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If governments want to ensure that they can fund the green recovery plans needed to avert the worst impacts of the climate crisis, they’ll have to collaborate with private sector financial institutions.

As governments in Europe, North America and around the world announce trillions of dollars in stimulus to revive moribund economies, many experts are urging them to focus on climate-related efforts that will help the world avert the worst impacts on climate change.

This is a sentiment that has moved from the sidelines to becoming a key recommendation of the International Monetary Fund (IMF). The IMF’s recently released flagship publication in advance of its annual meeting emphasized the power of public investment in uncertain times, noting that raising public investment by 1% can increase private investment by more than 10%. It also noted that “the goal of bringing net carbon emissions to zero by 2050 in each country can be achieved through a comprehensive policy package that is growth friendly (especially in the short term).”

At the same time, institutional investors and asset managers are deepening their commitments to sustainable financing by increasing their investments in the green economy and providing fuller disclosure of their climate-related risks and opportunities.

It’s critical that government officials and business leaders have mutually reinforcing strategies in order to maximize the impact of both public and private financial efforts. Otherwise, governments could pursue investment plans that gain little traction among corporate strategists, while institutional investors may miss out on opportunities created by government programs that would reduce the risk of investing in the emerging clean economy.

While there has been growing focus on the importance of harnessing capital markets to address climate change, government action remains critical, says Sean Kidney, CEO of London-based Climate Bonds Initiative, an international non-government organization working to mobilize debt markets for climate solutions.

“It is not possible for private markets to do this. That is a total fallacy,” Kidney says. “This is not something that is going to be solved by the private market. This is something that is going to be solved by close collaboration between public and private markets.”

Kidney will join a panel of financial experts on Wednesday in a webinar, “Financing Green Stimulus: Opening the Purse Strings,” co-hosted by Corporate Knights and the German embassy in Canada. The virtual conference is part of a series sponsored by the German government; called Building Back Better Together, it looks at green recovery plans in Canada and Europe and highlights risks, opportunities and best practices to ensure those plans are practical and effective.

In a series of white papers released this spring, Corporate Knights advocated that Ottawa allocate $109 billion over the next decade to climate-related spending, with some 40% of that money earmarked over the first two years as part of a green stimulus plan.

That investment would generate an additional $681 billion of spending from private sector sources, for a 7-to-1 ratio of private sector/public sector contribution, according to analysis by Corporate Knights; Ralph Torrie, president of Torrie Smith Associates; and Céline Bak, president of Analytica Advisors. Together, that spending would reduce Canadian greenhouse gas emissions by 242 megatonnes annually by 2030, setting the course for a net-zero-carbon economy by 2050.

Similarly, the Task Force for a Resilient Recovery issued its report this summer, calling for Ottawa to embark on a $55.4-billion green recovery package over five years that would focus on building retrofits, electric vehicle production and infrastructure, clean power, natural infrastructure and adoption of clean technology.

On October 1, the Liberal government announced a $10 billion “growth plan,” which will see the Canada Infrastructure Bank (CIB) focus on five key areas. Some $6 billion of that will go to clean-energy infrastructure, the adoption of EV buses and charging networks, and energy retrofits for buildings. The CIB’s chief investment officer, John Casola, will participate in Wednesday’s web conference on climate-related financing.

The federal infrastructure bank was established to provide public-private collaboration in the financing of major projects in strategic areas of the Canadian economy. “Every dollar of public investment capital from the CIB will increase impact because we attract additional investment from the private sector,” says David Morley, the agency’s head of corporate affairs, policy and communications.

The CIB hasn’t indicated what level of private sector investment it requires before approving financing for a project, or what leverage of additional investment is expects with the $10 billion growth fund.

For the $2-billion building retrofit plan, the CIB indicated it would focus on large real estate owners, both public and private, to help them modernize their buildings and improve energy efficiency. However, residential homeowners – who have seen energy retrofit programs in the past – will likely require grants rather than loans to persuade them to do “deep retrofits,” says Corporate Knights publisher Toby Heaps, adding that a significant early push to scale up residential retrofits would be imperative to bringing the costs down through modularization, so that the momentum can be sustained without hefty public supports.

To pay for the green recovery programs, governments will rely on a mixture of new debt and tax measures. In Europe, there are proposals to tax internet giants like Facebook and Netflix, tax financial transactions, impose carbon border taxes, and extend carbon levies on shipping.

Ottawa could end tax breaks in a number of areas, particularly in high-GHG-emitting sectors, the Corporate Knights Building Back Better proposal said. It identified $240 billion in tax breaks per year, including $40 billion that amounted to “naked examples of corporate welfare, with almost no evidence of increased investment as a result.” As governments move to attract private sector investment in new electric-vehicle plants and other low-carbon industries, offering permanent tax breaks (rather than short-term grants) may prove fiscally unsustainable as clean industry supplants traditional industries as the locus of economic activity.

However, eliminating a tax break rarely results in a gain of $1 in revenue for every $1 “loophole” closed. These tax measures were put in place to help stimulate economic activity. If that activity ends as a result of the loss of a tax incentive, the tax revenue will also be lost.

Most of Europe’s green recovery will be financed through debt, taking advantage of rock-bottom interest rates that central bankers have said will remain in place for the next few years, at least. Canada’s Liberal government has also indicated that it’s prepared to borrow heavily to finance the recovery, though it has not released a budget that would provide such detail. (Finance Minister Chrystia Freeland is due to release a financial update this fall.)

There is growing interest in green bonds, which appeal to institutional investors and other asset managers that have made commitments to reduce the carbon intensity of their portfolios. Germany issued its first sovereign green bond in September; the €6-billion, 10-year offering was wildly over-subscribed. The EU plans to issue €225 billion green bonds to finance its recovery.

Last year saw a record US$263-billion in green bonds issued globally, up from just US$1 billion a decade ago, according to Moody’s Investors Service. The bond-rating service projects that up to US$225 billion in green bonds will be issued this year, despite a COVID-19-related slump in the second quarter.

There are two caveats concerning green bonds: some critics argue they provide little benefit in terms of financing costs and are essentially a marketing exercise, though there is emerging evidence that green bonds allow issuers to get even cheaper cost of debt. As well, there need to be clear guidelines as to what type of investments qualify as “green,” a standard-setting process known as taxonomy.

There are clear benefits to having an explicit connection between institutional investors and the sustainable projects they are financing, says the Climate Bonds Initiative’s Sean Kidney. But, he adds, a rigorous taxonomy is critical to ensure that green-bond issuers are truly financing sustainable activity. “That provides science-based guidance for what we have to do.”

As governments look to partner with the private sector to allocate capital to drive a zero-carbon transition, the need for better disclosure of carbon-related risks and opportunities is critical, including by any companies that want to have their bonds purchased by central banks. A network of central banks is currently pursuing further work to foster international disclosure and the standardization of data, says Henner Asche, who represents the German central bank in that exercise. He will also be joining the Corporate Knights panel on Wednesday.

Better disclosure is “a prerequisite for better climate-risk pricing,” Asche says. “Only on the back of better climate risk data can the financial system become a true driver of the transformation in the real economy.”

However, the business leaders in the “real economy” must be ready to change, says Sabrina Schulz, of Berlin’s Das Progressive Zentrum (The Progressive Centre). She notes that Germany and the EU are allocating hundreds of billions of euros to drive the structural transformation of the economy. “Right now, the structures are not there to absorb the money, to spend it wisely and to spend it on future-proof projects.”

 

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

With the support of the Embassy of the Federal Republic of Germany in Canada.

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