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Sustainable finance at the heart of the fight against climate change

After 2017, a year marked by an unprecedented series of climate disasters, climate change is the primary global challenge we have to tackle together. Today, international commitments place us on a trajectory of over 3°C global warming, which is a long way off the objectives of the Paris Agreement adopted two years ago, which aims to limit rising temperatures to below 2°C, 1.5°C if possible. We can therefore see that much greater efforts are needed – a real revolution in our production and development methods.

Finance must play a key role as a driving force at the heart of this revolution. This role is crucial to stimulate the deployment of energy efficiency and low carbon projects. Billions worth of investments need to be redirected to bring about this change in our economic modelling.

Major financial operators and investment funds thus have a key role to play and must be involved in all discussions and reflections. This was precisely the aim of the One Planet Summit held on 12 December in Paris, which sought to rally the COP21 stakeholders and to bring global funds together to tackle climate change.

Today, the financial community is engaging with climate issues. It is a grassroots movement, and the number of investors involved in fighting climate change by reducing the carbon footprint of their portfolios is growing very rapidly. It is already bringing together the largest fund managers, such as the Norwegian sovereign wealth fund, but also AXA, Allianz, BNP Paribas, etc.

In this context we can see constructive approaches developing, based on dialogue between investors, sometimes grouped together within coalitions, and businesses. Investors are showing willingness to engage in dialogue with businesses to contribute to the strategic choices which will enable capital allocation to be shifted towards sustainable projects. BlackRock is a good example of this approach.

Progress on transparency and disclosure of financial information relating to climate issues has also been significant over the past year. Thus, the Financial Stability Board (FSB)'s task force, known as the Task Force on Climate-related Financial Disclosures (TFCD), has submitted its final report with a series of recommendations on information to be included in the financial report; there are 11 aspects of disclosure covering four areas – governance, strategy, risk management, and metrics and targets.

In terms of tools, we can see that the green bonds market has developed fast: in 2017 a record EUR 120 billion euro of bonds were issued, and some experts expect the EUR 165 billion threshold to be crossed in 2018.

The issue of reflecting climate risk in financial analyses and the insurance industry has become crucial. The IMF now incorporates climate risk into its macroeconomic models and scenarios and identifies the delay in tackling climate change as one of the main risks which could derail world growth. Large credit rating agencies such as S&P are also considering the issue of environmental and climate risks and their impact on credit rating. They believe that we are very likely to see multiple business downgrades in the future because of these risks. Lastly, there is a growing demand for labelling and indexes for financial products dedicated to fighting climate change and to the energy transition.

Mobilising public and private sector financing and creating an innovative framework to develop sustainable finance

Development financing is crucial if the transition to a low carbon economy is to be successfully achieved. It is essential to develop innovative financial instruments to take account of climate risks and actions at the time when an investment is assessed, and to find financial models that allow future value to be assessed more effectively.

We must develop innovative financing tools and the relevant incentives to speed up deployment of low carbon technologies. The barriers that are still there today – cost and financing issues – need to be addressed.

The Action Plan for Putting the Financial Sector at the Service of the Climate, to be unveiled by the European Commission in March, following the submission of the report by the High-Level Expert Group (HLEG) on Sustainable Finance, should allow further progress to be made on sustainable finance and boost the market for green financial products, in particular incorporating a green supporting factor, establishing European green labels and a classification system for the green economy

About the author:

Anne Chassagnette

Member of the Employers’ Group

Engie Group