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Daniel Hanna |
The International Energy Agency estimates that $53 trillion is needed to achieve the Paris Agreement and keep global warming below 2 degrees. A separate analysis suggests that $5-7 trillion is required to meet the United Nations Sustainable Development Goals by 2030. While advanced economies are close to meeting these requirements, there is a funding gap of around $2.5 trillion in emerging and developing countries, with $1.3 trillion of that in Africa alone.
Can finance be part of the solution? I believe it can.
Impact investing is on the up – but more is needed
There are encouraging signs that private finance is responding. Already, one in every four dollars invested globally takes into consideration some form of environmental, social or governance filter. This ’responsible’ kind of investment is growing at 12% per annum in Europe, according to Global Sustainable Investment Alliance, far outstripping the 3% annual growth of conventional investment.
We have also seen the development of new products like green bonds or green loans channelling capital into climate-related projects. From the very first climate bond just over 10 years ago, green bond issuances reached a record $167 billion in 2018, according to Climate Bond Initiative.
However, much more needs to be done. While we can point to some progress around ‘green’ finance issues on land, much less progress has been made on other climate-related matters. Take the ocean. It absorbs 25% of all CO2 emissions and it generates 50% of the world’s oxygen. Yet the ocean and coastal areas face a worrying set of environmental threats, whether from climate change, rising sea levels, or over-exploitation and pollution.
The global cost of rising sea levels is estimated to be $14 trillion per year by 2100, according to the UK National Oceanography Centre, and many of the threats are concentrated in Asia, Africa and the Middle East. China is likely to face costs running into the hundreds of billions of dollars, while higher sea levels present an existential threat to small island nations in the Pacific and Indian oceans. For countries like Kuwait and the UAE, the threat could impact up to 24% and 9% of their GDP respectively.
Africa is also vulnerable, with at least 19 coastal cities with populations of more than 1 million at risk. Some coastal communities in sub-Saharan Africa are already being washed away, with some locations losing up to 30 metres of land each year.
Blue bonds for a blue economy
To combat these threats to the oceans and communities, we must learn from the success of green finance and capitalize on the growing awareness among the public and investors to catalyse ‘blue’ and other sustainable financing. I believe a collective effort is needed around three ‘Ps’ – partnerships, platforms and products.
Creating a sustainable blue economy requires collaboration across the public and private sector. Both sides have key roles to play in creating sustainable finance solutions. The public sector is best placed to ensure a good regulatory and business environment and to help tackle risks that are difficult to quantify or forecast; while the private sector can often bring additional financing capacity, technology and implementation expertise. Solutions such as blended finance – when public money is used to spur private investment into sustainable projects – can and must play an important role.
Private investors also prefer platforms that channel financing in a scalable manner. Standalone projects can help deal with specific challenges, but to turn millions of dollars of investment into billions, credible defined platforms become important.
A number of frameworks have successfully emerged in green financing – for example, the Climate Bond Initiative or Green Bond and Loan Principles – and we are beginning to see the emergence of frameworks in other sustainable areas such as the European Commission’s Sustainable Blue Economy Finance Principles and the WWF’s Blue Finance Principles. The next step is to turn these into investable platforms, such as the World Bank’s Scaling Solar programme, which aims to create viable markets for solar power.
Lastly, investors require standardized, comparable, liquid products to be able to buy and sell, as they already do in green bonds. The first blue bond issue took place last year when the Republic of Seychelles, supported by the World Bank and Standard Chartered, raised $15 million from impact investors to finance the expansion and transition of its marine protected areas, improve governance of priority fisheries and develop its blue economy. It was a small issue, but its success has attracted widespread interest from international investors and regulators.
The prize is substantial
We are now working with a number of stakeholders to develop Blue Bond Principles to help further catalyse the blue bond market leveraging the work on green bonds by the International Capital Markets Association, Climate Bond Initiative and others.
The vision of all of us active in sustainable finance is to bring together both the private and public sector to replicate the successes we have seen in, for example, green bonds to help tackle areas such as blue finance. The prize is a substantial one: filling the finance gap where it is needed most, while also providing sustainable returns to investors, so that finance can be part of the solution to put the world’s economy on a more sustainable footing.
About the Author
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Daniel Hanna, Global head of sustainable finance, Standard Chartered
Based in London, Daniel's responsibilities include the Bank-wide Sustainable Finance strategy, developing new products and solutions, further incorporating environmental, social and governance considerations into banking decisions, and identifying sustainable finance opportunities for clients. His responsibilities also include the Bank's Environmental and Social Risk Management team. Daniel is a member of the Sustainable Development Investment Partnership and the City of London Sustainable Development Capital Initiative steering groups. He also established and ran the UK India CEO Forum under the sponsorship of Prime Ministers David Cameron and Manmohan Singh, and previously worked as a visiting Fellow for Chatham House and the President of the European Parliament. He has a Masters in Business Administration from London Business School, a Certificate d’Etudes European from Science Po Strasbourg and a BA in economics and politics from Exeter University.
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