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Financing Green Trade in a Climate Crisis

Even though the media furor regarding Glasgow COP26 has died down somewhat, one can be sure the next frenzy is sitting in the wings, waiting to take its place in news headlines once again, as, obviously, the topic of climate change isn’t going anywhere. Because global trade sits at the heart of most human endeavors, it too then sits at the heart of the climate question, and the financing of trade looking forward is going to play a vital role in addressing the issues. What then is green trade finance and how is it going to help?



Cop Out


The Glasgow COP26 has now come to be known as the Glasgow climate pact. In the build-up to it, it was reported as being the last chance saloon to make any significant advances to tackle climate change.


The number that has come to define the conference is 1.5 – the limit in Celsius by which we must contain the increase of average global temperature (over and above what it was in the middle of the 19th century).


As discussed in The Economist, the vast majority of the delegates representing the 197 parties to the UN Framework Convention on Climate Change acquiesced to some sort of concession on their misgivings. This at least appears to have been a success. The magic 1.5 number came into being due to reporting in 2018 by the Intergovernmental Panel on Climate Change which ardently stated that allowing anything above this number was dangerous: world weather system volatility would recalibrate to a different state. More than this, low-lying coastal regions in the world would not be able to survive the resultant sea level rises.


Overall, global leaders came to realise that cuts in carbon emissions (as well methane) needed to be meaningful and that before Glasgow (set out in Paris in 2015) these established promises were not adequate. The emissions are based on Nationally Determined Contributions (NDCs) and a timetable was set for how and when countries would proceed.


Sadly, the small matter of a global pandemic upset the apple cart a bit and the NDCs finally became a backdrop upon which to base the COP26 negotiations. Glasgow is now in all of our rear-view mirrors and, disappointingly, it has not passed muster. According to the Economist, the new NDCs will fail to contain global warming within the 1.5C boundary. Data modeling carried out by individuals within the conference indicates that following the latest NDCs will result in a 68% likelihood of average global temperatures rising to between 1.9C and 3C, with a median value of 2.4C.


As things stand, earth’s climate system through the coming century, will likely not just become more unstable, it will be transformed: what is considered to be extreme now, will become commonplace.


The four industrial sectors involved in green trade finance (as discussed by Societe Generate and Wikipedia)

Objectives


Green trade finance (GTF) encompasses climate finance, and its aim is to reduce emissions while enhancing sinks of greenhouse gases. Further to this, it also has the objective of preserving and advancing the resilience of human and ecological systems to the ongoing consequences of climate change. Essentially, it can be treated like a manifesto and was set out by the United Nations Framework Convention on Climate Change (UNFCCC). Unlike capital markets involved in Green Bond Principles, there aren’t currently any standards set in place for GTF.


This tends to leave the space vulnerable to practices such as greenwashing (pointed out by Harris Clark & Rickerbys solicitors in their blog titled The Rise of Green Finance), where vacuous claims are made to paint a company or product as being environmentally considerate. Green bonds or loans are subject to market scrutiny compared to a lack of oversight in GTF. To compensate, rules from such regulated markets can be commandeered for GTF but this is still no easy feat, and the fit is an uncomfortable one.


As shown in Figure 1 and as discussed by Societe Generale and described by Wikipedia, there are four primary industrial sectors that comprise GTF. These sectors are specific as they were included in the United Nations Sustainable Development Goals which were set out by the United Nations General Assembly in 2015 with the intention of being achieved by 2030.


As noted in figure 1 there are 17 sought-after goals and even though they are shown as distinct items, in many ways they overlap, and where one goal is achieved, another may also benefit. Equally, the four primary sectors intersect also. Water management and waste management go hand-in-hand: where one activity is done well, the other is also positively affected. And clean energies for use in transport are invariably renewable. The sectors and goals are dynamic in that regard – progress can be made on multiple fronts by addressing one strand.


Where and How Much?


One of the most profound issues of the climate crisis is the question of developing countries. Were they to continue to progress in the same way as developed ones, they would become highly industrial and acutely worsen the climate problem, not to mention cause immeasurable environmental harm. It is vital their respective progressions occur in a way that betters each population but also nurtures the natural world. No small undertaking. And because developed nations were able to grow and develop uninterrupted by environmental concerns, many undeveloped countries now have the moral high ground: why shouldn’t they also have the same freedoms to progress their countries in the same way? If developing nations are to move forward in a new and sustainable way, the onus sits on rich and developed nations to provide the means – money – to do this.


The Paris agreement reiterated a 2009 commitment that the World’s rich countries should provide $100 billion per year by 2020 to assist developing nations handle the impacts of climate change and transform their economies into green ones. As discussed by the BBC, by 2019, only $79.6 billion was raised. Even more, a recent United Nations report has indicated that the agreed upon amount would not be reached until 2023, and this is despite the fact that newer and more ambitious targets have been put in place for 2025. What this all tends to suggest is that governmental drive is not going to be enough. What it suggests is that the time is at hand for private money – commercial enterprise – to step into the gap and start playing its part in a much more meaningful way.


As demonstrated by Nature in data taken from OECD.org, 2013 saw the generation of $52.3 billion of green financing for developing nations. Of this, $39.5 billion was public money and 12.8 private. In 2014, this total rose to $61.8 billion with 45.1 being public money and 16.7 private. Rolling the clock forward to 2017, the total amount generated was $71.2 billion. 56.7 was public sourced money and only 14.5 was private. Irrespective of gaps in the data, it does point to two things.


The first is that not enough finance is being generated for developing nations for them to suitably prepare for the climate crisis. And second, the amount of private funding flowing into the climate kitty for developing countries does not appear to be forthcoming. In a post-COP26 world, and with newer and starker warnings about where the climate crisis is taking us, the world of finance needs to get on board, and quickly.








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