We are in a climate emergency. We must act fast to keep global warming below 1.5°C and avoid the worst impacts of climate change. This requires a major transformation of our economies and societies, from fossil fuels to renewables, from waste to circularity, from high to low carbon. We must also help those most vulnerable to cope with the impacts of climate change.
But we cannot do this alone. We need everyone to join forces: governments, businesses, civil society and individuals. And we need money to make it happen.
That's why the World Economic Forum (WEF) 2024, taking place this week in Davos, Switzerland, is an important moment for climate finance. More than 100 countries, international groups, civil society organizations, experts, activists, social entrepreneurs, and media are gathering in the Swiss ski resort for the 54th WEF, whose theme is "Stakeholders for a Cohesive and Sustainable World."
Among them are some of the world's top financial and political leaders, including Li Qiang of China, Emmanuel Macron of France, Jeremy Hunt of the United Kingdom, Antony Blinken and Jake Sullivan of the United States, Javier Milei of Argentina, Sam Altman of OpenAI, Kristalina Georgieva of the IMF, Ajay S. Banga of the World Bank, and Ngozi Okonjo-Iweala of the WTO.
They have a great opportunity and obligation to raise the trillions of dollars needed for a sustainable future. Nigel Green, CEO of deVere Group, says: "The vast financial sector is the only source of the trillions of dollars needed for a sustainable future, so it is vital that Davos 2024 leaders push for the rapid unlocking and deployment of private finance.
Public finance alone is not enough to meet the climate challenge. The UN says we need an additional $2.5 trillion every year to meet the Sustainable Development Goals, which include climate action. The public sector can provide some of the money, but it also needs to leverage the private sector, which has much more capital.
Creating the framework to define and measure climate-smart investments
How can this be done? One way is to create a clear and consistent way to define and measure climate-smart investments. This is what the Sustainable Finance Action Council (SFAC), a group of Canada's 25 largest financial institutions, proposed in its Taxonomy Roadmap Report released earlier this year. The report includes a Canadian Green and Transition Financial Taxonomy Framework, which seeks to provide standardized and science-based definitions of green and transition investments based on the 1.5°C goal. The framework is supported by the Institute for Sustainable Finance and the Canadian Climate Institute as independent Core Knowledge Partners.
A taxonomy can help investors find and compare the environmental impact and performance of different projects and activities, and allocate their money accordingly. It can also help policymakers design incentives and regulations to support green and transition investments, and monitor the progress and results of their policies. A taxonomy can also help to improve
communication and trust between different stakeholders in the market.
But a taxonomy is not enough. We also need to align the financial system with the long-term goals of the Paris Agreement and the SDGs, and ensure that the risks and opportunities of climate change are well priced and presented. We also need to encourage innovation and collaboration among financial actors, and provide them with the tools and advice to integrate environmental, social and governance (ESG) factors into their decisions.
There are already many good examples and actions in this area, such as the Task Force on Climate-related Financial Disclosures (TCFD), the Principles for Responsible Investment (PRI), the Net-Zero Asset Owner Alliance, the Green Bond Principles and the Equator Principles. These voluntary standards and frameworks can help financial institutions align their portfolios and operations with climate goals and report on their performance and impact. They can also help build a common language and understanding among different stakeholders and increase market confidence.
But voluntary action is not enough. We also need strong and clear policy signals and regulations from governments to create a fair and stable environment for investors. Governments can use a variety of policy tools, such as carbon pricing, subsidies, mandates, standards and disclosure requirements, to steer the financial sector towards sustainability. They can also use their public funds to leverage private finance through guarantees, risk-sharing mechanisms, blended finance, and public-private partnerships.
The good news is that many governments are already acting on climate finance as part of their recovery plans from the COVID-19 pandemic. According to the World Resources Institute, more than 30 countries have announced green stimulus packages totaling more than $1.8 trillion. These include investments in renewable energy, energy efficiency, clean transportation, nature-based solutions, and green innovation. These investments can create more jobs, increase economic growth and improve social welfare compared to traditional options.
The green share of the global recovery is only about 18%.
But we still have a long way to go. The green share of the global stimulus is only about 18%, and many countries are still supporting fossil fuels and other polluting sectors without any conditions or safeguards. The stimulus packages are also mostly focused on short-term recovery and not enough on long-term change. There is a risk of locking into unsustainable and carbon-intensive ways of doing things and losing the chance to rebuild better.
