Climate change outpacing green investment, report shows

Climate change outpacing green investment, report shows

Editor's note: For GreenBiz coverage on sustainability outcomes from the 2013 World Economic Forum, click here.

More than most of the major actors in the climate change crisis, sustainable investors have sought to call corporations to account for unsustainable business practices and advocate for effective legislative and regulatory measures. Because of these efforts, assets allocated to sustainable investment strategies have continued to increase throughout the past decade.

Meanwhile, as a new report from the World Economic Forum points out, "Greenhouse gas (GHG) levels are rising amid growing concerns that the world is moving beyond the point at which global warming can be contained within safe limits."

The report — entitled the Green Investment Report - The ways and means to unlock private finance for green growth — warns, "Investment-grade public policy is an important prerequisite to engage the private sector." It has been estimated that private investment will have to account for as much as 85 percent of the transition to a low-carbon economy. "Public financial institutions need to more actively engage private investors," the report states.

The report does record some developing success stories, albeit on a small scale, in the public financing of such a transition. Developing nations, many of which are expected to be the hardest hit by climate change, have been scaling up their green investments at a rate that significantly exceeds that of the member nations of the Organization for Economic Co-operation and Development.

"Clean-energy asset financing originating from developing countries in 2012 is on track for the first time to exceed those originating from developed countries," the report states, noting that most of the financing has been encouraged by government policies.

Photo of a World Economic Forum 2008 session by World Economic Forum via Wikimedia Commons.

Globally, however, "Progress in green investment continues to be outpaced by investment in fossil-fuel intensive, inefficient infrastructure," according to the report. "Legacy fiscal measures such as fossil-fuel subsidies combine with the slow progress of international climate negotiations to weaken market signals that might otherwise incentivize green investment."

About $5 trillion per year through 2020 is required under a business-as-usual scenario to promote global development. But even that amount will not be sufficient to effectively address climate change. To limit the global average temperature increase to 2 degrees Celsius above pre-industrial levels, an additional $700 billion per year will be required.

Existing evidence demonstrates, however, "that the targeted use of public finance can scale up private financial flows into green investment through measures such as guarantees, insurance products and incentives, combined with the right policy support," the report argues. "There is strong potential for increased lending, advancing and rolling out de-risking instruments, using carbon credit revenues, and targeting grant money combined with technical assistance to attract much greater private investment."

But private investors are not off the hook until perfect government policies are in place. They need to take a new approach, the report advises.

"Private investors do not need to wait for public policies or subsidies to remove all material risk," the report states. "The rapid pace at which green solutions are developing is an ideal opportunity for investors to enter a growing market."

Citing the recently formed Global Investor Coalition on Climate Change as a potential source of leadership, the report argues that a more explicit factoring of climate change into long-term investment strategies could help unlock greater private investment in a green economy.

With $71 trillion in assets under management, pension funds and other institutional investors have important roles to play in the transition to a green economy.

"Successfully mobilizing institutional funds in equity injections can be achieved through complex financial engineering by providing the investor with a 'quasi fixed-income position,'" the report states. "A fixed-income position can provide the investor with long-term returns in line with their investment strategy and risks."

Nevertheless, the report warns, "To ensure growth is sustainable, an unprecedented shift in long-term investment is required from conventional to green alternatives."

This article originally appeared at SocialFunds.com and is reprinted with permission.