COP28 will be seen as a missed opportunity if the role of local banks in emerging markets is not addressed as a crucial solution to scaling climate finance. Lachlan Cameron, Director of the Green Finance Centre at Finance in Motion sheds light on the role private banks can play in meeting 2015 Paris Agreement's goals.
The heat is on as we approach COP28 in December, the principal meeting and decision point for global climate action. It will be the first gathering after the UNFCCC’s recent assessment of progress towards the 2015 Paris Agreement's goals. The assessment is clear, we are off track. Global temperatures are forecast to rise to 2.9 degrees Celsius – well above the boundaries for a safe planet – and countries’ promises of action are not enough.
To effectively meet these goals, climate finance must increase by at least five-fold annually to avoid the worst impacts of climate change. Those levels of investment are required to fundamentally change the way societies produce and consume, including decarbonizing our underlying energy system. Closing the financing and warming gap will not be achieved by government spending alone and will require the private sector to invest and, in many instances, lead this transformation.
COP28 is a critical opportunity to focus on an often overlooked but crucial solution: rewiring existing banking sectors to direct their fundamental activity – the provision of credit to businesses and households – towards a Paris-aligned future.
The critical role of private finance
The International Monetary Fund estimates that climate mitigation investment in emerging markets alone must rise from USD 400 billion annually to USD 2 trillion by 2030. Public resources will not bridge this funding gap, especially amid ongoing humanitarian crises, rising debt costs, and inflation. The private sector will need to step in and fulfill the lion’s share of future investment needs.
In emerging markets this will not happen without local banks leading the charge. In these settings, capital markets are often underdeveloped – leaving banks as the foundational provider of credit to households, businesses, and governments. Only the existing banking industry can deliver quickly enough at scale and with the necessary reach, meaning banks represent a vital solution commensurate to the size of the crisis at hand.
Shifting the climate finance pendulum
The challenge lies in directing the collective resources and capacities of financial sector actors towards a Paris-aligned future. In advanced economies, this shift is underway and driven by two factors. First, governments and the financial sector increasingly recognize the climate risks associated with a warming planet, leading them to reassess investments and decision-making. Second, the transition to a decarbonized future presents enormous business and lending opportunities.
In emerging markets, climate risk regulation is often lacking but climate impacts are increasingly being felt by local banks which in turn is motivating them to act. This is due in part to increasing country-level vulnerabilities but also because emerging market banks allocate a proportionally higher share of credit to businesses dependent upon a well-functioning planet.
Modern banks must understand that climate and environmental concerns are not siloed under sustainability but affect all economic sectors, as well as their own business model.
A modern, green bank understands that the transition to a sustainable future represents an enormous opportunity, with one study from the International Finance Corporation (IFC) estimating that climate lending by emerging market banks must increase to up to 30% of portfolios by 2030, from often negligible shares today.
Banks are often portrayed as conservative and risk-averse, but they can and do lead change. In addition to their scale, they are unique in engaging across different levels of society. Engagement is the lever that can transform banking from a financial service provider to an institution that influences how people act and think. To achieve the Paris Agreement, we must influence the decisions and activities of billions of people – modern, green banks are unique in their ability to do this. In turn, banks need to be shown that green finance is the future and be supported in mainstreaming climate considerations into their business models.
Driving banks to think and act greener
Finance in Motion is a leading impact asset manager working exclusively in emerging markets for nearly 15 years. Throughout that time, it has been a champion of sustainability in the banking industry, combining targeted finance with tailored support to its partners to green their activities. With more than 160 active banking and financial partners across the funds that FIM advises, we invest to steer societies and economies towards a more sustainable future. These efforts have led to more than EUR 5 billion in financing to households, businesses, and governments for impactful green investments related to climate action.
Through the Green for Growth Fund, its flagship climate mitigation fund, Finance in Motion provides comprehensive support and advice to partner banks to mainstream and implement deep green climate finance into their business models and strategies. This allows banks to reap the benefits of growing their green finance offering and to build this into a core pillar of their business.
Climate action demands ready solutions that can scale and deliver results - deep greening banking sectors in emerging markets will be vital in delivering the green investments that a Paris-aligned future so urgently needs. Our only chance to get back on track is to repurpose and redirect current financial flows - building the green banks of tomorrow is essential to our success.