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What’s corporate treasury’s role in climate finance?

It's crucial for corporates to play a part in achieving the $6.9 trillion annual investment needed to achieve the Paris Accord's climate goals. How can finance and treasury professionals play a role?

Businesses will have to play an instrumental role in meeting the global climate goals outlined in the Paris Agreement, which seeks to keep global average warming below an increase of 2 degrees celsius. This was discussed at the recent ECOCITY World Summit in Melbourne, Australia, where panellists talked about four ways in which private businesses are helping governments to meet the global targets. These comprise emissions targets, energy efficiency, R&D and, lastly, climate finance. So what is climate finance and is it something treasurers are (or should be) getting involved with?

Green investment burden falls to private sector

Climate finance is defined as the investments needed to drive our economies towards a low-carbon and resilient, or sustainable, model. And to see why it's so important for finance professionals in the private sector to get involved in climate finance, you just need to look at the figures, which show a huge shortfall in investment coming from governments. Without the private sector investing in a sustainable, green way, it's hard to see how the global community meet the agreed climate target. According to the Organisation for Economic Co-operation and Development (OECD), a total of US$6.9 trillion will need to be invested annually for the next 15 years in order to meet the infrastructure needs (energy, transport, water, telecoms) consistent with a 2°C scenario. But so far, governments have committed an annual amount of just US$100 billion. According to this report on the ECOCITY World Summit by the International Chamber of Commerce, the remaining US$6.8 trillion will have to be sourced from the private sector.

A drop in the ocean

The ICC states that there has been “strong appetite” for climate finance from the private sector, pointing to the €500 million green bond issued by HSBC in December 2015. Green bonds enable companies that are driving sustainable infrastructure projects to access the growing pool of global investors looking for climate-friendly investment opportunities. According to HSBC, the proceeds of its first-ever green bond were allocated to support renewable energy, energy efficiency and waste management projects in 10 countries (eight European countries, plus South Africa and Turkey). The funds were used to provide loans and project finance to HSBC clients, from wind farm projects to solar plants and sustainable waste management facilities in the UK and France.

Climate finance is financial sound

Of course, a €500 million green bond, however laudable, is a drop in the ocean compared to US$6.8 trillion that the OECD says needs to come from the private sector. And HSBC's Gordon French writes in this recent article that green bonds still account for less than 1 per cent of the overall global bond market. But he believes the market is growing, partly because there has been a fundamental shift in global awareness of the urgency of tackling climate change, especially since the signing of the Paris Accord in 2015. The green cause is also gaining vital backing from Asian giants India and China and also, developing technologies mean there are an increasing array of low-carbon solutions that are financially viable. French adds: “Green investments are increasingly not just ethically but also financially sound.”

So the question still remains about how treasury can get more involved in green finance. Many companies now have a sustainability policy, which treasurers should take note of and champion. Placing excess cash into green investment vehicles demonstrates the company's commitment to sustainable and socially responsible goals. As HSBC's French writes, the fact that green investments are increasingly sound financially means that it's a market that is set to grow.

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