Financing the fight against climate change: Where are the governmental shareholders?

Gerhard Schick

According to UNDP, limiting global warming to less than 2° Celsius above the pre-industrial era is estimated to require about $250 billion a year in additional investment to “green” the world economy in 2010-2015.  Governments would be wise to meet this target by investing in low-carbon development – particularly since the cost of the alternative is much more expensive.  However, high and rising government debts will significantly preclude this path.

In order to avoid climate catastrophe, we need to focus on the role of private finance in climate change.  At present, the level of private investment in renewable energy is only a “drop in the bucket” compared to overall investment levels.  It is urgent that more private capital be channeled into financing sustainable technologies, eco-funds or energy efficiency initiatives in order to fight against climate change.  However, the majority of banks are making a negligible contribution to the promotion of sustainable investment strategies.  Indeed, private investors are often unaware of “green investment” options, since banks do not usually include such funds in their portfolios and, when they do, clients are seldom informed about them.

The financial crisis could be the window of opportunity to change this situation – assuming that governments are willing to provide banks with incentives to change.  Governments are well-positioned to carve out a more constructive role for banks — not only because they are spending billions of Euros and Dollars in rescue packages, but also because they are frequently becoming  bank shareholders  with voting powers commensurate to their holdings.   Bearing in mind the fact that all developed country governments are wielding high-flying rhetoric about the need to fight climate change, it would make sense if – as bank shareholders – they set out sustainable investment priorities for banks.  The report “Financing Objectives 2020 – Mobilising Private Capital” (Sustainable Banking and Public Policy Consortium) correctly points out that “it is certainly within the interest of governments to ensure that overall State interests along a broader set of metrics are also represented in the banks’ lending and investment policies.”  It seems self-evident that mitigating climate change is an “overall State interest.”

In response to the financial crisis, some governments – not all and not enough – have formulated economic stimulus packages that support climate-friendly technology sectors.  Nevertheless, governments have usually relinquished their power to shift the priorities of “their” banks through, for instance, voting on shareholder resolutions or appointing a member of the Board of Directors.  This power should be exercised not only in regard to investments of existing capital but also  in efforts to leverage more “green” private capital through improved consultation with prospective investors.

When it comes to shaping a new, sustainable banking system, governments are not only able to exercise influence through their shareholding, but also by implementing effective laws and policies to finance green technologies.  The international debate on regulation of financial markets neglects the significant potential of such strategies.  However, positive examples exist.   France and the Netherlands have established green savings accounts and lending programs.  This is a beginning, but more is needed.   Banks should also be required to report on the climate impacts of their investments.  Incentive and subsidy mechanisms must complement bank policies.  And last, not least, public money, e.g.,  public pension funds, should to be invested following sustainability criteria – everything else contradicts the efforts taken by national governments to fight climate crisis. In the end, greening the financial sector has a lot to do with policy coherence.