Finance and Climate: Investing in a Sustainable Future
By Jude Najjar
If you had the chance to stop the COVID-19 pandemic before it hit, would you have taken it?
COVID-19 upended life as we know it and altered the fabric of social life and human interactions. With the global race to vaccinate people, the light at the end of the tunnel seems to be getting nearer. However, a more significant threat looms outside of the tunnel, one that cannot be easily reversed if left unaddressed; climate change.
Climate change is already happening; the global temperature has risen by 1°C since the industrial revolution and is still rising. Extreme weather events are becoming more frequent, and oceans are becoming more acidic1. These and other consequences of climate change can affect and disrupt processes and conditions vital to life, such as water availability, food production, biodiversity, the economy, and financial stability. Most countries have made commitments to combat climate change and have signed on to international treaties, such as the Paris Climate Agreement, to slow down its progression. Nevertheless, economic development and growth are still generally environmentally destructive, and significant long-term investments in green infrastructure and projects are needed to transition to a more sustainable economy and future.
As the backbone of the economy, the financial sector has an essential role in addressing climate change by facilitating financing and introducing new financing methods for green infrastructure and projects. The availability of funding and support from the financial sector can increase the involvement of the private sector, which is crucial to achieving green and climate goals and reducing the effects of climate change. This is especially important since the public sector alone cannot shoulder the responsibility of combatting climate change. This is the concept behind green financing, which the World Economic Forum defines as “any structured financial activity – a product or service – that’s been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms, and investments that are used to encourage the development of green projects or minimize the impact on the climate of more regular projects. Or a combination of both.”2
Financial sectors and regulators in many countries and regions have begun implementing green and sustainable finance frameworks to encourage the uptake of green finance, each with a different approach. The frameworks ranged from mandatory requirements for financial institutions set by the regulator to voluntary commitments made by financial institutions and banking associations. Global recommendations are being released to help with the design and implementation of these policies and increase the focus on managing climate-related risks in the financial sector. These efforts are being led by global coalitions of central banks and financial regulators and international financial institutions such as the World Bank and the International Finance Corporation (IFC).
Global recommendations and regulatory mandates aside, financial institutions have a responsibility to support and adopt green and sustainable finance frameworks to ensure their sustainability and meet their clients’ demands. A KPMG study found that 76% of CEOs interviewed believed that their institutions’ growth would depend on their ability to shift to a greener economy3, which indicates that green and sustainable finance can help ensure the sustainability of institutions. An EY study found that millennials are twice as likely to invest in companies or funds if they target specific social and environmental results4, which is expected to increase the demand for sustainable investment with the growing share of millennial investors.
Shifting to the local context, Jordan currently faces a host of climate-related challenges such as lack of water and energy insecurity. It has demonstrated its commitment to tackling these challenges by joining international treaties and coalitions, such as the Paris Climate Agreement and the Sustainable Banking Network, and introducing policies and plans to address climate change. These include, but are not limited to, the following:
- The National Green Growth Plan (2017)5
The Jordanian Ministry of Environment developed this plan in collaboration with the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, and the Global Green Growth Institute. This plan aims to identify green growth opportunities in Jordan, align green projects and investments with other national development goals, such as Vision 2025, and set a roadmap for implementation.
- The Amman Climate Plan (2019)6
The Greater Amman Municipality developed this plan to determine the approach needed and set a roadmap for implementation to reach near-zero carbon emissions in Amman by 2050.
- The National Climate Change Policy (2013)7
A policy developed to guide the implementation of national plans, priorities, and objectives related to climate change. This policy identifies short-term objectives (2013-2020) and long-term goals (beyond 2020) associated with climate change.
These national plans and objectives create considerably large climate-related investment opportunities. The IFC’s analysis of Climate Investment Opportunities in Cities estimates the climate investment opportunities in Amman to be worth over 12 billion dollars, divided between sectors such as public transportation, green buildings, water, and renewable energy8. By channeling and incentivizing private investments in green projects and sectors to fill the gaps in identified investment opportunities and increase progress made on goals and objectives identified in national plans, green finance policies and frameworks could be vital. The legal basis for private sector involvement in green public infrastructure projects already exists and was enabled by enacting legislation for public-private partnerships (Jordanian law no. 31/20149). The next step would be to introduce a financial market policy dedicated to green finance to increase the participation of local banks and financial institutions in financing green projects.
Faced with a threat as significant as climate change, Jordan and the world find themselves racing against time to achieve ambitious goals and objectives to curb the forecasted ramifications of climate change. The future is uncertain, but at least one thing is clear, climate goals and objectives cannot be achieved without the necessary investments and funding. The opportunity to stop a new global crisis before it hits has presented itself; will the financial sector take it?
- What is climate change? Natural Centre for Atmospheric Science. (n.d.). https://ncas.ac.uk/learn/what-is-climate-change/
- Fleming, S. (2020, November 9). What is green finance and why is it important? World Economic Forum. https://www.weforum.org/agenda/2020/11/what-is-green-finance/
- KPMG. (2019). (rep.). The Numbers that are Changing the World: Revealing the Growing Appetite for Responsible Investing.
- EY. (2017). Sustainable Investing: the Millennial Investor.
- Ministry of Environment. (2017). A National Green Growth Plan for Jordan. Amman, Hashemite Kingdom of Jordan.
- The Greater Amman Municipality. (2019). (rep.). The Amman Climate Plan: A Vision for 2050 Amman. Amman, Hashemite Kingdom of Jordan.
- Hashemite Kingdom of Jordan. (2013). National Climate Change Policy of the Hashemite Kingdom of Jordan: 2013-2020.
- International Finance Corporation. (2018). (rep.). Climate Investment Opportunities in Cities - An IFC Analysis. Washington, D.C.
- Law No. 31 of 2014 concerning Public-Private Partnership. ISN: JOR-2014-L-100337.