The Climate Finance Leadership Initiative (CFLI) is laying out concrete plans for the private sector to finance the low-carbon transition, say Tyeler Matsuo and Lucy Kessler of Rocky Mountain Institute. One important insight of their new report “Financing the Low-Carbon Future” is that it’s not enough to back clean energy. Climate finance also needs to accelerate the retirement and transformation of the carbon assets that are responsible for 78% of global emissions. That means creating the right financial mechanisms that make investments much easier. To do so, the CFLI report opens the “black box” of private finance to understand the differentiated chain of institutions involved, each with its own incentives, tools, and constraints. It also gets to grips with the relationships with regulators, rating agencies, public finance and others. The report is very thorough and the roster of CFLI members is impressive. It includes the CEOs of Goldman Sachs, HSBC, Allianz Global Investors, AXA, Enel, Macquarie and was set up by Michael Bloomberg.
New York City was abuzz with Climate Week (September 23rd to 29th), with hundreds of events showcasing climate action, report releases, new partnerships, and ambitious commitments. Adding to the buzz is the Climate Finance Leadership Initiative (CFLI), a private-sector-led initiative formed by Michael Bloomberg and chief executives from seven major private-sector institutions. That week, CFLI released a landmark report, Financing the Low-Carbon Future, the first private-sector perspective on what it will take to finance the low-carbon transition. But with dozens of reports on climate action and the clamour of events during the week, why should we pay attention to CFLI?
CFLI’s report is momentous not just because of its messaging, but because of the messenger. CFLI members, who include the CEOs of Goldman Sachs, HSBC, Allianz Global Investors, AXA, Enel, and Macquarie—as well as the chief investment officer of Japan’s Government Pension Investment Fund (GPIF)—collectively represent $4.5 trillion in assets under management and a market capitalisation of over $500 billion. They lay out a vision for how mainstream private banks, insurers, asset managers, and asset owners can collaborate with public banks and policymakers to accelerate decarbonisation. And that vision challenges conventions of how we think about climate finance—and the private sector’s role in it.
Here are three ways the CFLI report is shifting the needle on climate finance.
1. The CFLI report redefines climate finance
To date, “climate finance” has largely been a catchall for efforts to scale up new low-carbon investments. However, the CFLI report rightly calls out that doing “more green” is not enough: we cannot achieve the low-carbon transition by building a green economy on top of a brown one. Instead, we must also position climate finance to accelerate the retirement of long-lived emitting assets—such as coal plants, combustion vehicles, and inefficient industrial facilities—that make up 78 percent of global emissions.
Already, the “committed” emissions from existing fossil-fuelled assets may lock us in to a future wholly incompatible with what’s needed to avoid the most catastrophic climate impacts. CFLI confronts this (often uncomfortable) challenge by identifying pragmatic solutions for the private sector to retire today’s dirtiest assets: from financial mechanisms such as coal securitisation to innovative strategies to repurpose decommissioned fossil fuel assets as new sources of development for communities.
2. It opens the black box of private finance
The need to mobilise private finance for climate action has become almost a mantra in the climate finance domain. Yet, the way we’ve thought about private finance has often been as an abstract, monolithic pool of capital. The CFLI report opens this black box, explaining that private finance is actually a differentiated chain of institutions, each with its own incentives, tools, and constraints. It also situates private finance in the broader ecosystem of regulators, rating agencies, and public finance.
In doing so, the CFLI report offers insights as to how we might move individual institutions—from banks, to asset managers, to asset owners—as well as how multiple parts of the financial system may work collectively to meet climate targets. Some of these insights reinforce what we know already, such as the need for more effective partnerships between development finance institutions and private finance to scale investments in emerging markets. Others offer less obvious leverage points. For example, credit rating agencies and index providers may not allocate capital themselves, but can help create the right signals and products to move the trillions in asset owners’ portfolios.
3. It reinforces a new paradigm for the private sector’s role in climate action
Expectations of financial institutions are evolving, and the CFLI report is a clear sign that these new expectations are moving to the mainstream. Until now, banks and investors have been pressured to stop contributing to the climate problem, as embodied in the $11 trillion divestment movement. In its report, CFLI presents a bold alternative: the low-carbon transition will require supporting the transformation of carbon-intensive industries—not abandoning them. Proactive engagement is especially critical in sectors such as heavy industry, heavy-duty transport, and land use, where the solutions aren’t readily available.
Real change comes when the financial sector works to develop the necessary solutions to drive down global emissions. Financing the Low-Carbon Future offers concrete solutions to support the complex transitions most industries will need to navigate, including transition or sustainability-linked corporate bonds, effective engagement strategies, or collective efforts to align their portfolios with global temperature targets. Through CFLI, major institutions across the investment chain are signalling that private finance is not only well-positioned, but ready to drive the necessary solutions to climate change.
RMI was proud to have contributed to the CFLI report. Learn more about CFLI and its report at bloomberg.com/cfli.
Tyeler Matsuo is a Senior Associate at Rocky Mountain Institute
Lucy Kessler is a Senior Associate at Rocky Mountain Institute
This article is published with permission. Copyright 2019, Rocky Mountain Institute.