Tackling the climate emergency with green finance
Sustainability, states the United Nations Brundtland Report of 1987, is about “meeting the needs of the present without compromising the ability of future generations to meet their own needs”. It stands on three pillars: the environment, society and the economy.
Laying the foundation with the Paris Agreement
Signed on 12 December 2015, the Paris Agreement is a legally binding treaty aimed at limiting global warming to 1.5°C and well below 2°C relative to pre-industrial levels. Reaching this goal will require humanity to move towards carbon neutrality by 2050 by not emitting more greenhouse gases (GHG) than the planet can absorb.
The challenge of reducing emissions
To achieve carbon neutrality, individuals and businesses alike must cut their GHG emissions by at least 7% every year until 2050. It’s a tall order, for over 80% of primary energy consumed is derived from fossil fuels: one-third from oil, a quarter from gas and a fifth from coal — all energy sources that emit large amounts of CO2, the primary GHG.
Changing the way we live
Under the Paris Agreement, signatory countries will need to implement a climate action plan. Individuals must also do they part by adapting the way they eat, live, travel and consume to attain the goal of lower GHG emissions. It’s a transition that also concerns the financial system, as financial flows must be directed towards more sustainable activities.
Jean-Christophe Jouannais
Sustainable engineer at Societe Generale Private Banking France
The role of sustainable finance
This cost of this climate transition is estimated at between €30 billion and €65 billion per year1. Government funding will not be enough; sustainable finance will play an essential role by connecting project developers working on the transition with private investors capable of funding such efforts. The stakes are high, as it involves mobilising household savings, estimated at over €6 trillion in France.
Sustainable finance instruments
Green bonds are debt securities issued by governments or by companies to finance environmental projects. In June 2017, Agence France Trésor issued the first ever sovereign green bond for €8 billion, with demand reaching €98 billion, demonstrating investor appetite to support the green transition.
Since 2016, Paris Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) indices and thematic funds have been investing in companies aligned with the decarbonisation trajectory of the Paris Agreement.
Greenfin-labelled funds, which are audited by independent third-parties such as EY France, Novethic and AFNOR, which assess the actual contribution of investments to the energy and ecological transition.
Regulators too have their part to play in the green finance revolution by establishing legislation such as the Green Taxonomy (2020), SFDR (Sustainable Finance Disclosure Regulation — 2021), CSRD (Corporate Sustainability Reporting Directive — 2024), and the Energy-Climate Law (2019). These frameworks:
Create a common language for sustainable finance;
Help investors, financial intermediaries and regulators identify what constitute sustainable projects; and
Encourage all market participants to adopt practices that are in step with the energy transition.
The Montreal Protocol: a regulation success story
One outstanding example of effective international regulation is the 1987 Montreal Protocol for the protection of the ozone layer. By regulating the use of CFCs (chlorofluorocarbons), primarily found in aerosols, industries were forced to find alternatives. This significantly reduced these harmful gas emissions and helped restore the ozone layer over time.
Conclusion
Green finance is essential for addressing the climate emergency. It serves to direct the necessary financial resources into sustainable projects and transform economic behaviours towards a future that is kinder to the planet… and therefore kinder to humanity.
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