Solidarity is the key to unlocking a just transition
By José Viñals, Group Chairman at Standard Chartered
Investment gaps are standing in the way of achieving global climate goals. In this post for the Sustainable Finance Leadership series, José Viñals highlights the need to increase finance flows to developing markets in the spirit of solidarity and shared responsibility for the net zero transition.
Solutions through ‘solidarity, sustainability and science’
With the opening of the UN General Assembly (UNGA) on Tuesday 13 September, there is no better time to consider its unofficial motto: ‘solutions through solidarity, sustainability and science’, and what this means for reaching the goal of net zero emissions by 2050.
On accepting his appointment as President of the 77th UNGA, Csaba Kőrösi, Director of Environmental Sustainability at the Office of the President of Hungary, suggested that this very expression would guide his efforts in the role. Indeed, it is likely we will see this come across in the UNGA’s discussion of the Sustainable Development Goals – and how to finance them – at the start of the second week of the gathering.
While science and innovation have a huge part to play in making our world a more sustainable place, solidarity is especially important as we seek to stave off the worst impacts of climate change. Nations must work together to reach the ultimate shared goal of net zero carbon emissions globally by 2050 – and that means unprecedented international collaboration. Specifically, it means increasing the flow of finance from developed economies to emerging and developing markets.
Standard Chartered’s recent Just in Time report investigated the cost and socioeconomic implications of a just transition – the shift to a more sustainable and equitable economy – revealed that almost US $95 trillion of financing is needed to help emerging and developing nations to meet their long-term climate goals. According to these findings, Indonesia, the United Arab Emirates (UAE) and Nigeria face financing gaps of US $2.7 trillion, US $671.1 billion and US $283.3 billion respectively. If such markets were to attempt to self-finance these investments, it would lead to higher taxes and an increase in government borrowing, meaning that some of the world’s most vulnerable people would have less to spend on their everyday needs.
In this scenario, the risk is that households in the eight emerging and developing markets included in our research could be US $2 trillion poorer on average each year. That means consumption would fall by as much as US $79.2 trillion by 2050.
The first step to building true solidarity and helping emerging and developing markets to meet their climate goals is regaining trust. Ahead of COP26 last year, a group of emerging and developing countries including India and China accused richer nations of acting inequitably by playing a historical role in causing the climate crisis then shifting the burden of transitioning to more sustainable models onto emerging markets.
A strong start towards reconciling this issue would be for both the public and the private sector to fulfil the financing pledges they have already made ahead of COP27. Governments cannot be expected to provide all the finance, but the public sector will need to use its funds to encourage private investment. Indeed, public sector money has the potential to ‘crowd in’ private sector finance.
Financing the just transition
Blended finance, for example, can incentivise private sector investment by using development funds to de-risk investment opportunities in sustainable infrastructure projects. Governments can also encourage investment by issuing more sovereign green bonds, which can help bring down the cost of capital for green projects such as renewables.
At the same time, progress is needed on the private sector side. Making use of the trillions of dollars in assets held by the members of the Glasgow Financial Alliance for Net Zero (GFANZ) will go a long way to convincing emerging and developing markets that the net zero transition will be a just transition, without stunting growth.
But there first needs to be more dialogue and understanding between banks and emerging and developing markets to: foster the right investment environment; develop low-carbon projects to the point that they are ready for investment; and create financial products that can fund them.
Part of this job is convincing investors that these investments are not only the right thing to do, but that they will also bring strong financial returns. According to Standard Chartered’s $50 Trillion Question study, 88% of investors revealed that investments in emerging and developing markets matched or outperformed developed markets between 2017 and 2020. Despite this, the world’s top 300 investment firms have just 2%, 3% and 5% of their investments in the Middle East, Africa and South America respectively.
Plugging the investment gap would also create economic opportunities. According to the Just in Time report, helping emerging and developing markets to find the funding they need would lead to a US $108.3 trillion increase in global GDP by 2060 and boost household spending in these regions by an average of US $1.7 trillion annually.
A lot to lose
Emerging and developing markets need investment, and without help from developed markets, their prosperity – and our shared net zero ambitions – are at stake. Bodies like GFANZ and the United Nations Global Investors for Sustainable Development Alliance, which I am proud to co-chair, have the mobilisation of finance at the heart of their mandates. We need more climate action – and failure to mobilise capital will mean that climate goals are missed, which would trigger an environmental catastrophe.
As Csaba Kőrösi suggests, solidarity is what is needed. Governments, the financial sector and developed and emerging markets must come together in the pursuit of a more sustainable future, and do so quickly. The stakes have never been higher, and the clock is ticking.
The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute.