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Financier: Private money to invest in ‘green economy’ waiting to be unlocked

The need to recognize the very important role of finance in enabling sustainable landscapes.
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According to Mark Burrows, there is not a lack of finance for forests and, more broadly, green growth.
According to Mark Burrows, there is not a lack of finance for forests and, more broadly, green growth.

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Editor’s Note: Check in at forestasia.org to see news updates from the Forests Asia Summit. Videos of all presentations and speeches at the Summit will be posted here. A version of this story was previously published at Forests Climate Change. A transcript of this speech appears at the end of this article.

JAKARTA, Indonesia — More than enough private capital is available for green growth initiatives, including forest projects, but a lack of political will has blocked investors from unleashing much-needed finances, Credit Suisse Managing Director and Vice Chairman Mark Burrows said at an international conference Tuesday.

Lack of financing has been cited as a major setback in the Reducing Emissions From Deforestation and Forest Degradation (REDD+) scheme, aimed at conserving forests and preventing vast amounts of carbon from entering the atmosphere.

But according to Burrows, there is not a lack of finance for forests and, more broadly, green growth. What’s lacking is the action from governments, standards and certainty needed to green-light investment.

“There are signs that one of greatest social innovations, and that is the financial market, can be realigned to channel capital into the green economy,” Burrows said at the Forests Asia Summit, organized by the Center for International Forestry Research (CIFOR) and Indonesia’s Ministry of Forestry.

“The really good news is this capital already exists at a staggering scale. An estimated $225 trillion of private capital is currently allocated throughout the world’s financial markets,” he said, describing a private sector eager to jump into green investment.

He said that public policy must pave the way with a financial framework to allow capital to flow into the green economy.

“We need political investment to unlock private investment,” he said.

Currently, an array of green investment opportunities have high environmental and social returns, but still lack concrete financial returns. To kickstart a vibrant green economy, governments need to make changes to the real economy — introduce carbon pricing, pollution taxes and define minimum wages, for example.

“Such changes could leverage between three and eight private sector dollars for every public sector dollar spent,” Burrows said.

With more than 40 years banking experience, Burrows sees green bonds — fixed-income financial instruments linked in some way to climate change solutions — as central to mobilizing funds to green growth.

Many of the world’s biggest sovereign wealth funds, banks and trillion-dollar-investors are showing enthusiasm in green bonds, Burrows said, largely because bonds are a “simple and standardized” product that investors are familiar with and that can reduce the risk and complexity of green investing.

The private sector, the public sector and civil society all use their own jargon or ‘language’ to describe the same problems

Mark Burrows

Bonds are crucial because they represent the largest single pool of capital in the world and can easily be channeled to feasible forest conservation initiatives, including those defined as REDD+ projects, Burrows said.

“We need a green growth blueprint. Once we have a blueprint, we can use green bonds as the mechanism for preferencing sustainable investment over alternative growth strategies in forest communities,” he said.

But the financial sector does not need to wait for government action in all areas to scale up the opportunity.

“We could look at banking regulations and credit ratings to ensure the solvency implications of natural resources are properly factored into asset prices,” Burrows said.

“Although the financial systems must at times seem very far removed from the forests… and the agricultural systems we are here to talk about, they are in fact intrinsically linked.”

TRANSCRIPT OF MARK BURROWS’ SPEECH:

Honourable Ministers, Distinguished Delegates, Ladies and Gentlemen,

Thank you for your kind introduction and for allowing me this opportunity to address you today on a subject that is extremely dear to my heart. I need not remind you that tropical deforestation is one of the defining issues of our time. It requires local solutions to a global problem that must be implemented within a narrow window of time. This is no easy task. However, I also need not remind you that Indonesia is a beacon of hope for the rest of the world as we wrestle with the complex yet vital challenge that has brought us all to Jakarta today.

I stand before you today as a concerned father and grandfather, but also as a representative of the finance sector. We live in an interconnected world where the financial economy facilitates much that takes place on the surface of the earth. I am not rash enough to suggest that finance is the perfect solution that will enable sustainable landscapes. With a problem of such complexity, I would argue there is no perfect solution. What I would like to impress upon you today is that finance has a very important role to play and I would like to make three observations. These observations give me confidence in our future, and I hope they give you confidence too.

Discussions on the private sector and sustainable landscapes often gravitate to the issue of the ‘finance gap’. There is a valid concern that we need to unlock the vast pools of private sector capital to address the transition to a Green Economy-  an economy that is low carbon, resource efficient and socially inclusive. The annual investment needs for this are measured in tens of billions of US dollars. This is critical and I have no intention of telling you otherwise.

However, there is another gap that we tend to ignore which is critical too. I refer to this as the ‘perception gap’. This becomes apparent if you enter a room with a variety of people discussing a common topic. The private sector, the public sector and civil society all use their own jargon or ‘language’ to describe the same problems. Different stakeholders can be in violent agreement on a subject without realising it as their messages are clouded by the terms and phrases unique to their trade.

Narrowing the perception gap and communicating more effectively is a tough challenge but also a huge opportunity. Some of you may be familiar with the work of the Carbon Tracker Initiative. They have helped to transform the debate on climate risk within the finance community. They have taken some well-established scientific facts and presented them in a manner which financial analysts and investors can easily relate to. They have turned a climate risk into a financial risk by using appropriate language. New phrases such as ‘stranded assets’ and ‘unburnable carbon’ are increasingly part of the financial lexicon and we are starting to see capital being redirected as this common language and understanding emerges.

Ladies and gentlemen, I often talk about investment in my day job. My first point this afternoon is that I urge you to invest in understanding each other and narrowin the perception gap. We must leave our comfort zones.  While it will not be easy, I am confident it will pay handsome dividends.

We all know the challenge of creating sustainable landscapes will require vast pools of capital, and most of it will need to come from the private sector. We also know that sustainable landscapes depend on activities far beyond the forest frontier. We need a broader transition to a Green Economy. We need to rethink other sectors such as the agricultural, urban, transport and energy systems that can all impact the forests. This will cost money, but the good news is that this capital already exists at an enormous scale- an estimated US$ 225 trillion dollars of private capital is currently allocated through the world’s financial markets.

However, if achieving the goal of economic growth decoupled from resource exploitation were a simple exercise in matching financial resources with expenditure needs, we would not be gathered here today. It is not. These vast private resources cannot be released without a public lever. Public policy must pave the way with a financial framework that is conducive for private money to flow at scale into the Green Economy. We need political investment to unlock private investment.

Even with the best intentions, market and policy failures currently make it challenging to allocate capital to activities with high social and environmental returns but low financial returns. There are many ways to address this.

  • We can focus on fixing the ‘real economy’- and introduce carbon pricing, pollution taxes or minimum wages
  • We can continue to use public sector funds or incentives in a strategic manner. If done well, this can leverage between 3 and 8 private sector dollars for every public sector dollar spent
  • We can continue to use public sector balance sheets. The Chinese Development Bank, Germany’s KfW and the European investment Bank are already among the world’s largest investors in renewable energy in developing economies.

All of these can and should be part of a comprehensive financing solution. However, we are dealing with a challenge of such magnitude that these are insufficient within the window of time available.

What is needed is not just money. That exists in vast quantities.  What is really needed is the political will to correct market failure by rethinking parts of the financial system. Fundamental shifts in the metrics, institutions, and policies that govern how financiers and investors evaluate economic activities are required. We must also think about changing the very rules of the financial system to create a level playing field and help all boats rise on the incoming tide.

I urge you to follow and encourage the positive changes taking place in the financial ecosystem, as they can be a powerful force for good in the physical ecosystem

Mark Burrows

The APAC region is already showing great initiative in this regard. China has been speaking of the need for an ‘ecological civilisation’ since 2007 and those of you familiar with their Five Year Plans will know this is not just political rhetoric. Our hosts today, Indonesia, are part of a world-first group of financial regulators focused on advancing green finance brought together by China and the IFC. This is a reaction to the social and environmental pressures that rapid economic growth and resource exploitation has brought. The Sustainable Banking Network for Regulators also includes financial regulators from China, Vietnam, Bangladesh, India and Nigeria.

Our hosts and APAC neighbours are showing us there is much that we could do. We can look at how we account for and report environmental and social risks, and redefine terms like materiality and fiduciary duty to properly account for externalities. We could look at banking regulations and credit ratings, to ensure the solvency implications of natural resource use are properly factored in to asset prices. We need to consider the social and environmental metrics that underpin tomorrow’s sustainable, inclusive economy.

None of this is easy, and the last few years bear testament to that. But the stakes could not be higher. However, we are already seeing positive change as I have just mentioned. These are all signs that one of our greatest social innovations – the financial markets – can be realigned to channel capital into a Green Economy.

Ladies and gentlemen, although the financial system must at times seem far removed from the forest and agricultural systems we are here to talk about, they are in fact intrinsically linked. I urge you to follow and encourage the positive changes taking place in the financial ecosystem, as they can be a powerful force for good in the physical ecosystem.

I have so far spoken of the perceptions and policy, and the third ‘P’ I would like to address relates to a financial product. A recent conversation with senior management of one of the world’s largest Sovereign Wealth Funds makes me believe we will be hearing much more about these in the future. I want to talk to you about bonds, and specifically about green bonds.

Bonds are attractive for many reasons; they are a familiar product to the investment community and they represent the single largest pool of capital in the world. The key question today is how would these benefit our forests?

You may have noticed that I have spoken of green, and not forest, bonds. To take the pressure off the forests we need a holistic approach to green growth, not a siloed approach. We need to deal with the agricultural, infrastructure, urban and transport requirements that are essential to create a Green Economy. This is vital to create the jobs and green growth that will in turn create the social and political space for our forests to thrive.

To do this we need a green growth blueprint. Once we have a blueprint, we can use green bonds as a mechanism for preferencing sustainable investments over alternative growth strategies in forest economies.

Green Bonds capitalise on a growing appetite for ‘purpose-driven’ finance and can help reduce the risk and complexity of greener investing, They make product selection simple and standardised for investors and they outsource the social and environmental due diligence to credible third parties. They have the potential to create a virtuous cycle. Uncovering the large-scale investor appetite we are seeing in the market will help to drive governments to develop green growth frameworks in the knowledge that cheap private sector capital is eager and available.

The key question is how do we scale up this opportunity? To do so, there are several key requirements:

  • Investors demand large-scale investment opportunities. We need to be thinking of investment grade bonds of half a billion dollars and upwards. This will make it easier for money managers to increase green capital allocations within existing liquidity and creditworthiness constraints of investors. Let’s think big.
  • Green bonds are a relatively new concept. We need to use public funds strategically to improve the attractiveness of the products and develop an investment track record. We need to bring in the balance sheets of rich nations to buy down the cost of capital. However, at the other extreme, we must avoid Development Banks providing 100% of project financing and crowding out private finance. We need to be strategic.
  • We need to be clear and rigorous about what green growth is, especially in complicated areas such as forestry and agriculture. For that we need standards, and then third party verification of those standards. There is huge demand from the finance community for this. They want help to screen and preference green investment. We need to simplify and standardise.
  • We need to use incentives for Green Bonds. This isn’t rocket science. Tax incentives have driven expansion in the US oil and gas industry for many years. It is just a matter of defining your qualifying universe and implementing it. Very little treasury loss can be a very big boost to investment. We need carrots.
  • Build a green growth narrative in a language that resonates with our target audience. Once again, we need close the perception gap. Let’s reposition the narrative in both politics and financial markets towards financing productive investments that will provide a long-term economic stimulus. We need a compelling story.

Ladies and gentlemen, my allotted time is almost up. I have given you some views today on Perceptions, Policy and a Product that could all contribute to sustainable landscapes.  The challenge ahead of us is considerable, but we should never stop reminding ourselves of the vast opportunities for the planet and its people that lie beyond it. People like you will make this happen.

I want to leave you with the words of the American writer and anthropologist, Margaret Mead:

“Never doubt that a small group of thoughtful, committed people can change the world. Indeed, it is the only thing that ever has”

Thank you and good afternoon, Terima kasih.

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