Significant progress has been made since December 2015, when the Paris Agreement was adopted by a consensus of 195 countries at the 21st United Nations (UN) Climate Change Conference (COP21) in Paris. The agreement has since slid smoothly into force; with governments, the financial markets and corporations putting a low-carbon future firmly on the agenda. The impressive growth rate of the green bond market, and the establishment of international funds to finance environmentally-friendly projects in developing countries, are just two clear indicators of participants’ dedication.
However, there is much more to be achieved in order to meet the Paris Agreement’s key target of limiting the global temperature increase to less than two degrees. The continued development of such climate financing will therefore be crucial.
Mobilising climate finance; progress so far
One climate financing tool that has seen significant progression is the green bond – that is, a bond issued to fund projects that have positive environmental and/or climate benefit. In fact, as of the start of November, global green bond issuance totalled US$64.3 billion for the year; 50% higher than total green bond issuance in 2015.
As well as growing in scale, the green bond market is also growing in range. Over the past year, green bond proceeds have diversified away from renewable energy investment, to include water, waste, and the adaptation of existing infrastructure projects.
Additionally, a number of sovereigns are set to issue their first green bonds in 2017, mainly in an effort to meet their COP21 pledges, which are now being legally enforced. France, for instance, will be the first to issue in the new year; proposing €3 billion of green bond issuance in 2017 contributing towards a total of €9 billion by 2019.
One key pledge is the UN’s Green Climate Fund – created under the Paris Agreement – which aims to provide US$100 billion annually between 2020 and 2025 in order to fund adaption and mitigation projects in developing countries – where the issue of climate change may be further down the political agenda. However, pledges, so far, have only reached US$10.3 billion.
More to be done
Clearly, there is the need for a significant scaling up of climate finance. In fact, the Global Commission on the Economy and Climate estimates that US$80 to 90 trillion in environment-related infrastructure development (such as renewable energy, energy efficiency equipment and updating inefficient projects) would be required over the next 15 years to meet climate change targets. This is due to rapid global urbanisation and population growth rates, in addition to the necessary refurbishment of ageing infrastructure. Global infrastructure investment totalled US$3.4 trillion in 2014, and would therefore need to increase by more than half to reach this target.
Additionally, research from Oxford University’s Sustainable Finance Programme shows that if current and planned energy infrastructure is operated to the end of its normal economic life, we won’t be able to build any more fossil fuel infrastructure after 2017 if we are to meet the two-degree target.
From politics to action
Remarkable progress has been made over the past 12 months. The Paris Agreement came into force, reassuring the financial markets that political turbulence is unlikely to derail the global climate agenda. However, serious financial commitments are needed if countries are to meet the ambitions goals set at COP21 and thereby avoid the catastrophic, irreversible environmental impacts that leading scientists predict.
Michael Wilkins is Head of Global Environmental & Climate Risk Research at S&P Global Ratings.
Read the S&P report Green Finance: Scaling Up To Meet The Climate Challenge