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Conceptualising Climate Finance: Definitions, Typologies and Discourses
- 1. Conceptualising Climate Finance: Definitions,Typologies and Discourses Felicia Liu King’s College London | National University of Singapore Global Conference of Economic Geography 2018 26th July 2018 Finance and Environmental Sustainability
- 2. Climate finance debateto date Fig. 1 No. of journal articles dedicated to climate finance Fig. 2 Distribution of climate finance mechanisms by geographical articles
- 4. Source: Buchner etal. 2017 Total climate finance flow in 2016: USD 383 billion in 2016 The total value of ETSs and carbon taxes in 2016: US$50 billion Total value of green bond issuance in 2016: US$81 billion
- 5. Climate finance debateto date (cont’d) - Disproportionately focused on carbon markets - One term use for all
- 6. Climate finance debateto date (cont’d) - Disproportionately focused on carbon markets - One term use for all - Value of studying climate finance from a geographical perspective
- 7. Typology Existing instruments with additionalrequirements - Additional information disclosure and analysis that does not involve new financial products e.g. responsible investment Grants - Philanthropy - Public or multilateral funds Debts - Green bonds - Loans Market making - Carbon trading - Carbon tax Insurance - Rebatement incentives - Microinsurance - Catastrophe bond Non-financial instruments - ‘Enabling’ mechanisms - ‘Capacity building’ mechanisms
- 8. Green Bonds - Fixedincome capital-raising tool - High profile - Ample market advocacy and research - Fastest growing climate finance mechanism
- 9. Green Loans - Privategreen loans - Wider range of sizes of debtors and projects - Green Loans Principle
- 10. Non-financial Tools - ‘Enabling’tools - ‘Capacity-building’ tools
- 11.
- 13. Enabling Tools ● Otherexamples, e.g. sustainability reporting regulations, responsible ownership pledges ● Voluntary guides and frameworks ● Market norms and practices ● Legislation and regulation ● Actors in determining the market environment and development
- 14. - Knowledge buildingand experience sharing e.g. seminars, webinars, conference, expos Capacity building tools - Match-making e.g. CDP matching cities to investors, UN-led match-making between countries and multilateral development banks - Research e.g. Climate Finance Lab, Global Innovation Lab for Climate Finance - What would be interesting to explore further: - Players involved - What types of assistant or services are they providing - What are their incentives - How does that in turn change the way the market engages in climate finance
- 15. Conclusion - More researchthat pays attention to the variety and unique features of different climate finance is instrument is needed to: - Fully appreciate the suitability of different tools in meeting the climate change demand in different markets; integrated to geographical locations - Enrich current literature on market-making and and regional relations
- 16. Future Research Plans -Compare the engagement in green bonds in Hong Kong and Singapore, and green sukuks in Malaysia - Specifically interested in looking at how non-financial tools have shaped the market - Previously looked at sustainability reporting - Local certification schemes, alignment with government agenda, government incentives and the ‘know how’
- 17. Thank you! Felicia HM Liu Department of Geography Bush House 30 Aldwych WC2B 4BG felicia.liu@kcl.ac.uk
Editor's Notes
- #2 Good afternoon everyone. Many thanks to Janelle and Sabine for organising this session I’m Felicia, I’m a first year PhD student jointly supervised by King’s College London and the National University of Singapore. Today’s talk is the result of my review of the literature, and it will inform the basis of my fieldwork on engagement in climate finance in three capital markets in Asia, which I’ll talk a bit more about towards the end of the presentation. For today’s talk I’m going to focus on my understanding of the literature on climate finance to date, provide a typology of climate finance mechanisms, then I’ll proceed to talk about a few mechanisms that are interesting but understudied and give some concluding thoughts on where I think are some potential future research directions. (Click)
- #3 So first of all what does the debate on climate finance look like? I did a quick Google Scholar search for ‘geography’ ‘climate’ and ‘finance’. (Click) In the first fifteen pages I found 28 relevant articles, 20 of them are published in geographical journals or published by a scholar from a geography department. (Click) Of those 20 articles, 15 of them have put carbon market as the centre of analysis or equating climate finance to carbon markets. Other topics covered includes weather derivatives, wetland banking, catastrophe insurance and general commentary on green capitalism This I’m sure does not cover all articles written about climate finance to date, but it provides a snapshot of what the literature looks like. (Click)
- #5 This is interesting because the carbon market plays a relatively small role on the aggregate volume of climate finance. This is the latest stock take of the flow of primary investment into productive assets at the project level in 2016, so excluding stuff like R&D investments, bonds or insurance. (Click) According to this study, total flow of these investments were worth USD 383 billion. (Click) According to the Climate Bonds Initiative, the total value of labelled green bond was worth US$118 billion, the universe including unlabelled bonds was worth US$694bn (Click) On other hand, according to the World Bank, the total value of Emissions trading scheme and carbon tax combined in the same year was only worth USD 50 billion. These numbers fluctuate depending the methodology of different reports. But I’m hoping to show that carbon markets are not the most significant tool in climate finance in terms of volumes raised. Therefore, it appears that geographical literature has currently disproportionately focused on a climate finance mechanism that has limited impact on raising capital for climate change.
- #6 What the Google search has shown is that there is a tendency to associate climate finance only with carbon markets, when in fact it cover a range of instruments and mechanisms especially if we look at the conversations banks and NGOs and consultancies are having about climate finance. So the literature is not reflective of the landscape of climate finance. So with the typology I’m hoping we can acknowledge the range of financial mechanisms that have been employed to support the financial demands climate change mitigation and adaptation And we’ll be surprised to see that these instruments feature in geographical literature, just not mentioned in a climate change context.
- #7 Before I move onto the typology I would also say most geographical literature are critical of various mechanisms of climate finance We flag up issues of ‘commodification’, ‘normalisation’ and ‘marketisation’ etc, which are all valid criticism and valuable insights, but we should be cautious we don’t make sweeping dismissals of climate finance as a concept without empirical evidence, and overlook the importance of exploring and assessing the intricate processes and relationships in their actually occurring forms
- #8 Here is my typology of climate finance mechanisms. The purpose of creating this table is to showcase the variety of mechanisms, their suitability of different purposes and players. For example: Responsible investment falls under ‘existing instruments with additional requirements’ - instead of creating a new financial products an extra layer of climate information disclosure and analysis is added. It is suitable for meeting ethical investments requirements and increasingly in fulfilling fiduciary duties instances where the term that accounts for longer term sustainability. But relying on this alone is insufficient in providing the financial demands for climate change. Grants - coming from public or philanthropic fund, acting as a catalyst to support new technology or R&D, and in some cases in very weak markets Market making - all very familiar with - carbon trading and tax change the price signals of the market in an attempt to addressing the ‘negative externality’ Insurance - industry with material interest in not just mitigation but in strengthening ex-ante adaptation. Introduced rebatement incentives but also catastrophe bonds to protect their businesses (Click) Won’t have time to go through each mechanism in detail, but I’d like to draw your focus on debt and non-financial instruments because I think these mechanisms are scarcely touched on by the literature and also because the relationship between these instruments provide a strong case as to why economic geographers should study climate finance
- #9 Won’t go into the details of how a green bond works. (Click) But I’d like to highlight that green bonds are gaining enormous traction in the financial industry with lots of market research and advocacy, mostly highlighting the benefits of issuing and investing in a green bond and how it is suitable for infrastructural development. (Click x3) almost seem like everyone is trying to cut a share from the green bond market. There is the Climate Bonds Initiative which is the authority behind the voluntary certification of green bonds (although it is not the only standard setter). White and Case the law firm which help corporate clients with regulations and compliance with transactions. The City UK which is a think tank the seeks to attract investment flow into the city of London All of these are addressing slightly different audiences but essentially raising the interest and know how in green bonds to relevant stakeholders, almost enticing them to engage Coincidentally, green bonds is one of the fastest growing climate finance mechanisms
- #10 Now I’d like to turn to green loans There are other forms of public and blended loans used for climate change purposes but I’d like to focus on private loans Compared to green bonds, private green loans receives much less attention This is a bit of a tricky claim to make because there are no market estimates of how much green loans are worth; I also acknowledge that bonds are by nature more visible than loans In general there are less talk around it until March this year when the Green Loan Principles was published (click), then we begin to see these types of headlines and blogs advocating for the potential of green loans (click) I’m by no means suggesting having some sort of voluntary standards was the make and break for green bonds and green loans, I don’t think it is wise to point to a single reason for the emergence of certain financial mechanisms, but I believe these could be clues that invite us to conduct further investigation to the players and processes that shaped the market
- #11 On this note, I’d like to turn your attention to non-financial tools I categorise them into enabling and capacity building tools These are generally not taken stock in market research because they do not directly generate capital but facilitates various processes of climate finance, for example in ensuring that the earmarked bond or loan are used for its intended purposes, or in directing interested investors to suitable projects the first place And I’ll talk about enabling instruments first
- #12 these two tables are taken from the Climate Bond Initiative, explaining the process of obtaining certification to hold the issuer accountable for the ‘greenness’ of the project To answer the requirements, we have the Climate Bond Standards and Green Bond Principles to enable the issuance of a green bond that is worthy of investors confidence What would be interesting to learn is who built these enabling tools who promoted them, who adopted them and who executed them, and how that shaped the green bond market to what it looks like today
- #14 There are other enabling tools that serve other purposes, for example there are climate risk reporting standards that seeks to harmonise information disclosure. There are also responsible investment principles and guides that helps investors process information climate risk. Enabling tools also come in different forms. The two standards I talked about are voluntary. However, other enabling tools have been legislated or regulated, for example governments and stock exchanges are increasingly requiring listed companies to disclose carbon emissions and climate change risks. (click)
- #15 Second category of tools do not facilitate accountability or transparency. Instead they seek to ‘build capacity’ to educate market players about the advantages (or some would argue the necessity) of engaging in climate finance, essentially advertising and explaining the ‘shopping catalogue’ of climate finance. Taking the example of green bonds again. These are the speakers at an event scoping the landscape of European green finance: - there’s a bank, a railway company, Climate Bond Initiative, a consultancy, a law firm - mix of players, each of them has some knowledge and expertise to offer at the issuance and transaction of green finance Other forms of capacity building tools - match-making, research Yes, existing geographical literature is right that players have vested interest, they gain business from hosting these events and for offering reporting, accounting, auditing service, but these are also part of the processes and relationships that shapes the climate finance markets Ultimately the question lies in who played what role in shaping what type of relationship that gave rise to what type of climate finance mechanism to achieve what outcomes?
- #16 Climate finance at its current trajectory of exponential growth with political commitment, involvement of private players and innovation. Existing geographical literature seems caught up by carbon markets and various forms of of neoliberal critique. I believe economic and financial geography with its expertise and knowledge to study the players, processes and relationships shaped this increasingly prominent market
- #17 Finally, I’d like to briefly talk about some directions for my future research Compare the engagement in green bonds in Hong Kong and Singapore, and green sukuks in Malaysia Specifically interested in looking at how non-financial tools have shaped the market Previously looked at sustainability reporting Local certification schemes, alignment with government agenda, government incentives and the ‘know how’
- #18 As I said at the beginning of the presentation, this typology is going to inform my fieldwork, so any questions, comments and suggestions would be greatly appreciated.