The importance of financing a sustainable future
While climate change may have taken a back seat in a news cycle dominated by Covid-19, war and the cost-of-living crisis, the risks and threats associated with our warming planet remain the biggest long-term threat to our combined economic future.
By Sunil Kaushal
Banks and financial institutions will be critical in managing the risks through, for example, financing sustainable infrastructure, supporting the energy transition and investing in green innovations.
In fact, the banking industry has a responsibility to bridge top-down and bottom-up approaches to net-zero and help the public and private sectors realise the vast opportunities the energy transition and the move to sustainable infrastructure promises.
We can do that by providing capital to finance investment in renewables, climate adaptation technologies and the transition to a ‘circular economy’ which encourages sustainable use of resources.
According to EY, financial institutions recognise that the transition to net zero will involve more than investments and underwriting for “green” assets and businesses such as renewables and electric vehicles. To achieve net zero across the whole economy, legacy carbon intensive assets and companies will require financing to help them transition to a cleaner future.
For businesses, this means a fundamental change to operations, and that, in turn, requires capital. Insurers, lenders and investors will play a crucial role in making that capital available and in incentivising and supporting their clients and investees as they make their transitions.
While stimulating growth through investment in roads, buildings and power supplies isn’t a new strategy, now it offers an opportunity to redefine the traditional playbook and focus on investing and financing sustainably for the longer term.
Finance fit for the future
Creating sustainable and climate-friendly infrastructure will, however, require finance that is fit for the future. There is a growing concern, for example, around stranded asset risk – particularly for long-term investments such as infrastructure.
Infrastructure projects need to consider risks 10 years and beyond into the future, many of which may not be immediately apparent. These risks include rising sea levels, increasing temperatures, drought, and coastal erosion. There are also financial and economic risks associated with making investments outside an ESG framework, this includes changes to regulatory settings that may disadvantage or penalise these investments.
Projects that are climate adapted from the outset reduce some of these risks and are more likely to stand test of time, so banks will need to take into account the potential climate risks over the lifespan of the project to ensure resilience and protect investments.
Sustainable infrastructure projects, however, are traditionally more difficult to make bankable. With a bit of thinking, though, there are usually profitable solutions. For example, in a renewable energy plant you have clear cash flows linked to the price of generated energy or for an energy efficiency improvement project, you have energy savings which can be translated into cost savings, and they can repay financing.
The need for action from finance providers is to not only decarbonise their own balance sheets but also to help businesses in the real economy move towards a sustainable future. A successful net-zero transition must be just, leaving no nation, region or community behind and, despite the hurdles, action needs to be swift. To meet the 2050 goal, we must act now, and we must act together: companies, consumers, governments, regulators and the finance industry must collaborate to develop sustainable solutions, technologies and infrastructure.
By Sunil Kaushal, CEO of Standard Chartered Africa and Middle East (AME)
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