Later last month, IMF called on world to make green recovery from COVID19. The main part of that recovery is expected to cover the fight against climate change. The transition to low-carbon economy is estimated to require a 2.3 Trillion USD investment in energy sector alone annually for the next decade.
Economies could generate such investment by only innovative green finance products such as green bonds. It also requires governments to harmonize fiscal measures to support investments in mitigation of green house gases and adaptation to new physical conditions like extreme weather events, droughts and sea level rise.
The devastation inflicted by the virus is a reminder of our vulnerability and the importance of prevention and mitigation. It also presents solid evidence about the scale of economic shock the world will face if we fail to meet the targets of the Paris Agreement, which aims at keeping the rise of global temperature by 1.5 degrees Celsius. A major study published in Nature Communications last month estimated the cost of climate inaction. If we do not transition to a low carbon economy and mitigate our GHG emissions, we can expect a bill of between US$150 trillion and US$792 trillion by 2100. This shock would be even more financially catastrophic than coronavirus. The good news is that limitation of temperature rise by 1.5 degrees would deliver a corresponding boost to the global economy helping it to grow by US$616 trillion compared to inaction.
The EU Technical Expert Group (TEG) on Sustainable Finance, the advisory body for the European Commission on the Action Plan on Financing Sustainable Growth’s implementation, has also released its recommendations to guide the EU plans for recovery from the COVID-19 pandemic. In their statement, the experts highlight that governments “must be attentive to the details of what a resilient, sustainable and fair recovery looks like in practice—to ensure greater resilience to further environmental and social crises ahead.” It is clear that the balancing of the markets in the aftermath of COVID-19 can only be considered a recovery if it transitions the economy to a new stage to resolve the issues which are the root causes of the pandemic itself. Let us not forget that the outbreak happened because of loss and destruction of biodiversity and spread so fast due to lack of international coordination and leadership. It finally dragged the world to an economic disaster due to lack of norms and practice to respond to this crisis with strong social protection and adequate public investment. The world now needs an integrated model to build environmental resilience and transition the economies to sustainable models through sustainable finance. However, with panic, if the economies immediately revert to business as usual and maybe even with reflexes to rebuild employment and economic growth based on investments in fossil fuels and destructive industries with no safeguards mechanisms, the outcome will only me unequal and socially damaging systems that lead to further catastrophes.
The chart from World Economic Forum below (Global Risks Report 2020) displays all different risks of failure in climate action. Financial sector plays an important role to bring consciousness to the post covid19 economic environment with well-established safeguards mechanisms and innovative financial tools that foster manageable risk - high return investment climate. As we are on the verge of revising our social and economic contracts and revise all schemes of governance with awareness of long-term thinking, there is ample opportunity for the financial sector to be the intermediary between sustainable investors and sustainable projects. The investors now should be in interested in social and green bonds and other green finance instruments more than ever and year 2021 will probably be the year of innovative green finance.