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Climate Action 2010-2011

Finance and Markets

Finance and Markets Through the fog of the carbon war, a new climate economy is emerging. © Creative commons/flickr/flakeparadigm Achieving a low-carbon economy requires a private investment revolution Remco Fischer Programme Manager, UNEP Finance Initiative Investment in clean energy systems will have to more than triple current levels in order to revolutionise our energy supply and put us on the path of climate sustainability. As the overwhelming majority of the investment required will have to come from private sector sources, we need a parallel revolution in the way the world’s financial markets allocate capital to energy systems, to favour lower carbon intensity and higher energy efficiency projects. The climate finance gap Approximately US$500 billion is required annually as incremental investment until 2030 to reduce the carbonintensity of energy systems, improve their efficiency and limit GHG concentrations to a maximum of 450 parts per million (ppm), the target governments have set themselves under the Copenhagen Accord. To put this figure into perspective, 2009 saw, after a number of years with unprecedented, double-digit growth rates in sustainable energy investment, a total of US$162 billion going into sustainable energy companies, technologies and projects; a seven-fold increase over 2002. Given global energy demand forecasts, much of this investment will have to flow into the developing and emerging world, where according to the World Bank, climate change mitigation investment needs are estimated to be around US$400 billion per annum, including in the broader energy sector. Of the 2.5 per cent of global | 104 | energy demand growth per year forecasted to 2030, 93 per cent is bound to take place in the swiftly growing economies of Latin America, Africa and Asia, where local middle classes continue to emerge and strive for western consumption lifestyles while the 1.5 billion people currently without electricity find their way to the grid. The availability of sufficient, appropriate financial resources at the needed scale and in the right place will be key. Achieving the complex task of solving the world’s energy problem while reducing GHG emissions at magnitudes sufficient to stabilise the climate will require what the International Energy Agency (IEA) has termed a true revolution in the way mankind sources, transforms and consumes energy. The wide body of analysis available on the financing of climate change mitigation points towards two facts of utmost importance to the way in which societies respond to climate change: • 85 per cent of the total investment needed for climate change mitigation across sectors and regions will have to come from private sector sources. www.climateactionprogramme.org

Finance and Markets Figure 1: New investment in sustainable energy, 2002-2008. Source: New Energy Finance of the revolutionary transition of energy systems towards lower carbon-intensity and higher energy-efficiency. Increasing private financial flows at the needed scale will require financial practitioners of all types to shift perceptions regarding the attractiveness of sustainable energy technologies, projects and companies, and it is unlikely that a shift of this size will come entirely from philanthropic and corporate social responsibility (CSR) motivations. The financial services sector is a heterogeneous group of institutions, mindsets and procedures. But fundamental changes in the way capital is reallocated to technologies, companies and projects – at the scale required – will have to be triggered by one of two variables that essentially drive mainstream financial decision-making, namely risk and return. • Over 70 per cent of total investment in sustainable energy to date has been financed by third-party entities, meaning external investors and lenders which include financial services sector, the capital markets and thirdparty investors such as venture capitalists (see Figure 1). The availability of sufficient, appropriate financial resources at the needed scale and in the right place will be key. As the overwhelming majority of these resources will only be available from private as well as third-party sources, it becomes clear that not only a revolution in the energy sector is needed. A parallel revolution is needed in the way the world’s financial markets allocate capital to energy-supply and demand: bankers, investors, financial analysts, and fund managers will have to be at the heart Increasing private financial flows at the needed scale will require financial practitioners of all types to shift perceptions regarding the attractiveness of sustainable energy technologies, projects and companies. Financial return and risk are not stand-alone categories however: lenders and investors want to make a return proportional to the level of risk they undertake. Sustainable energy investment will hence become more likely and frequent if perceived levels of risk are reduced for a given level of return, or returns are increased for any given level of risk. The growth throughout the last decade of sustainable energy investment has been triggered Figure 2: Global transactions in sustainable energy, 2008, US$ billion, per source of finance. www.climateactionprogramme.org | 105 |