UN Secretary-General Ban Ki-moon (second left) speaks at the Climate Finance Ministerial lunch in Lima, Peru.

There’s a major shift happening in private sector investment to address climate change, with innovative finance mechanisms like green bonds leading the charge, a new UN report has found.

The report, Trends in Private Sector Climate Finance, said the finance community was emerging as a leader in the fight to limit climate change, but policy intervention was now needed to broaden and deepen available opportunities.

While the private sector was both recognising threats posed by climate change and waking up to the massive commercial opportunities available, there were myriad problems identified regarding increased take-up, including investment levels remaining too low, not all countries seeing benefits and leadership by some in the sector matched by inertia from others. It was now time, the report said, for governments and policymakers to take action to accelerate private sector investment.

The five signs showing things are shifting

The report details five “inflection points” demonstrating early signs of a long-term shift in private sector investment.

The first point is that financial institutions – in both developed and developing nations – have committed hundreds of billions of dollars to support low-carbon and climate-resilient investments around the world.

“Crucially, many of the organisations taking these actions are not just identifying changes they will make to their business practices in the near term,” the report said. “Rather, they are altering their long-term business models in response to the commercial opportunities and challenges posed by climate change.”

However the UN has said $100 billion a year needs to be mobilised by 2020 to limit warming to 2°C.

“We need bold leadership from finance ministers, from business leaders and investors, and from international financial institutions that include the voices of developing countries,” UN Secretary-General Ban Ki-moon said.

The second inflection point is the green bonds blitz, which the report said was expanding at a rapid pace and was one of the most significant developments in the financing of low-carbon investment opportunities.

“Six years ago, green bonds were a concept. In 2015, it is expected that issuance will be between $50 and $70 billion,” it said.

China was at the forefront of recent green bond developments, with central bank regulations to govern a domestic green bond market to be published later this month.

Other innovative financing trends growing in popularity included Yieldcos – companies aiming to exploit the predictable and low-risk nature of operational renewable projects to provide high dividends to investors.

Third was a trend for businesses to adopt “internal carbon prices”, which according to the CDP has trebled in the last year to almost 450 companies.

“By market capitalisation, around 15 per cent of the S&P 500 factor in a price on carbon when undertaking investment appraisal. A further 580 companies anticipate introducing an internal carbon price within the next two years.”

The fourth inflection point was around investors expressing increasing concern about carbon-exposed assets, which can be seen in the growing divestment movement.

“Investors have made commitments to decarbonise broader market portfolios worth hundreds of billions of dollars, and they have developed the investment strategies and instruments necessary to do so.”

The actions were sending powerful long-term signals to companies about the desire of the investment community to move towards low-carbon investments, the report said.

Finally, the insurance sector has responded, scaling up efforts to respond to climate impacts already locked in.

Developed countries had seen a rise in the proportion of weather-related losses insured – from 30 per cent to 50 per cent over the past three decades.

“There has been a steady rise across both developed and developing countries in the number of lives and value of assets insured, and an improvement in risk reduction and disaster response measures,” the report said.

Governments now need to act

While the five signs were encouraging, the report described “challenges, gaps and fragilities” that need to be addressed to ensure widespread adoption and continuation of the trends.

“Overall low-carbon investment levels are currently below those needed to avoid breaching the 2°C threshold this century, and adaptation funding gaps are anticipated,” it said.

“Governments now have a unique opportunity to change rules so as to address the current gaps and weaknesses in private sector climate finance.”

Policymakers needed to increase the demand for low-carbon, climate resilient investment, which could be achieved through reforms to energy pricing, carbon pricing and adjusting infrastructure needs assessments to prioritise low-carbon, climate-resilient infrastructure.

More policy attention was also needed to allow low-cost capital to flow towards these opportunities. Enhanced disclosure rules and stress testing would provide better quality information to improve decision-making by companies, investors and regulators.

“Depending on national circumstances, capital flows to the low-carbon climate resilient economy can be further supported by tax incentives, interest rate subsidies, credit enhancement, and dedicated financial institutions for green financing.”

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