Can finance solve the GHG reduction and sustainable growth riddle?

Achieving significant GHG reductions and sustainable growth is the challenge of our times. Lord Stern explains the policy and investment challenges ahead.

Nicholas Stern is the I. G. Patel Chair of Economics and Government at the London School of Economics and Chair of the Centre for Climate Change Economics and Policy. He spoke to us at the One Planet Summit.

Finding ways to meet the challenge of financing sustainable, inclusive growth and reduce our greenhouse gas emissions is vital. Is it possible to achieve both objectives?
The question is fundamental and it is very urgent. We must reduce overall emissions in the next two decades by at least 40% for a target of 2°C and at least 70% for a target of 1.5°C. And we must go net zero in the following two or three decades. We must change the whole economy.

That sounds like a rather tough challenge.
The good news is that this can be the sustainable growth story of the 21st century. It does not sacrifice growth; rather, it can drive growth that will last and create many new jobs. This does not mean it is easy: good policies, good investments and innovation are vital. For this to happen, finance and economy ministers must take the lead
How can we make it work?
There is no shortage of wonderful potential projects and there is no shortage of finance. The challenge is to translate possibilities into real investment programmes and enable the right kind of finance in the right place at the right time.

What is the role of the policy framework in bringing about the right kind of finance?
French President Emmanuel Macron provided great support and sense of direction for our work in the One Planet Lab. First, getting the policy framework right is essential if we want strong green and clean investments. A carbon pricing regime, stopping fossil fuel subsidies, the right kind of regulation, urban design are but a few examples of what governments can do. Second, private investment and private finance are key. This means moving the entire financial system: removing obstacles is critical if we want to be serious about “greening” the system. Transparency and regulation are critical to climate-related financial disclosure, which would accelerate the whole financial system. Third, you have to align incentives faced by multilateral institutions and development banks. The whole portfolio – its very raison d’être – has to be sustainable.

How can we scale-up financing for these investments with this policy framework?
Various presidents and prime ministers pledged to unlock $100 billion of financial flows for developing countries at the 2009 UN Climate Change Conference in Copenhagen (COP 15) and this was translated into the Cancun agreement (COP 16). This $100 billion figure relates to the concessional public funds and the private sector flows they can unleash. First-loss provision is a key example. It is about providing guarantees and underwriting political risk. This allows for early-stage equity and infrastructure investments, whose risk profile can otherwise create obstacles to private-sector involvement. The Green Climate Fund (GCF), along with the activities of institutions such as the Bank for Investment and Development (EBID), reduces risk for investors. So within that $100 billion, the concessional financial story is important: it is about de-risking long-term investment. And if we get that right, it will not only accelerate international agreement, it will also show powerful examples to the system as a whole.

About Nicholas Stern
Lord Nicholas Stern is the I. G. Patel Professor of Economics and Government at the London School of Economics and Chair of the Grantham Research Institute on Climate Change and the Environment.

Previously, Lord Stern was Chief Economist of the World Bank from 2000 to 2003, and Chief Economist and Special Counsellor to the President of the European Bank for Reconstruction and Development from 1994 to 1999. He led the Stern Review on the Economics of Climate Change, published in 2006.