Financial institutions can play a pivotal role in climate change mitigation and clean energy transition
It is much more than merely supporting a few renewable energy and energy efficiency projects or green establishments/factories. The financial institutions of all countries literally need to enhance their clean energy and climate change mitigation portfolios, both in terms of numbers and quality.
The latest report of the Intergovernmental Panel on Climate Change (IPCC) has reiterated that the impacts of human-induced climate change are only compounding. The recent disasters across the globe are also a testament to the IPCC claims.
In fact, it requires no discussion that climate change continues to affect different countries, be it rich or poor, at different scales and intensities. While much of the discussions are normally country-level policy centric, i.e., the political ambition of different countries, to accomplish the 1.5° C temperature goal and on the economics of clean energy and climate change mitigation, the role of financial institutions often remains as a secondary topic.
However, the clean energy transition and the level of climate change mitigation compatible with the 1.5° C temperature goal is only possible when the financial institutions channel sufficient finance to the clean projects and backtrack them from promoting polluting projects. It is much more than merely supporting a few renewable energy and energy efficiency projects or green establishments/factories. The financial institutions of all countries literally need to enhance their clean energy and climate change mitigation portfolios, both in terms of numbers and quality.
For instance, the 2019 assessment of the International Energy Agency (IEA) delineates that the financing requirement would be in the range of $660 to 730 billion per annum until 2030 to meet the sustainable development goal (SDG)-7, i.e., ensuring affordable, reliable, sustainable and modern energy to every individual of this world. Likewise, the European Union (EU) estimated that 275 billion EUR funding per annum is needed to reach the EU's 55 percent climate mitigation target.
If greenhouse gas mitigation targets of all countries are considered, as climate targets of the countries have an energy efficiency component, the demand for investment in energy efficiency per annum would be quite stupendous. Additionally, investments in electric vehicles and supporting infrastructure for charging stations require financing too. Therefore, for all practical purposes, the financing avenue for clean energy and climate change mitigation is only enlarging.
While obviously funding channels, such as the Green Climate Fund, different pledges of the rich countries, etc. would contribute to the clean development in poor and developing countries; the scale of finance necessary for global transformation is too big. If truth be told, the pledges of different countries for financial contribution and international financing like the GCF are still an insignificant proportion of the whole pie.
Hence, the banking channels of different countries will be the catalyst for both net-zero emissions by 2050 and the 1.5°C temperature goal by 2100. More importantly, the financial institutions should have the preparations to not only meet the demand for clean energy finance of today, but also the increasing volume that might be needed in the foreseeable future.
Different financial institutions are increasingly embracing green banking policies to finance clean energy, climate change mitigation and environmental compliance projects. In many cases, the objective of the policies of different banks is to finance green projects that constitute a very small fraction of their portfolios. The larger slice of the pie of their financing is targeted towards conventional projects, excluding a few exceptions.
Many banks around the world, reportedly, do not even have rating systems to eliminate coal or other polluting projects during the evaluation process. There are also examples of the giant banks of the world exclusively channelling large volumes of finance to fossil fuel, including dirty coal projects. Therefore, the financial institutions, in addition to having green banking policies, should develop project evaluation criteria that may include a rating system to prioritise clean projects and systematically reject polluting ones.
Obviously, this poses the question of whether project appraisal should be done only based on the criteria that favour clean projects. We then need to understand that clean energy projects, such as solar and wind, today deliver more return than coal and other fossil fuel-based projects. Likewise, energy efficiency projects in many cases have a very attractive payback period and internal rate of return.
The next point is attaining the capacity to finance a large volume of clean energy projects. There are differences between financing a new industry and financing a project that intends to retrofit an old industry with energy-efficient equipment.
Bankers need to clearly understand the energy audit reports and then make the assessments of energy efficiency projects. With time, the bankers will develop expertise in financing energy-efficient projects like they do in their traditional banking. However, measures should be taken to develop this capacity of the bankers, particularly on the technical dimensions of energy efficiency.
It is also noteworthy that energy audit reports often lack credibility. This also demands that bankers have a good grasp of energy efficiency issues to avoid financing sub-optimal projects. In the case of renewable energy, for instance, solar and wind, they should study the global trend of cost reductions. It is, furthermore, necessary that they have clear ideas about the challenges of renewable energies, such as intermittence.
Renewable energy, energy efficiency and green establishments create a huge untapped potential that financial institutions can harness. With the growing number of financial institutions and similarly, increasing business competition, clean energy financing is an avenue that bankers should focus on.
Financial institutions cannot be on the sideline when finance is the key to cutting down greenhouse gas emissions, and the concern about exceeding the global mean temperature beyond 2°C is increasing. The financial institutions of different countries should, therefore, make them ready to play a broader role in climate change mitigation and global clean energy transformation in the years to come.
Apart from making their portfolios clean, the financial institutions can operate with minimal impacts on climate. Among different ways, reducing resource consumption and implementing renewable energy projects to meet their own electricity demand could help a financial institution become green. Notably, many banks have already cut down their carbon footprint and there are excellent examples that others could choose to follow.
Shafiqul Alam is an environmental economist
