Climate change has become the defining political and economic issue and is likely to remain so for many years. Globally, government, investors, corporations are starting to take actions to respond to the climate crisis with a particular focus on decarbonization strategies. With countries and the private sector pledging to work towards net zero, growing pressure on businesses from customers, investors, regulators, employees and other stakeholders are also driving factors.
However, pledging and determination need to be followed by action and, of course, funding. Moving to a decarbonized economy is going to require an unprecedented level of new capital investment, particularly in the form of green finance, to support activities to reduce GHG emissions and to help corporations adapt to the impact of climate change.While the estimates of the funding requirements differ, they are all in the trillions. The G20 estimates that global investment of USD90 trillion would be required over the next 15 years to achieve global sustainable development and climate objectives.
According to the International Energy Agency, cumulative investment of USD53 trillion is required by 2035 in the energy sector alone. Also, it is now accepted that to enable a transition to a zero-carbon future, a mix of public and private sector capital will be required, and that public sector money alone cannot cover this cost.Therefore, there is an urgent need to enhance the ability of the financial system to mobilize private capital for green and sustainable investment. Financial institutions are responsible for being lenders, ensuring financial inclusion and helping customers and their supply chain and business model meet the sustainability standard.
In Asia, including Thailand, sustainable investments are gaining ground. For example, in 2019, the World Wide Fund for Nature (WWF), in conjunction with the Thai Bankers' Association, released a series of official guidelines that enable financial institutions to develop capabilities to handle ESG risks. The Principles for Responsible Banking launched by the United Nations (UN) Environment Programme Financing Initiative in 2019 are also likely to re-orient lending policies towards sustainable goals across the ASPAC region. Under these principles, banks commit to align their business strategies with the goals of the Paris Agreement on Climate Change and the UN's Sustainable Development Goals.While good progress is being made, the world will need a lot more funding to reach its climate change goals. This requires the development of new financing tools in order to match potential investors with the green financing requirements and to help mobilize capital in the scale required. Some of the current financial tools being used today towards green financing include:
- Green bonds: Green bonds have become a popular choice to finance projects with environmental benefits. In particular low carbon transport, clean power and energy efficient buildings. Green bonds are likely to be a mainstay of the green finance revolution.
- Green equity funds: A green equity fund is a structured investment vehicle that selects investments based on a commitment to a green investment strategy. This allows different investors to pool their capital to pursue an agreed investment strategy. Green equity funds have been used extensively to support investment in renewable energy over the past 15 years.
- Green loans: Green loans are loans aimed at advancing environmental sustainability and are similar in nature to green bonds.
"While green bonds, green equity funds and green loans have paved the way for investors to inject money into financing sustainable projects, in order to reach anywhere near the level of funding needed, other financing methods need to be included in the equation," says Ganesan Kolandevelu, Head of Climate Change and Sustainability Services, KPMG in Thailand. "This could include emerging green products such as 'Green securitization' which is the bundling of green loans into securities, enabling the aggregation of multiple small-scale loans helping attract a different investor base; and 'Green leasing/renting' such as green property leases, green car leasing, energy efficiency leasing and green mortgages. Moreover, other solutions such as public/private partnerships, climate insurance, and transition and sustainability bonds need to be considered. Whatever the solution, it is clear that the initiative for a greener future is not something only one sector or country can do alone. This needs to be an initiative from all stakeholders. At KPMG, we have the professionals to help guide companies through their journey towards green financing."