The Trillion Dollar Question

  • 12 September 2019
  • Blog | Green Finance | Blog


The Trillion Dollar Question: How can Sustainable Finance tackle Climate Change, Biodiversity and other sustainable development goals?

Amongst the various challenges facing countries today, one is truly unprecedented and global. In the “Anthropocene era” , human impact on the planet Earth has become so profound that it is changing the climate in ways never before seen in humankind’s history. It is also resulting in mass extinction of species and ecosystems loss at global level. Current global action to address these issues is unfortunately nowhere near sufficient. To meet climate and biodiversity objectives and the broader sustainable development goals (SDGs), much more investment is needed. Private finance and the financial sector more broadly are essential to achieving the transition towards sustainable growth. Conversely, sustainability considerations are increasingly relevant for the financial sector. The trillion-dollar question is how to scale up sustainable finance, to support climate and biodiversity objectives, human wellbeing and the SDGs, while ensuring the long-term sustainability of the financial system.

Last October, the special report on global warming of 1.5°C by the UN Intergovernmental Panel on Climate Change (IPCC) reminded us that achieving climate and sustainable development objectives requires urgent climate action.  The extreme weather events we experienced recently  are merely a taste of how climate change could spin out of control, threatening human wellbeing and our planet. For instance, one by-product of carbon-intensive assets is local air pollution and associated health costs. More than 90% of the world’s children breathe toxic air every day.  

Climate action is urgently needed and requires systemic change. We need to nearly double our infrastructure in the next decade to meet global development needs, while transitioning to a low-emissions, climate-resilient economy to avoid catastrophic climate change. The OECD estimates that around USD 6.3 trillion of investment in infrastructure is required annually between 2016 and 2030, to meet global development needs, regardless of climate concerns.  Making these investments “climate-compatible” only costs around 10% more. However, it requires a systemic shift away from business-as-usual, carbon-intensive options to low-emissions, resilient infrastructure. It is clear that public finance alone cannot fill the infrastructure investment gap. Instead, policy makers need to find ways to scale up and mobilise private sources of capital.

Action is also needed to halt and reverse biodiversity and ecosystem services loss. A recent report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES)  showed that one million species are threatened with extinction. Natural forests declined by 6.5 million hectares per year between 2010 and 2015.  Yet the economic value of ecosystem services is estimated to be between 125 and 140 trillion USD globally per year.  Business and financial organisations also depend on biodiversity: the annual market value of crops dependent on animal pollination ranges from USD 235 billion to USD 577 billion.  

We urgently need to rethink our relationship with the environment. Transformational change is needed, not incremental progress, to transition to sustainable development.  The good news is that it is not too late to build inclusive economic growth in a way that respects nature. To do so, we need to take a critical look at our economic and business models, and we must take stronger action  now to achieve transformational change. In particular, we need to ensure our financial system is fit for purpose, to deliver on the SDGs. 

A shortage of globally available capital is not the problem to meet sustainable investment needs. After all, institutional investors manage USD 55 trillion in assets in OECD countries alone.  

Thankfully, we have witnessed the start of a transformation in thinking and action by investors in recent years. Investors increasingly recognise the negative impacts of climate change on portfolio performance. Such investors thus try to integrate climate risks and other ESG factors in their governance, strategies and risk management. According to a recent survey, 78% of asset owners worldwide are integrating ESG factors into their investment. 

Another bit of good news is that investors see that financing sustainable growth creates new markets and investment opportunities.  Renewable technologies for instance are increasingly cost-competitive. The costs of utility-scale solar photovoltaic electricity have fallen 70% since 2010.

Interest in green, sustainable finance can also be seen in the impressive growth of the green bond market in just a few years. Since its inception ten years ago, annual green bond issuance reached USD 168 billion in 2018, up from USD 37 billion in 2014.  Total green bond issuance over the past 10 years has passed the USD 500 billion mark cumulatively, largely for climate objectives.

And the trend towards sustainable investing is expected to grow. In next 15 years, USD 24 trillion of wealth will be inherited by millennials, who are more than twice as likely as other generations to invest in assets that target social or environmental outcomes. 

Despite all of these developments, progress is too slow and time is running short. Global carbon emissions jumped to an all-time record high in 2018.  As for biodiversity, natural wetlands declined by 35% between 1970 and 2015. Although businesses are starting to take commitments to protect biodiversity,  efforts to integrate biodiversity risks remain limited compared to climate risks.

How can policy makers help scale up sustainable finance, including in support of climate action and biodiversity protection?

First, policymakers have a critical role to play in getting the prices right by internalising negative externalities associated with environmental degradation. They also need to strengthen domestic enabling conditions for green infrastructure, to improve the risk-adjusted return profile of individual projects. Private investment in green infrastructure is also constrained by the lack of pipelines of bankable projects. Governments and other public institutions are essential actors in project pipeline development, in addition to investors, financiers, and project developers. 

Second, there is also a mismatch between globally available pools of capital and bankable sustainable assets. Policymakers, in co-operation with international and domestic financial institutions (such as public green investment banks and national development banks) can help channel investment into bankable sustainable projects through appropriate financial instruments (such as blended finance, cornerstone stakes or green bonds).  

Third, policy makers and financial regulators can help spur efforts by the financial sector towards sustainable investing, while supporting market transparency, integrity and efficiency. On this front, new initiatives are emerging throughout the world. In Europe, the European Commission launched a year ago an ambitious Action Plan on Financing Sustainable Growth. The OECD is pleased to support the Commission’s efforts on sustainable finance, including by serving as observer to the EC’s Technical Expert Group on Sustainable Finance. Other recent initiatives include: the Central Banks’ and Supervisors’ Network on Greening the Financial System (NGFS), where the OECD serves as observer; the Finance Ministers Coalition for Climate Action; and the Sustainable Finance Network of the International Organization of Securities Commissions (IOSCO).

Fourth, governments also have an important role in guiding responsible business conduct of businesses and investors. The OECD Guidelines for Multinational Enterprises  call on business to carry out due diligence to identify and respond to environmental and social risks. The OECD has developed guidance for institutional investors on how to carry out due diligence for responsible business conduct. 

We need to further integrate climate and biodiversity in businesses and financial decisions, especially biodiversity. Most businesses and investors do not fully understand biodiversity-related risks and opportunities. Policy makers can better engage businesses and financial organisations towards developing a common methodological framework for measuring and integrating biodiversity in business and investment decisions. 

What we need now is urgent, ambitious and coordinated action to mobilise actors across the financial spectrum, including corporations, investors, capital markets, financial regulators, international financial institutions and banks. 

To support this effort, the OECD launched the OECD Centre on Green Finance and Investment in 2016.  The Centre provides a platform to engage countries, investors, businesses, development banks and civil society and promote concrete actions across countries. The Centre’s flagship event is the OECD Forum on Green Finance and Investment, which will take place on 29-30 October 2019 at the OECD in Paris. The OECD looks forward to further engaging key stakeholders to help mobilise sustainable finance, in support of the transition to sustainable development.

Read more from the Sustainable Finance Report here.