The world’s climate finance market structure (CFMS) must grow at an unprecedented scale of US$3-5 trillion per year globally in order to meet the Paris Agreement target of limiting the global temperature rise to below 2 degrees Celsius from pre-industrial levels, and to pursue efforts to limit it to 1.5 degrees Celsius. CFMS collectively refers to financial market participants, products and financial instruments, policies and regulations, financial market infrastructure, and enablers that support capital markets activity in climate finance.
This means that the volume of climate-aligned finance, basically the financing that focuses on enabling climate change mitigation, that will be necessary to achieve the Paris Agreement targets will have to grow to over US$100–150 trillion cumulatively in the next three decades, according to a report issued by the Global Financial Markets Association (GFMA) and the Boston Consulting Group (BCG) in December 2020.
“The most significant regional investment demand, estimated at US$66 trillion, is expected to come from Asia. This is driven to a large extent by the scale and pace of growth of Asia’s economies, growing population, increasing urbanization, and rapid industrialization,” says Grace Hui, head of green and sustainable finance at Hong Kong Exchanges and Clearing Limited. Hui cited the report during a panel discussion at the Asian Financial Forum.
North America requires US$21 trillion in investments for decarbonization, while Europe requires US$17 trillion, and the rest of the world US$11 trillion.
The current market for climate finance is estimated to be approximately U$600 billion, implying that an increase of more than five to eight times in the short term will be needed to support transition pathways to a low-carbon economy, Hui says.
“This is differentiated to a large extent by scale and phase of growth of Asian economies, growing populations, increasing urbanization, and rapid industrialization. So meeting the financing needs of this decarbonization levers will require not only a significant scaling of the climate finance market but also changes in financing solutions,” she says.
In the shipping sector, for example, a large part of the merchant fleet is owned by Asian investors or entities, while sectors such as iron and steel have large and growing markets given the large-scale infrastructure development.
This demand will require the development of more efficient and at-scale capital markets that support global mobilization of climate-aligned capital. There is expected to be a significant dependency on bank-intermediated lending in these markets, according to the report.
Mobilizing capital at this scale in Asia is likely to be challenging given Covid-19-related economic strains and constraints on institutional investor risk appetite for exposure to some emerging markets. Financial innovation in Asia may facilitate global funding channels as Asian markets open to foreign investors, according to the report.
In Asia, says Hong Kong Under Secretary for Financial Services and the Treasury Joseph Chan, different countries and different economies will have their respective pathways to decarbonization based on their local situation.
“At the end of the day, all these require certain investment, financing, and capex. So definitely sustainable finance plays a key role. If you look at the last few years, China is the second-largest bond issuer by origin in the world. But if you look at the Chinese green bond issues over the last few years, over 80% of those were issued onshore. So there is a need for offshore capital to help finance the green projects and enterprises in the Mainland,” Chan says.
According to Chaoni Huang, vice president and secretary general of the Hong Kong Green Finance Association, and head of sustainable capital markets, global markets APAC, at BNP Paribas: “We need the international capital to really flow into Asia’s decarbonization. Otherwise, it cannot fund itself. Government resources are always very limited. In the PBOC (People’s Bank of China) report, it’s about 15%. So 85% will need to come from the private sector, and not just domestically but internationally. But for international capital to flow, I feel that they need to be convinced of the local decarbonization roadmap or targets.”