By Sunil Kaushal
While climate change may have overtaken a news cycle dominated by COVID-19, war and the cost of living crisis, the risks and threats associated with our planet’s warming remain the greatest long-term threat to our combined economic future.
Banks and financial institutions will play a critical role in managing this risk, including financing sustainable infrastructure, supporting transition and investing in green innovation. In fact, the banking sector has a responsibility to bridge the top-down and bottom-up approaches to net zero and to help the public and private sectors realize the vast opportunities that the energy transition and shift to sustainable infrastructure promise.
We can do this by providing capital to fund investment in renewable energy, climate adaptation technologies and the transition to a “circular economy” that encourages sustainable resource use.
According to EY, financial institutions recognize that the transition to net zero will involve more than investing and underwriting “green” assets and businesses such as renewable energy and electric vehicles. To reach net zero across the economy, carbon-intensive assets and businesses will need financing to help them transition to a cleaner future.
For companies, this means a fundamental change in operations, which, in turn, requires capital. Insurers, lenders and investors will play a crucial role in making this capital available and in incentivizing and supporting their customers and beneficiaries during their transition.1
Although stimulating growth through investments in roads, buildings and power supply is not a new strategy, it now offers the opportunity to redefine the traditional scenario and focus on investment and financing. longer term sustainability.
Creating sustainable and climate-friendly infrastructure will, however, require adequate funding in the future. There are growing concerns, for example, about the risk of stranded assets, particularly for long-term investments such as infrastructure. Infrastructure projects must consider risks 10+ years into the future, many of which may not be immediately apparent. These risks include sea level rise, increased temperatures, drought and coastal erosion. There are also financial and economic risks associated with making investments outside of an ESG framework, this includes changes to regulatory parameters that may disadvantage or penalize such investments.
Projects that are climate-smart from the start reduce some of these risks and are more likely to stand the test of time. Banks will therefore need to consider potential climate risks throughout the life of the project to ensure resilience and protect investments.
Sustainable infrastructure projects, however, have traditionally been more difficult to make bankable. With a little thought, however, there are usually cost-effective solutions. For example, in a renewable energy plant, you have clear cash flows linked to the price of the energy produced or for an energy efficiency improvement project, you have energy savings that can translate by cost savings, and they can repay the financing.
At Standard Chartered, we are committed to playing our part in supporting sustainable projects in the region. We take a strong stance to accelerate net zero by helping emerging markets in our footprint reduce carbon emissions as quickly as possible and without slowing development, putting the world on a sustainable path to net zero by 2050.
Sustainability has long been at the core of our strategy, and we have committed $40 billion of project finance services for sustainable infrastructure and $35 billion of services for renewable energy and clean technology projects by the end by 2024. We are also committed to catalyzing $300 billion in sustainable investments by 2030. The projects we finance will promote trade and growth and contribute to a better quality of life through sustainable development.
The need for action from lenders is not only to decarbonize their own balance sheets, but also to help companies in the real economy move towards a sustainable future. A successful transition to net zero must be fair, leave no nation, region or community behind and, despite obstacles, action must be swift. To achieve the 2050 goal, we must act now, and we must act together: businesses, consumers, governments, regulators and the financial sector must work together to develop sustainable solutions, technologies and infrastructure.
Sunil Kaushal is the CEO of Standard Chartered Africa and Middle East (AME)