The financial sector must be an engine of change if we are to achieve the objectives of COP26

It’s no secret that governments and businesses need to do more if we are to reduce the adverse effects of climate change, as recent discussions at COP26 have clearly shown. Climate change is not just a global crisis affecting us all; it is a global crisis that all stakeholders, from governments to businesses to individuals, can play a key role in tackling.

But it begs the question: who is best placed to lead policy and finance around climate change? Is it governments, who can put policies in place, but perhaps lack key funding or influence over companies? Are these academics who bring innovative research and an understanding of how to solve these problems, but who may find it difficult to persuade policy changes or a reallocation of capital? Or are they companies, which may have the funding, but lack the incentives to divert resources to climate strategies?

Governments, who don’t care about profits or pleasing their stakeholders, are in a good position to lead climate initiatives, but some of them lack the knowledge or funds to invest in climate solutions. This particularly applies in low-income countries, which are often the most affected by climate change, yet have fewer resources to tackle it.

A financial framework for a sustainable future

Global flows of governments and businesses are needed to finance their transition to a low-carbon economy, but emerging markets have not received the required amount of capital. This must change. Local and foreign investors, as well as governments, should invest in building renewable infrastructure in emerging markets, as well as adaptation and mitigation strategies.

Climate finance frameworks need to evolve, barriers to foreign investment need to be removed, and bolder government policies need to be adopted. All pillars and sectors of society must come together to develop clean energy in emerging economies and to achieve a sustainable future for countries around the world.

An industry is in a unique position. The financial sector has both the capital and the incentive not only to sustain, but also to actively drive real change. And yet, overall, it is still not doing enough to meet the key targets set to tackle climate change and reverse (or halt) the devastating impact it has already had.

Often asset managers, hedge funds and other players in the financial industry are looking to invest in climate solutions, but they should go beyond green or ESG labeled products because there are many decarbonization initiatives that do not fit perfectly into the green category.

To achieve this green status, companies often part with dirty assets and remove them from their balance sheets, giving the impression that they are effectively tackling climate change. However, these projects could end up with unregulated or governed private operators, which would not solve this problem. We must methodically decommission certain assets and invest in green and transitional activities if we are to achieve systemic decarbonization.

Steps towards energy transition

However, one thing that businesses, as well as governments, often miss is exactly how to invest in climate and transition solutions, which are most effective, and how much investment is required to make those solutions viable. This is especially true in low-income countries where there is less data available and less evidence of the success of previous initiatives.

This is why, alongside my colleagues from Center for Climate Finance and Investment (CCFI) of Imperial College Business School and the International Energy Agency (IEA) work on clean energy pricing in listed and unlisted renewable markets. Our common goal is to bring more transparency and provide more data that will help financial institutions and policy makers play a role in the energy transition.

Shifting to a cleaner and more resilient power system will require mobilizing capital for renewable sources of generation, as well as investments in infrastructure and system flexibility. We are working with the IEA on our third study, which focuses on unlisted markets, which represent more than half of the revolving investment universe available to institutional investors.

The financial sector is in a unique position. Financial institutions can use their bank balance sheets and investment pools to finance and invest in decarbonization initiatives, especially in low-income countries. The power of finance and investment enables the financial sector to be an effective partner with governments, businesses and academics. To truly achieve our COP26 goals, the financial sector must be a driving force behind these initiatives.

Mili Fomicov, Research Associate, Center for Climate Finance & Investment at Imperial College Business School.

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