Just days before the opening of the latest G20 meeting in Hangzhou, China and the United States announced that they would formally ratify the Paris Agreement. This is excellent news, but it is only a start. The G20 now has to play a leadership role to ensure that global financial markets value the natural world and encourage sustainable development. Known as “green finance”, as a rule, these environmentally-friendly investments should discourage activities that damage the environment and favour companies that are part of the solution.
To prevent the worst impacts of climate change, G20 countries must – at a bare minimum – meet the commitments they have made under the new global climate deal. These commitments include reducing their emissions in line with the Paris Agreement’s long-term goals – action which will further increase their emissions reduction pledges from the current levels. Unfortunately, G20 countries are a long way from this mark right now – they are still subsidizing fossil fuels, not eliminating them. Globally, in 2014 alone, close to US$500 billion was spent on consumer subsidies to support fossil fuel use – money which could have been spent on investing in renewable energy or energy access for the poor.
The G20 countries are the world’s leading greenhouse gas emitters. These countries must eliminate fossil fuel subsidies by 2020 and work towards providing clean and renewable energy access for all in order to accelerate the trend towards a green and low-carbon economy. Time is not on our side: a delay of even a few years could mean the difference between mild climate change and dangerous climate change driving more extreme weather, more poverty and greater climate change mitigation costs. G20 countries should now be leading the charge to implement their Paris climate pledges through the investment decisions they make.
The private finance sector also has a role to play, although the players in this sector first need to understand how the coming shifts in G20 government policy will impact them. For example, we recently identified over 60 Asia-Pacific companies that depend on an on-going demand for oil, coal and gas to remain profitable. We believe that these companies will face future financial difficulties should the G20 implement targets restricting climate change to “well below two degrees” – as the companies will be required to curtail production of their unsustainable products. The shareholders and owners of these companies need to watch developments carefully, as do their bankers – companies that ignore this trend could be hit with falling valuations, declining share prices and defaults on debt.
While there may be uncertainty on the timing of the shift from using energy derived from fossil fuels to energy derived from renewables, it seems that investing in fossil fuel companies is becoming inconsistent with long-term investment horizons. This is not only an issue for the private sector – special attention also needs to be paid to state-owned and state-controlled fossil fuel companies in Asia. Their governments may try to bail them out in the face of shrinking markets and shrinking profitability – an act which effectively further subsidizes fossil fuels – when actually these governments should instead remove the “safety net” for such companies and let the market sort them out. For governments to uphold their global environmental responsibilities, halting support to these companies is the only viable, sustainable option.
The G20’s ultimate aspiration is to achieve stable, sustainable global economic growth. G20 leaders should recognize that such stability cannot be achieved without investing wisely in the environment and in a sustainable future. At the same time, the investment community needs to prepare for this transition by understanding the coming changes and identifying the future winners and losers in this new landscape.
Gavin Edwards, Conservation Director, & Jean-Marc Champagne, Climate Finance Advisor, WWF Hong Kong