Sophie Haas, head of sustainable investing at JP Morgan explains why climate change will not be stopped without serious climate financing.
At a time when extreme weather events are increasing in size and scale, the need for public and private financing in the transition to net-zero has never been more pressing. The last eight years have been the hottest eight years on record. Earlier this year, the temperature in Antarctica reached 39⁰C above normal while temperatures in India peaked at 51⁰C during the heatwave, making some areas unfit for human life. The window of opportunity to tackle climate change is closing rapidly as we have already reached around 1.35 ⁰C of warming against the 1.5⁰C threshold we have set ourselves before reaching irreversible damage.
The longer we wait, the more costly it will get. Climate change and subsequent extreme weather events have both a human and a financial cost associated. The transition to a lower carbon economy is now inevitable. Both public and private investments need to be mobilised on a large scale to tackle both climate adaptation and climate mitigation.
We are seeing policy momentum with countries either doubling down or finally ramping up on the transition. Following the invasion of Ukraine, the EU solidified its commitment to being the first net-zero continent by 2050 by launching the Re-Power EU Plan in March 2022. The EU is seeking to accelerate the transition to renewables, focus on energy efficiency, green hydrogen, and decarbonising industries.
The US is finally ramping up its efforts to tackle climate change, passing the Inflation Reduction Act (IRA) legislation over the summer with $369bn allocated to energy and climate investments. This includes incentives to develop renewable capacity, residential solar and electric vehicles. The IRA is finally putting the country back on track to reduce its carbon emissions closer to its Paris Agreement pledge.
Climate change will not be tackled without serious climate financing. Prior to COP27, the Standing Committee on Finance showed that public and private global climate finance flows were 12 per cent higher in 2019-2020 versus the previous two years, reaching $803bn per year. Developed countries must also fulfil their pledges to the emerging countries who face the consequences of extreme weather events like record flooding in Bangladesh or record droughts in part of Africa while being responsible for a tiny fraction of total global carbon emissions. The Climate Finance Delivery Plan’s renewed commitment of $100bn in financing to development countries by 2025 needs to materialise. A third of that commitment is expected to come from the private sector.
Despite market volatility, investors are doubling down on sustainable investing, both in the public and private market space. Popular thematic strategies often focus on climate. Contrary to conventional investments, inflows into sustainable funds year-to-date have been resilient. In Q3, global sustainable funds experienced $22.5bn inflow while conventional funds experienced US$198bn outflow. Impact investing has hit the $1trn mark for the first time ever. Green Bond issuance reached $2trn at the end of Q3. We are also seeing innovation in the climate investment space with carbon funds emerging and forestry emerging as a new asset class.
Financing and investments are needed to continue to scale up already commercially viable technologies like wind and solar power generation but are also required to pursue further innovation like green hydrogen and direct air capture. While climate mitigation receives the bulk of finance flows today, with extreme weather events increasing, additional funding must be provided to tackle climate adaptation, like building flood defence for example. All solutions must be mobilised to get to net-zero as quickly as possible. Will financing flows into climate growth strategies and innovation slow down at a time when it needs to be ramped up due to market conditions and increasing interest rates? The commitment of investors to finance climate solutions must not waver when it is the most needed.