Finance at COP26 JULY 2020
Finance will play a crucial role in the transition to net zero, but there is a vast gap, and too much money still flows to carbon-intensive activity Estimated infrastructure investment per year required to meet Paris is $6.9 trillion per year $742bn $2.5-3.5T $6.9T Fossil Fuel $295bn Investments Renewables investments $3.4-4.4T $373bn Fossil Fuel $150bn Current global Gap Required financing Subsidies financing Renewables subsidies Transport Power & Electricity Energy supply chain Water & Sanitation Telecoms Energy demand 1 Source: OECD — Financing Climate Futures 2018, UNFCCC Standing Committee on Finance, 2018 Biennial report
Developed countries have contributed most to climate change but the impacts will be felt disproportionately by developing countries Developed world represents largest historical Climate change will massively impact agriculture, contributions to global emissions principally in developing countries Cumulative CO 2 emissions, 1750 -2014 25% 13% 6% 6% 5% 4% 3% 2% 2% 2% China Russia USA Germany UK Japan India France Canada Poland High temperatures during growing season High climate variability Developed Countries Emerging markets/ developing countries Growing season reductions Combination of two or more climate hazard 2 Source: Carbon Dioxide Information Analysis Center ,Prepared by Philip Thornton, CCAFS, for the Global commission on Adaptation
Developed countries have committed to providing $100bn per year of climate finance by 2020; demonstrating momentum is essential for sustaining developing countries’ confidence in the UNFCCC process Total progress towards $100bn/year of climate finance ($bn) 100 29 71 2 15 28 27 Bilateral public Multilateral public Mobilised private Export credits Total Gap Paris commitment (attributed) (attribtued) 3 Source: OECD
Bilateral donors and existing funds will need to scale their investments and facilitate fund access to meet Paris commitments Top 10 multilateral Key Climate DFIs 1 & institutions Top 10 bilateral donors 3 Funds ($B) ($B) ($B) World Bank Group Japan Green Climate Fund 10.50 1.2 7.2 Germany Global Env. Facility EU institutions 2 5.50 6.7 1.0 France GEF general Asian DB 4.60 0.9 4.3 UK to increase United Kingdom Least Dev Count. Fund Inter-American DB 3.80 0.1 1.5 to $3.5bn PA by 2025 USA Climate Inv. Funds Int. Finance Corp. 3.50 0.6 1.3 EB for Restr. & Dev. Norway Clean Technology Fund 3.40 0.3 0.8 Netherlands Strategic Climate Fund European Inv. Bank 2.90 0.7 0.3 Asian Infr. Inv. Bank Sweden Int. Fund for Agr. Dev. 1.60 0.6 0.5 African Dev. Bank 1.30 0.1 Switzerland 0.5 Adaptation fund 0.02 0.1 Canada 0.4 GGGI Nordic Dev. Fund 1. Development Finance Institutions 2. Commission of the European Communities and the European Development Fund 3. Japan Climate commitments include financing for "Clean Coal" and headline funding does not account for differing qualities of finance (e.g. grants vs loans) 4 Sources: OECD 2016-2017 Climate related development finance database
Green/brown energy ratios for MDBs Energy related climate finance vs. fossil finance (2015- 16 average) in MDBs Inter-American 13.9:1 development bank African 5.3:1 development bank MDBs have committed 1.2:1 World bank group to aligning finance with Paris, but have European bank for reconstruction and 1.2:1 not laid out clear development plans to this end 1.0:1 European investment bank Asian development 0.9:1 bank Energy-related climate finance($B) Fossil finance ($B) 5 Source: E3G — Aligning Development Banks with the Paris Climate Agreement
Finance for the transition is currently evenly split between public and private, and flows predominantly to mitigation; increased private finance mobilisation is essential to meet goals Private Finance needs to represent Vast majority of finance flows to greater proportion of total finance mitigation rather than adaptation Public finance is essential but not sufficient to meet climate needs Total global climate finance, two-year Recipient sector, Ø 2017-2018 ($B) averages 2013-2018 ($bn) Scope for further public finance 579 537 commitments more limited than private finance 463 ~50% of UK To meet the trillions of funding gap 56% 56% funding is 365 to decarbonize the economy, public committed to 54% adaptation finance will need to be used effectively to mobilise additional 60% private finance 44% Rebalancing of adaptation/mitigation 37% 46% 40% 30 finance flows essential for 12 5% negotiations 2% 2013/2014 2015/2016 2017/2018 Mitigation Adaptation Dual Benefits Private Finance Public Finance 6 Source: The Climate Policy Initiative (CPI) — Global Landscape of Climate Finance 2019
Capital allocators are increasingly aware of the financial risks posed by climate change, thanks in part to initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) TCFD mandates reporting across four areas: Governance TCFD currently has more than Disclose the organization’s governance around climate -related risks 1000 supporters of TCFD from 54 and opportunities countries Strategy Disclose the actual and potential impacts of climate-related risks and Representing a market cap of opportunities on the organization’s businesses, strategy, and financial $16.7T planning where such information is material Risk management Includes 473 financial firms responsible for $138T in assets Disclose how the organization identifies, assesses, and manages climate-related risks under management Metrics and targets Disclose the metrics and targets used to assess and manage relevant climate- related risks and opportunities where such information is material 7 Source: TCFD, Recommendations of the Task-Force on Climate-related Financial Disclosures, 2017
• The Prudential Regulation Authority in April released a supervisory statement noting that few firms today are taking a strategic approach considering how actions today affect future financial risks At a macro level, • The Bank of England will be the first regulator to stress test its major firms against different climate pathways, including early action, late Central Banks can action and the disastrous Business-as-usual scenario help speed the • The test will show how major financial firms expect to adjust their business models, and the impact of these responses on the wider transition by economy. including climate • It will expose those that have prepared, and those that have not, and results will be share in the second half of 2021 scenarios in Bank's • The Bank of England will share its experiences, and create best stress tests practice to facilitate the refinement of methodologies as other central banks conduct future stress test • 15 other authorities have committed to run stress tests, with further expansion of this coalition a key ambition for finance at COP 26 8
Awareness of climate risks are changing underlying private finance incentives, with capital costs for renewables projects decreasing steadily Changing cost of capital for oil and gas vs. clean energy, % Drivers of weighted average cost of capital (WACC) for listed energy company 15% 15% Top power companies Top oil and gas companies (by renewables ownership) (by production) 12% 12% 2018 capital structure 9% 9% 50% equity/50% debt 2018 capital structure: 6% 6% 75% equity/25% debt 3% 3% 0% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2006 2008 2010 2012 2014 2016 2018 Cost of equity Cost of debt (before tax) Cost of debt (after tax) 9
Recommend
More recommend
