First appeared in BusinessGreen
Ahead of the Paris climate talks the burning question for policy makers and investors is how to redirect the trillions of dollars needed to pave the way towards a low-carbon future, if we are to stand any chance of limiting warming to 2 degrees.
Next Friday, on International Climate Finance Day, 500 of the world’s leading financial professionals will descend on UNESCO’s headquarters in Paris to thrash out how best to redirect capital in what may eventually turn out to be a global paradigm shift.
The transition won’t be easy. But enlightened financiers have the chance to lay the building blocks for a dynamic and powerful global economy based on technological innovation and clean energy.
That seismic shift will require wrenching capital away from rigid funding streams. The elephant in the room I will address at the gathering is that global finance is still predominantly focused on business as usual “brown” investments: Coal, oil and gas-based energy growth.
The capitalization of the global fossil fuel sector is at least 23 times that of the renewables sector according to Bloomberg data. Likely a lot more if we factor in state-owned fossil fuel companies and diversified mines. Lets face it, the vast majority of financial market professionals and the funds they are responsible for deploying are still very much focused on the brown side of the equation.
In 2014 alone the fossil fuel industry raised some $113 billion in equity-based finance compared with a tenth of that for alternative sources and $2.4 billion from debt markets, close to 20 times more than for renewables, Bloomberg data shows. So the scales are still very much tipped in favour of business as usual carbon intensive energy.
That is the bad news. The flip side is that financial resources are already in place to finance a clean energy transition. We simply need to level the playing field to divert them. And during Climate Finance day we will hear about critical and necessary work to address the risk and reward the green, climate side of this equation. That includes climate policy, carbon pricing, renewable support mechanisms, climate bonds and rating systems. This work is already making a difference. The World Bank in a report this week said countries can move their economies on to a net-zero emissions trajectory at an affordable cost, but that work should start immediately. It also encouraged the removal of fossil fuel subsidies, a stumbling block, which reached $548 billion in 2013.
All these efforts should be having a much greater impact in scaling up climate finance and indeed they would if we were dealing with a level playing field. We are not even close, however, because the financial markets are underpricing the risk premium associated with fossil fuel investment. This is resulting in the cost of capital being cheaper for fossil fuel investments than they should be.
If the financial markets were pricing the fossil fuel risk-premium correctly then all these efforts on addressing the risk reward equation for green, climate finance would have a much smaller barrier to overcome than they currently do. They could compete on a level playing field without robbing Peter to pay Paul. This would immediately make clean and renewable energy relatively more attractive to investors; it would also avoid the risk of substantial value destruction of the type we have recently seen with coal stocks and utilities. Money is being poured into high-cost high-carbon fossil fuel projects that are increasingly unlikely to deliver any good return to investors as shown through Carbon Tracker’s stranded assets work. Our recent report, “The U.S. Coal Crash – Evidence for structural change” found that in the last three years alone, a price collapse has driven at least two dozen coal companies into bankruptcy. What is more, many U.S. companies have lost 80 percent of their value including coal colossus Peabody Energy. One can only surmise: is this a harbinger of things to come for other fossil fuel markets globally.
Next week in a series of written and video blogs I will address six key points that are critical to levelling the playing field and to scaling up climate finance:
- To gain attention of the mainstream financial markets and thus private capital it is critical to translate climate risk into the language of financial markets in a form that is relevant now;
- Why does the Carbon Bubble create a potential risk for investors and financial stability? The disorderly transition and why this should matter to Governments;
- If you are going to talk about scaling up climate finance the elephant in the room: Currently BAU/Brown is focus of 99% of financial markets and capital (currently 23 times that that of green):
- How do you begin to level the playing field between BAU/Brown investment and Green/Climate Investments –i.e. How do we mobilise private sector funding to fund the orderly transition?
- Step One: Why we need financial transparency & disclosures sufficient to allow markets to price the true fossil fuel risk premium;
- Finally, how do we avoid value destruction? Why we need a “blue print” for a low carbon transition i.e. a road map for the fossil fuel industry.
Anthony Hobley is the CEO of London-based Carbon Tracker
Read the second blog: ‘Facing up to the fossil fuel risk premium’
Read the third blog: ‘When does the “carbon bubble” become a systemic risk?’
Read the fourth blog: ‘Are regulators prepared if the market misreads climate risk?’
Watch here the short video interview to Carbon Tracker’s CEO Anthony Hobley on this topic.