While climate change may have taken a back seat in a news cycle dominated by COVID-19, war, and the cost-of-living crisis, the risks, and threats associated with our warming planet remain the biggest long-term threat to our combined economic future.
Banks and financial institutions will be critical to managing that risk this includes financing of sustainable infrastructure, supporting a transition, and investing in green innovation. In fact, the banking industry has a responsibility to bridge top-down and bottom-up approaches to net-zero and help the public and private sectors realize the vast opportunities the energy transition and the move to sustainable infrastructure promises.
We can do that by providing capital to finance the investment in renewables, climate adaptation technologies, and the transition to a ‘circular economy’ which encourages sustainable use of resources.
According to EY, financial institutions recognize that the transition to net zero will involve more than investments and underwriting for “green” assets and businesses such as renewables and electric vehicles. To achieve net zero across the whole economy, legacy carbon-intensive assets and companies will require financing to help them transition to a cleaner future.
For businesses, this means a fundamental change to operations, and that, in turn, requires capital. Insurers, lenders, and investors will play a crucial role in making that capital available and in incentivizing and supporting their clients and investees as they make their transitions.
While stimulating growth through investment in roads, buildings and power supplies isn’t a new strategy, now it offers an opportunity to redefine the traditional playbook and focus on investing and financing sustainability for the longer term.
Creating sustainable and climate-friendly infrastructure will, however, require finance that is fit for the future. There is a growing concern, for example, around stranded asset risk – particularly for long-term investments such as infrastructure. Infrastructure projects need to consider risks 10 years and beyond into the future, many of which may not be immediately apparent. These risks include rising sea levels, increasing temperatures, drought, and coastal erosion. There are also financial and economic risks associated with making investments outside an ESG framework, this includes changes to regulatory settings that may disadvantage or penalize these investments.
Projects that are climate adapted from the outset reduce some of these risks and are more likely to stand the test of time, so banks will need to take into account the potential climate risks over the lifespan of the project to ensure resilience and protect investments.
Sustainable infrastructure projects, however, are traditionally more difficult to make bankable. With a bit of thinking, though, there are usually profitable solutions. For example, in a renewable energy plant, you have clear cash flows linked to the price of generated energy, or for an energy efficiency improvement project, you have energy savings which can be translated into 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 firm stand in accelerating to net zero by helping emerging markets in our footprint reduce carbon emissions as fast as possible and without slowing development, putting the world on a sustainable path to net zero by 2050.
Sustainability has long been a core part of our strategy, and we have committed USD40 billion of project financing services for sustainable infrastructure and USD35 billion of services to renewables and clean-tech projects by the end of 2024. We have also committed to catalyzing $300 billion in sustainable investments by 2030. The projects we finance will trade and growth and contribute to a better quality of life through sustainable development.
The need for action from finance providers is to not only decarbonize their own balance sheets but also to help businesses in the real economy move towards a sustainable future. A successful net-zero transition must be just, leaving no nation, region, or community behind, and, despite the hurdles, action needs to be swift. To meet the 2050 goal, we must act now, and we must act together: companies, consumers, governments, regulators, and the finance industry must collaborate to develop sustainable solutions, technologies, and infrastructure.
Sunil Kaushal, CEO of Standard Chartered Africa and Middle East (AME)