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FORESIGHT — 10 Climate & Energy

Getting the finance to flow





Development banks struggle with fossil fuels

Danish firms want rewarding for climate action

A bond for the energy transition

EU ushers in gamechanging financial rules






Coronavirus crisis can catalyse clean energy investment

FORESIGHT Climate & Energy SPRING / SUMMER 2020


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The world was going into a tailspin as FORESIGHT Climate & Energy went to press as emergency measures to tackle the spread of the Covid-19 virus were implemented, causing panic in the markets and increasing the likelihood of a global recession. As shops shut, factories closed and planes ground to a halt, governments scrambled to agree financial packages to bail out companies and support individuals, with some calling for the clean energy transition to be bumped down the political and economic pecking order. While knee-jerk reactions in certain quarters focused on propping up twentieth-century industries and business models, more forward-thinking organisations and individuals were highlighting the crisis as an extraordinary moment to change the way we work and finance the world — for our health, the climate and prosperity. The effects of Covid-19 are likely to be temporary, while the threat posed by climate change will remain, says Fatih Birol, head of the International Energy Agency (IEA). “We should not allow today’s crisis to compromise our efforts to tackle the world’s inescapable challenge,” he states, underlining the potential of stimulus packages to “build a secure and sustainable energy future”. Large-scale investment to boost clean energy technologies should be “a central part of government plans,” adds Birol. IEA analysis shows governments directly or indirectly drive more than 70% of global energy investments. The reaction to the Covid-19 virus and lifestyle restrictions accepted around the world also demonstrate that when we agree as a society something is an emergency, we deal with it. It is clearly easier for people to accept drastic steps for a presumed short period than the sustained lifestyle changes that reducing greenhouse gas emissions require. But the coronavirus crisis should be a wake-up call for the world, showing what can happen when experts and science are ignored. It can be the trigger needed to take climate change forecasts seriously. The real block to climate action is our collective choice not to act. We now have the opportunity to turn that mindset around, using the pots of money being released by governments to support the clean energy transition and ensure jobs and prosperity for today’s workers and future generations. Pushing back against climate action will help no-one in the longer term. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty,” said UK Prime Minister Winston Churchill. Now is the time for us to grasp the full range of opportunities offered by this emergency and make the right financial choices to reduce the threats posed by climate change and increase economic and societal resilience.

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Philippa Nuttall Jones EDITOR-IN-CHIEF







Denmark’s companies want favourable terms from government in return for implementing climate action initiatives

Some parts of the investment industry see the dangers ahead, but more and faster action is needed to avert disaster





Sustainable finance is growing, but more needs to be done to create demand by both the public and private sectors PAGE 10


The challenge of shifting entire economies away from climate-wrecking activity requires a more holistic approach from development banks PAGE 16


What can, and should, central banks do to support the shift to a low-carbon society?


Rigorous vetting and dialogue between investors and issuers of “transition bonds” for brown energy can help avoid greenwashing and investments that lock-in fossil fuels PAGE 40


Unanimity is rare in Brussels. But an EU taxonomy to define green investments has received almost unanimous praise PAGE 56


Europe is considering introducing a border carbon tariff on goods imported from regions where carbon pricing is lacking PAGE 62

The articles in this edition of FORESIGHT Climate & Energy were written prior to, or at the beginning of, the Covid-19 pandemic



The Big Picture Ice caps and glaciers are melting at alarming rates around the world. In February 2020, Antarctica recorded its hottest ever temperature when the thermometer surpassed 18°C. The unseasonal heatwave caused extensive ice melt. Stopping the ice loss means ending financial flows for fossil fuels and channelling more money to renewables and clean technologies. PHOTO Rolf Gelpke


Ending the global economy’s addiction to fossil fuels will require trillions of dollars of investment — and it will need the financial sector to identify, direct and manage those investments. While the supply of sustainable finance is growing, more needs to be done to create demand by both the public and private sectors

Getting the finance to flow


ble long-term risk which does not fit with the investment time horizons of the finance sector. It flies in the face of modern portfolio theory.” A recent poll of sustainable finance specialists carried out by the Global Sustainable Investment Alliance found that 87% do not believe markets are correctly pricing climate risk and 59% said they are not satisfied with the climate disclosures made by listed companies.

NEW CONVERSATIONS Efforts by concerned investors and regulators are, however, beginning to sweep away these blockages to the flow of finance. Investor efforts date back to the launch of the Carbon Disclosure Project in 2000, and efforts by regulators are most notably seen in the work of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD, chaired by former Bank of England chairman Mark Carney, has produced recommendations for companies and investors to consider climate change scenarios and report how they are positioning themselves in anticipation. “The TCFD has changed the discussion from one focused on historical, loss-based risks to a discussion of forward-looking risks,” says Eric Usher, Geneva-based head of the UN Environment Programme Finance Initiative (UNEP FI). The TCFD is only the start of the process, however, Usher continues. “We don’t just need disclosure, we need disclosure and action,” he says. The frameFORESIGHT

Incorrect pricing A poll of sustainable finance specialists found 87% do not believe markets are correctly pricing climate risk and 59% said they are not satisfied with the climate disclosures from listed companies

TEXT Mark Nicholls ILLUSTRATION Trine Natskår


ustainable finance is booming. Central bankers are raising the alarm over climate risk. Some of the world’s largest investment managers are warning the companies in which they invest that they will begin applying pressure on those who pay too little regard to environmental, social and governance (ESG) issues. Yet investments in renewables continue to lag, fossil fuel emissions continue to rise and most companies and their shareholders continue to prioritise quarterly profits over long-term sustainability. Investment in wind, solar and nuclear needs to more than double — from around $620 billion in 2018 — over the period to 2030 if the world is to meet the goals of the Paris Agreement, believes the International Energy Agency. Similarly, the International Renewable Energy Agency estimates that $22.5 trillion needs to be invested in renewables by 2050. Power generation is not the only field requiring investment. The Transition Pathway Initiative, which brings together pension funds managing $18 trillion, reported in February 2020 that fewer than one in five of the largest listed industrial companies are on a pathway to hold global warming to below 2°C. What explains the paradox between willing transition finance and the lack of demand for it and how can finance flow at the scale and speed needed to deliver the low-carbon transition? “At the macro level, there is a disconnect,” says Sean Kidney, CEO of the Climate Bonds Initiative. “Climate change is a palpa-


The world’s development banks are funnelling ever-greater volumes of finance into clean energy — but the challenge of shifting entire economies away from climate-wrecking activity and towards actions that align investment goals with those of the Paris Agreement requires a more holistic approach


he world’s leading development banks are becoming climate finance powerhouses. In 2018, they directed $43 billion to projects or programmes in developing countries with the purpose of mitigating climate change or adapting to its consequences. Their investments attracted an additional $68 billion in co-financing. At the UN Secretary General’s summit in New York in September 2019, nine of the leading multilateral development banks (MDBs) pledged to increase their annual climate change investments to $65 billion by 2025, 50% above current levels. Many are continuing to support fossil fuel projects, however. Development banks directed $50 billion of funding to fossil fuel projects in the five years to the end of 2018, almost as much as the $58 billion they invested in clean energy, show figures from Oil Change International, a US-headquartered

non-profit organisation. Few of the banks can claim their portfolios are compatible with the Paris Agreement goal of holding global warming to no more than 2°C above pre-industrial levels, say campaigners. “In general, development banks have got much better at climate change over the last ten years,” says Matthew Huxham, a London-based energy finance specialist at the Climate Policy Initiative, a global think-tank. In particular, they have made progress in using their funding to reduce the risk of clean energy projects and attract other sources of finance as co-investors, he adds. “This, however, only addresses how to get more money into green — it does not address what happens to existing brown investment.” The problem lies with their own portfolios and within client countries, continues Huxham, though signs of an awakening are apparent. “The leading development banks are now looking at both the green

COULD DO BETTER: Banks charged with investing public money in economic development are increasingly concerned about the risk climate change poses to financial assets, but few are redirecting investment in line with the goals of the Paris Agreement. Too many decisions are based on outdated knowledge about alternatives to fossil fuel projects. LEADERSHIP NEEDED: Heads of development banks should join politicians and show leadership in diverting money from fossil fuels to green energy and stimulating energy savings. KEY QUOTE: Leading development banks are looking at both green and brown investment, and are looking at climate-related financial risk. 16


TEXT Mark Nicholls ILLUSTRATION Trine Natskår

Development banks struggle with fossil fuel lock-in


Christine Lagarde, the European Central Bank’s new leader, talked up support for the energy transition in her pitch for the Eurozone’s most powerful economic job. She has launched a year-long review of the bank’s strategy, but as political pressure for climate action intensifies, what can, and should, the ECB and other central banks do to support the shift to a low-carbon society?

Central banks swept up in climate action debate ity can be taken into account, particularly how environmental sustainability should be included. “The primary objective of the ECB is to maintain price stability in the euro area,” says the bank. “As part of our strategy review, we will assess where and how climate change impacts our policies in terms of risk management, financial stability, market operations and banking supervision.”

USEFUL BUT MARGINAL There are plenty of ideas on what the ECB can and should be doing to combat climate change. Some have nearly universal support. Others split the finance community down the middle. Any changes to the bank’s monetary policy would require the support of Eurozone central bankers in the ECB’s governing council. The most progressive thinkers in this group have been the Bank of England, the Banque de France and De Nederlandsche Bank (the Nether-

PRINCIPLE AIM: The clean energy transition is a priority of the European Central Bank, but price stability is generally regarded as the main task of the ECB and other central banks. LACK OF INDEPENDENCE: Some central banks in Asia have a broader remit than the ECB, offering preferential loans for investments in the energy transition, but are still not independent and follow where governments lead. KEY QUOTE: Central banks cannot be a substitute for government action on climate change. 22


TEXT Sonja van Renssen PHOTO © Lemrich/European Central Bank


he said all the right things. At her hearing in the European Parliament’s economic and social affairs committee in September 2019, one-time French finance minister and former head of the International Monetary Fund, Christine Lagarde, won over the parliament’s newly reinforced green wing with her pledge to prioritise climate change and better public communication. She got the committee’s green light for the Eurozone’s top economic job, president of the European Central Bank (ECB), despite not being an economist and saying very little about her ideas for monetary policy. Eight months into her mandate, we are still waiting to hear more. And we will need to wait a little longer. On January 23, 2020, Lagarde launched a strategic review of the ECB’s policies whose results will only be unveiled at the end of 2020. An explicit part of the review is to explore how considerations beyond the bank’s primary mandate of price and financial stabil-

Christine Lagarde President of the European Central Bank


Denmark’s largest business organisation has launched a plan supporting its government’s ambition to reduce emissions by 70% by 2030, but companies are uncertain about how it will be financed. They want favourable terms from government in return for implementing climate action initiatives

Danish firms want regulatory rewards for climate action

ment in research and development. The government will also set aside €385 million in 2030 to compensate for losses to its coffers from reduced electricity and surplus heat tariffs. By making Denmark a low-carbon technology leader, the plan as a whole is expected to stimulate national growth, adding at least €14.7 billion to the economy by 2030 and creating 120,000 new private sector jobs. The Danish business sector is “signing up to invest massively in decarbonisation efforts and clean energy technology,” says Troels Ranis, sector director at DI. “We present a clear plan for how growth and the green transition can go hand in hand.” But the plan is short on specifics for reaching the 70% goal. “We cannot accurately say how much companies will have to and are planning to invest,” says Ranis. The lack of specifics prompts energy expert Brian Vad Mathiesen from Aalborg University to describe the plan as a “vague political wish list”. He supports its ambitions and intentions, but decries the lack of detail. “Industries are already investing billions in the green transition and the plan fails to examine where money should be invested, how much and the best ways to invest.”

THE PLAN: The 2030 climate action plan for business presented by the Confederation of Danish Industry proposes green tax reforms in the belief that regulatory and fiscal design can mitigate any potential risks of slower economic growth when companies divert investment into funding the green transition. EXPERT VIEW: More clarity is needed about what exactly needs financing to achieve ambitious carbon reduction goals and what is the best approach. Legislation is important to push companies to adopt change in-house and throughout their value chains. KEY QUOTE: “Industries are already investing billions in the green transition and the plan fails to examine where money should be invested, how much and the best ways to invest.” 28


Flying high Many Danish companies see a clear business case for decarbonisation. Ulrik Stridbæk from energy company Ørsted and Simon Pauck Hansen, vice president of Scandinavian Airlines, explain their climate plans

TEXT Anna Fenger Schefte PHOTO Sara Galbiati

“Together we create green growth” is the title of the 2030 climate action plan from the largest business organisation in Denmark, The Confederation of Danish Industry (DI), representing around 11,000 companies. The initiative, revealed in September 2019, presents a 70% by 2030 carbon reduction target mirroring the aspirations of the Danish government’s Climate Act. Prime Minister Mette Frederiksen praised the plan as a “giant leap forward” and plenty of cash has been pledged to create change, but energy experts warn it could fail to live up to expectations without a better understanding of exactly which projects need most investment and how best they can be financed. The 2030 statement of intent is a “together we move faster” statement from business to politicians and a financial plan outlining how Denmark can achieve its goal. The plan calls for public funding of green tax reforms grounded in the belief that regulatory and fiscal design can favour companies willing to fund the green transition, without impeding growth. In the plan, public funding will amount to €2.16 billion from 2020-2030 to realise 31 decarbonisation proposals. This sum includes €135 million a year in subsidies and grants to promote energy efficiency in industry and €337 million annually to increase invest-


As green bond issuance soars, investor attention has turned to financing “brown” projects to help carbon-intensive companies improve environmental credentials and pursue more sustainable business models. A rigorous vetting process and dialogue between investors and issuers of a new class of “transition bond” can help avoid greenwashing and investments that lock-in fossil fuels


panish oil and gas major Repsol helped break the ice for carbon-intensive bond issuers in 2017, tapping the green bond market with a €500 million issue to finance efficiency upgrades at its refineries. While proceeds from the bond were earmarked for projects targeted to cut 1.2 million tonnes of CO2 emissions, it was excluded from major green bond indexes. Investors were sceptical Repsol’s bond was sufficiently “green” since these projects also extended the life of fossil fuel assets. Demand for such pale-green bonds, however, has created interest in so-called transition bonds. They can be issued by oil and gas companies, as well as cement, steel, mining and other “brown” carbon-intensive industries looking to fund projects to cut their carbon footprints with an eye to becoming green. Transition bonds are all the rage, or at least the idea of them.

AXA Investment Managers, an arm of French insurer AXA, has called for the creation of a new transition bond asset class separate from green bonds and the International Capital Market Association (ICMA) in 2019 set up a working group on transition finance. “There has been very rapid growth in discussions of the concept of a transition bond among issuers and underwriters,” says Stephen Liberatore, head of the environmental, social and governance (ESG) team at US asset manager Nuveen. Only a small number of what are considered to be transition bonds have come to the market. Among these was a €500 million bond sold by Italian gas group Snam to investors in February 2019 to finance biogas and biomethane investments and efficiency upgrades for existing infrastructure. Liberatore says Nuveen did not invest in either the Snam or the Repsol bonds. The projects they were

PALE GREEN: Transition bonds can be issued by oil and gas companies, as well as cement, steel, mining and other “brown” carbon-intensive industries looking to fund projects to cut their carbon footprints with an eye to becoming green. GREEN BOND BOOM: A record €255 billion in green bonds and loans was issued in 2019 and €350 billion to €400 billion are expected in 2020. Transition bonds, which can complement green bonds and demonstrate the step-by-step process of the clean energy transformation, are an idea whose time may have come. KEY QUOTE: Transition bonds need to be combined with rigorous targets, measurements and scrutiny to avoid the risk of greenwashing and companies seeking to buy time we don’t have. 40


TEXT Heather O’Brian PHOTO Russ Heinl / Shutterstock

A pale green bond for the energy transition

Dirty fuel Alberta Tar Sands, Canada

funding “were undoubtedly better for the environment because they made both businesses more energy efficient”, he says. “But we aren’t looking to extend the life of fossil fuels.” For transition stories, the asset manager wants to be sure investments result in fundamental changes in business processes. That is in addition to routine green bond requirements like transparency, disclosure and the ability to measure their impact in helping a company decarbonise, Liberatore says.

CREATING CONFUSION Bram Bos, lead portfolio manager for green bond strategy at Netherlands-based NN Investment Partners, says the rise of labels like transition bonds and sustainability-linked bonds creates confusion. “One of our concerns is that dirty issuers could take advantage of this confusion to join the sustainable fixed-inFORESIGHT

come sector for marketing purposes or to benefit from low yields with no real intention of changing their business models,” he says. The debate over transition bonds comes at a boom time for the green bond sector. A record €255 billion in green bonds and loans was issued in 2019 and €350 billion to €400 billion are expected this year, says the UK-based Climate Bonds Initiative. “There is a vast demand for green bonds,” states Sean Kidney, head of the NGO. Whether that demand should be partially satisfied by transition bonds is proving controversial. Isabelle Laurent, deputy treasurer and head of funding at the European Bank of Reconstruction and Development (EBRD), believes creating a new asset class for transition bonds would be confusing and “unhelpful”. ICMA’s green bond principles and the EU’s sustainable finance taxonomy (EU ushers in 41


The early months of 2020 were notable for the number of major announcements by leading investment managers putting the climate crisis at the forefront of their investment policies. Clearly, some parts of the investment industry see the danger ahead, but more and faster action is needed to avert disaster. The G7 could lead the way by putting its $100 billion a year support for fossil fuels to better use



tors into how it invests the $7 trillion of assets it manages for its clients. As an asset manager, it will eject all companies from its actively managed portfolios that get 25% or more of their revenues from coal used in power plants, stated CEO Larry Fink on the eve of the World Economic Forum in Davos, Switzerland. “Climate change has become a defining factor in companies’ long-term prospects,” he wrote. Equally weighty were comments in Davos from Mark Carney, then governor of the UK central bank, the Bank of England, and now the UK Prime Minister’s climate advisor. Greenhouse gas emissions are no longer a niche investment issue, said Carney. “[They] will determine where capital is flowing, obviously influenced by public opinion, pressure, and government policy as well. But that moving from the periphery to absolutely the mainstream is what is going to drive transition and, might I add, jobs.” On the same theme, after meeting investors in Davos, Allianz CEO Oliver Bäte said he would try to persuade the Net-Zero Asset Owner Alliance, a group of insurers and pension funds seeking carbon-neutral investment portfolios by 2050, to double its commitment of $2.4 trillion by mid-century in low carbon products. Sovereign wealth funds, such as Norway’s, FORESIGHT

Waste of money Coal developers risk wasting more than $600 billion because it is already cheaper to generate electricity from new renewables than from new coal plants in all major markets TEXT Ros Davidson PHOTO Sara, Peter & Tobias


profound shift away from the global financing of fossil fuels is beginning, but much remains to be done. The developed world may be reaching a tipping point as governments, investment and insurance institutions flee the climate and financial risk of coal and to a lesser degree oil and gas. But in the newly developed world the trend has barely started, notably in countries such as China, home to half the world’s coal emissions, or India, another leading emitter. Turning off the spigot of fossil fuel financing will be no easy matter. “Is it one single thing or is it many different levers none of which will do the work alone? It is like slowly turning a huge tanker 180 degrees — we may only be turning one degree a year and that is too slow. There is no one silver bullet,” says Michael Mehling of the Massachusetts Institute of Technology (MIT), who has advised the European Commission, the OECD and the World Bank on energy issues. The first few months of 2020 saw major announcements regarding fossil fuel investments, even among US financiers, hardly known for their radical views. New York-based BlackRock, the world's largest fund manager has announced a suite of measures to further integrate sustainability and climate change fac-

Andreas Blacher Germany's last hard coal mine, Prosper-Haniel in the Ruhr Valley, closed after 155 years of service. PHOTO The Merge by Sara, Peter & Tobias

Guido Pollak


FOSSIL FINANCE: The world’s largest investment funds have provided $713.3 billion in loans, equity issuances and debt underwriting services to fossil fuel projects from 2016 to mid-2019, all of it since the 2015 Paris Agreement. MARKET SHIFT: Driven by fears of stranded assets and catastrophic climate change, the investment industry is starting to step away from fossil fuels and other environmentally damaging activities. One of the most notable announcements in the first months of 2020 was a declaration by New Yorkbased BlackRock, the world's largest fund manager, that it will more aggressively integrate climate change in how it manages its $7 trillion of assets. KEY QUOTE: Greenhouse gas emissions will determine where capital is flowing, influenced by public opinion, pressure and government policy. As climate concern moves from the periphery of investor thinking to absolutely the mainstream it will drive the transition and associated jobs.

the world’s largest and funded by revenues from oil and gas, should follow suit, said the insurance leader. In February, BP vowed to become a net zero company by 2050, slashing emissions from its oil and gas production, halving the carbon intensity of its products, measuring methane emissions from its major oil and gas processing sites by 2023 and halving the methane intensity of its operations. Additionally, the company said it will lobby for carbon taxes globally and launch a new team to “help countries, cities and large companies decarbonise”. Until the company reveals its strategy and near-term plans to make good on this commitment in September, it is difficult to assess whether the announcement is “a watershed moment or a whitewash,” says Kathy Mulvey, from the Union of Concerned Scientists, an NGO.

THE DIVESTMENT DILEMMA The campaign to pull investor assets out of fossil fuels, launched by students as a moral call to climate action in 2011, has become a mainstream financial movement, mobilising trillions of dollars in support of the clean energy transition, says Arabella Advisors, a philanthropic consultancy. In September 2019, the University of California announced plans to divest its $83 billion in endowment and pension funds from fossil fuels, sending ripples throughout US higher education. At the end of 2018, nearly 1000 institutional investors in 37 countries with $6.24 trillion in assets had committed to divest, up from $52 billion four years earlier. The trend is led by insurers, pension funds and sovereign wealth funds, with the insurance sector heading the pack, having committed to divest over $3 trillion in assets. FORESIGHT

Brian Moynihan, CEO of Bank of America, the world’s ninth largest bank as measured by assets, insists investment in oil and gas must continue to enable these companies to be part of the climate change solution. “We should lend to those companies to help them make progress faster, rather than divest from them,” he says. Supply side policies to reduce financing are “nowhere near there” for fossil fuels, stresses MIT’s Mehling. Government support for fossil fuels from G7 members totals more than $100 billion a year, says Han Chen, international energy policy manager at the National Resources Defence Council (NRDC), a US NGO. This considerable sum is despite pledges to end such subsidies by 2025. China, the world’s largest financier of coal, is not a G7 member. Government fossil fuel subsidies are very inefficient environmentally and fiscally, says Tyeler Matsuo, a senior associate in global finance at the Rocky Mountain Institute (RMI), a not-for-profit organisation. A coal-fired power plant producing electricity at greater cost than renewable energy may be financed instead of a renewables plant simply because of vested interests, she points out. The world’s largest investment banks have provided $713.3 billion in loans, equity issuances and debt underwriting services to fossil fuel projects from 2016 to mid-2019, that is since the Paris Agreement, shows data published in October 2019 by the NGO Rainforest Action Network (RAN). Wall Street’s JPMorgan Chase is the worst offender with some $196 billion in fossil fuel investments. This money has helped the global coal power fleet continue its expansion, particularly in China and the rest of Asia, reveals International Energy Agency (IEA) data released in March 2019. Driven by higher energy demand in 2018, emissions from all fossil fuels increased, with the power sector accounting for nearly two-thirds of all greenhouse gas growth that year. China, India and the US accounted for 85% of the increase, with emissions declining in the US and also Germany, UK, France, Japan and Mexico. Global emissions of CO2 from fossil fuel combustion were flat in 2019, mostly due to a sharp decline in power sector emissions in advanced economies show figures released in February 2020 by the IEA. Global coal emissions declined by 200 million tons of CO2 – a 1.3% decline, says NRDC’s Chen, but oil and natural gas emissions rose. Much more drastic emissions reduction is needed across the board if the world is to meet the commitments of the Paris Agreement. Most scenarios, including by the UN Intergovernmental Panel on Climate Change (IPCC), show coal emissions must fall by around 80% this decade to hold warming at no more 47

Ulrich Muss


“We have had lots of success in getting financial institutions out of coal — that could be replicated for oil and gas”

soaring. This number was double the $13 billion in bankruptcy-related debt the sector filed a year earlier, says the IEEFA. Financiers are finding that Arctic exploration for oil and gas has been an unexpectedly pricey proposition despite vast reserves. Tight environmental regulations in the US Arctic introduced by under former US President Barack Obama, extreme weather and a remote location, as well as vociferous opposition from NGOs and the public, have all combined to raise the direct and reputational costs of Arctic exploration. In 2015, Royal Dutch Shell pulled the plug on its Arctic venture in the region in 2015. JPMorgan Chase remains the biggest banker of Arctic oil and gas, followed by Deutsche Bank and Japan’s SMBC Group. Others are pulling out as the pressure mounts. In December 2019, Goldman Sachs said it would halt future financing of Arctic oil drilling or exploration. Nonetheless, financing for this sub-sector increased from 2017 to 2018, says RAN.

HARDER TO EXIT GAS THAN COAL The financial exodus from coal is no passing fad. In the first six weeks of 2020, 126 significant money institutions around the world — banks, insurers and asset managers — announced new restrictions or exclusions for coal mining and/or power generation. “We have had lots of success in getting financial institutions out of coal — that could be replicated for oil and gas,” says NRDC’s Chen. But even a more modest exit from oil and fossil gas financing will take longer and be far more complicated than for coal given that major oil and gas companies are so powerful politically and are among the largest firms globally in terms of capital investment. Energy emissions can be reduced by the electrification of oil and gas heating and oil-driven transport, as well as reducing energy wastage. But all countries need to act and this is still far from being the case. FORESIGHT

“Tell that to Alberta, the Dakotas and the Gulf countries,” says Mehling, referring to the oil and gas industry in Canada, a major US shale producing region in the US, and the Middle East oil economies.

THREE LEVERS TO STAUNCH THE FLOW Pressure on three levers is needed to turn off the finance spigot to oil and gas, says Greenpeace’s Dallos. First, regulation, incentives and subsidies to limit fossil fuel use must be imposed or improved, and voluntary agreements are inadequate, he says. This change is starting. In late 2019, the Bank of England unveiled plans for a mandatory across-the-board climate risk “stress test” for major UK banks and insurers starting in 2021. France’s financial regulator has also announced it would require banks and insurers to carry out climate change stress tests starting in 2020, having been required to report climate risks since 2016. The European Central Bank is considering doing the same. But even in Europe, where the will to take climate action is strongest, challenges to legislation are widespread, as demonstrated by the “yellow vest” riots in France in 2018. Even when implemented without popular dissent, policy change may not have the intended impact. Vehicle emissions have only decreased modestly in Sweden despite a high carbon price for the transport sector of around $130 a tonne, says Mehling, in part because of the trend for gas guzzling SUVs. Other regulatory solutions could include allowing the securitisation of coal plant retirements with lowcost publicly backed bonds, allowing owners to pay off debt more quickly and cheaply when a plant is retired. Owners could also receive public compensation through a system of “pay to close” coal plants, says RMI’s Matsuo. Likewise, renewable energy projects could be derisked by development finance institutions providing a full or partial guarantee that a utility will honour power purchase agreements. A second lever that must be pulled requires entire financial sectors to face up to the risks posed by fossil fuel investments and transition away from them. Banks, insurers, and asset owners and managers are getting the message, but credit rating agencies, auditors and proxy advisors that vote at shareholders meetings tend to be cautious of major change, says Dallos, adding that divestment discussions are also crucial for the transition. Acknowledgement of climate risk in financial markets must be followed by disclosure of the risk, agrees Mehling. Third, financial players must be pressured to divest by civil society, a potentially effective tack because just a handful of companies are linked to a large proportion of all emissions, meaning successful campaigns could ensure vast emissions reductions. • 51


Unanimity is rare in Brussels. Proposals from the European Commission, the EU administrative body, tend to attract immediate criticism from either business or NGOs. But an EU taxonomy to define green investments has received almost unanimous praise. And while the new rules apply only in Europe, other regions are already taking note


fter 18 months of discussions, EU governments agreed in December 2019 to a common classification system to define environmentally friendly investments. The aim is to generate data that will provide clarity for investors on what is green and help guide companies on their long-term profitability in a world focused on climate action and radical emissions reduction. “While we have a long history of developing products linked to ESG [environmental, social and corporate governance] and carbon emissions, the focus has often been on conduct rather than on what products companies are selling,” says David Harris at financial index provider FTSE Russell. “One of the big problems has been the inability of investors to really understand whether companies are green or not since

many do not break out their environmental services,” he adds. “They may report lighting, but not what percentage of their bulbs are LEDs, or construction companies may not spell out what they earn from flood defences versus other construction projects.” The taxonomy will encourage the flow of capital to companies providing environmental solutions by making it easier for investors to identify green products and reduce greenwashing claims, believes Lars Konggaard, a sustainability and business strategy advisor based in Copenhagen, Denmark. He welcomes the “enhanced degree of standardised and mandatory clarity and transparency” the taxonomy will bring. Under the new rules, investments will have to contribute to at least one of six objectives to be able to qualify as environmentally sustainable. The initial

GREEN RULES: Financial products sold as sustainable in Europe will, from 2021, have to show how they meet environmental objectives, beginning with how they contribute to climate action and the clean energy transition. BENEFITS: More and better data will encourage the flow of capital to companies providing environmental solutions, make it easier for investors to identify green products and reduce greenwashing claims. KEY QUOTE: The taxonomy will significantly accelerate the shift from brown to green as shareholders increasingly call for an end to high carbon infrastructure. For utilities it will no longer be enough to invest half of their capital expenditure in renewables and half in gas, they will need to invest all of it in renewables 56


TEXT Philippa Nuttall Jones ILLUSTRATION Trine Natskår



Europe is considering taking the bold step of introducing a border carbon adjustment tariff on goods imported from regions where carbon pricing is lacking, putting trade right in the middle of its climate ambitions

Using trade measures for climate gain

Solar production - Factory in Tangshan, China 62


TEXT Katie Kouchakji PHOTO Yuangeng Zhang


he EU continues to ratchet up its leadership on international climate action, filling a void left by the reticence of major emitting nations such as the US and China. The trading bloc’s latest response to the mounting climate crisis, the European Green Deal, sets out how member states will collectively pursue the EU’s goal to be carbon neutral by 2050 and addresses all sources of emissions: buildings, transport, energy, industry and food supplies. The goal is regarded as ambitious, but as always the devil is in the details. Key to ensuring that all the emissions reductions within Europe’s borders are not undone by businesses simply moving outside the bloc — so-called carbon leakage — is a proposal to introduce a carbon border adjustment. Essentially the proposal is a carbon tariff on goods imported to the EU from regions where similar climate ambitions are lacking. Since the inception of the EU Emissions Trading System (ETS) in 2005, some industries have campaigned furiously for measures to ensure it does not harm their competitiveness. For years, this opposition led to major CO2 polluters being allocated emissions allowances for free to shield them from the full cost of carbon. Despite various reforms aimed at removing the shield, some sectors are still benefitting, such as power generators in certain EU member states who get free allowances to help them modernise. And concerns about carbon leakage continue, with industries and lobbyists increasingly worried about how going carbon neutral could negatively impact European business. Many cite the manufacture in China of most solar panels and batteries as an example of the perceived leakage problem. Manufacturing costs are lower in China, which has bigger reserves of the minerals needed to make these products.



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FORESIGHT Climate & Energy Spring/Summer 2020  

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