Climate change is a global challenge. Either we all transition to net zero or none of us will. Yet Standard Chartered research shows that emerging markets currently have a USD94.8 trillion financing gap.1 If these countries are left to finance this shortfall themselves, it will leave emerging market households around USD2 trillion poorer each year between now and 2060.
Sustainable finance can play an essential role in supporting a just and inclusive transition. To do so, innovation is sorely needed. Sustainable finance needs to democratise its access and impact, standardise to raise quality and catalyse much more capital.A record USD1.6 trillion in sustainable debt instruments were issued in 20212 and momentum remained strong in 2022 until the recent market turbulence. Most of this finance, however, is raised in developed countries by established companies with access. Emerging markets in Africa and Asia that are among the most vulnerable to climate change face large funding shortfalls.
“Where” matters at least as much as “how much”. As Standard Chartered has shown, financing a solar project in India can help avoid more than seven times the CO2 emissions than a similar-sized project in France because of the current sources of power on those countries’ grids. As the world strives to achieve the UN’s Sustainable Development Goals (SDGs) by 2030, the financial sector needs to put a premium on driving finance to where it matters most, not where it is easiest.
A lack of harmonised sustainable finance rules is a significant obstacle to international capital rapidly scaling up renewables and other climate solutions, particularly in developing countries. A lack of common standards also increases the risk of green- and SDG-washing.
It can take decades to negotiate global standards, as we have seen with international tax harmonisation. In their absence, policymakers must focus on the interoperability – the ability to operate together – of different regulatory frameworks. Green and transition taxonomies are primary candidates for the development of global principles. Interoperability could support standardisation by defining key common metrics and allowing for regional and temporal variation within threshold levels.
The development of common standards and definitions will stimulate market growth by promoting transparency and building confidence in sustainable finance. Democratising the market will ensure that capital flows to the countries most at risk from climate change.
Catalysing sustainable finance
Mobilising the trillions of dollars needed each year to address global warming and other climate challenges will require greater innovation to link investors’ interests directly with real-world impact. New products are needed to catalyse financing from the widest possible range of investors.
Standard Chartered last year launched 16 new sustainable finance products such as sustainable trade finance and repurchase agreements linked to environmental, social and governance criteria. The Bank also launched green mortgages, green auto loans and sustainable deposits as part of its commitment to democratise sustainable finance for retail customers. Standard Chartered is committed to expanding the scale and reach of sustainable finance, with plans to mobilise USD300 billion in green and transition finance by the end of this decade.
Yet, while momentum is building in sustainable finance, the hardest work is still to be done. We have a deep market to source financing for renewable energy and other green projects in developed markets, but we now need to tackle the carbon-intensive, hard-to-abate industries that are embedded within the global economy.
Going beyond green
We need the momentum behind green bonds to turn into a rainbow of success. In addition to green bonds that support environmental projects, we need more orange bonds that unlock private capital for women’s empowerment and gender finance. Standard Chartered joined forces with the World Bank in 2018 to launch the world’s first sovereign blue bond, by the Republic of Seychelles, to help raise funds for projects such as ocean preservation and sustainable fishing. We need many more examples like this.
To act on climate change, we need to mobilise more funding into green projects, particularly in developing countries. But we also need to establish transition finance to accelerate companies’ efforts to align their operations and business models with the Paris Agreement goal of limiting global warming to 1.5˚C. At Standard Chartered, we have developed a Transition Finance Framework to govern our activities in this area.
Following the process set out in the Framework, we recently labelled our first transactions internally as “Transition”. These transactions included financing for projects that will kick-start the decarbonisation of a cement plant and contribute towards the elimination of flaring in an African country. Both are central to the decarbonisation strategies of their respective clients and markets.
Leveraging blended finance
Blended finance is another important tool for catalysing investment. This approach, which leverages public-sector development lending to unlock private capital, has mobilised more than USD160 billion for sustainable projects in developing countries.3 And the market is expanding steadily.
We have executed USD10 billion of blended finance deals over the past four years. This includes USD186 million in financing that we helped provide for a solar plant in Vietnam. This is the country’s largest renewable energy project, and is expected to reduce CO2 emissions by 123,000 tonnes per year. We teamed up with the Asian Development Bank to deliver financing for the deal, setting a precedent for successful funding of renewable-energy projects in the region.
Democratising the benefits
Finally, we need to direct the benefits of sustainable finance to the regions that are most at risk from climate change and have the biggest opportunity to reduce greenhouse gas emissions through a jump to low-carbon technologies.
The need for investment in these regions is urgent. Asia is home to 80 per cent of the world’s population that could be flooded if there is a 3˚C rise in global temperatures.4 Africa has at least 19 coastal cities with a population of more than 1 million at risk from climate change.
Yet low- and middle-income countries are receiving less than 60 per cent of the financing they need to achieve the SDGs. In Africa, this number is as low as 10 per cent.5 This is why at Standard Chartered we are proud that Africa, Asia and the Middle East account for over 84 per cent of our sustainable-finance assets.
The rapid growth of sustainable finance has helped drive progress on sustainable development and address global warming. With less than a decade to go before the deadline for the UN’s 2030 goals, we need to recognise that impact matters just as much as volume. Now is the time to optimise the impact of sustainable finance by focusing on the regions at greatest risk from climate change, and by tackling the inequalities that must be addressed in society and the economy.
Industries in Transition
With topics around urban transformation, energy transition, the future of transport and critical infrastructure across Asia, Africa and the Middle East, this content series will unearth fresh trends and showcase how we are supporting clients in the transition towards a more sustainable and inclusive future.