sure that the race to trillions happens, so that we win those two races. And thank you for all the work you’re doing. And I’ve been really inspired by the work you’re doing on green investment banks and credit enhancement, which to me fit exactly in that kind of bucket of initiatives which are needed to accelerate maturity of green markets around the world.

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