SEB’s latest green bond report put a price of $ 4 trillion per year on the energy transition if the world is to reach net zero by 2050.

He warned that while we haven’t quite reached the panic stage yet, it is no longer possible to ignore or challenge climate change, and now is the time to start spending quickly.

The good news is that the Swedish Bank concludes that this amount, equivalent to 5% of global GDP, is both cheap, compared to doing nothing, and quite achievable.

The report also says traditional fears of taking on more debt to fund this transition were swept away in 2021 due to two major developments that have helped persuade governments and the international investment community that they will have to spend more money anyway. money.

“Over the past year, we have begun to see adverse effects such as extreme heat, flooding and forest fires on a scale that threatens both the personal and economic security of larger population groups. The second [development is] that the pandemic has taught them that the rules can be broken if the danger is serious, ”the report said.

Simply put, the climate emergency and the experience of the global coronavirus pandemic (COVID-19) have created an emergency and provided clearer evidence that new investments are needed.

“Reality is starting to be felt as the cost of extreme weather events increases, both in terms of property and human lives,” says Thomas Thygesen, head of research, climate and sustainable finance, at SEB.

“At the same time, soaring natural gas prices highlight the danger of reducing one energy supply without adding another. In the latest issue of The Green Bond – titled Floods, Fires and the IPCC: The Climate Crisis Gets Real – we wonder if that means it’s time to panic. Our conclusion is that we certainly need to start spending, quickly. “

By 2021, the report predicts that global sustainable debt issuance will now exceed $ 1.5 trillion, driven by business and the public sector, up from previous SEB forecast of $ 1,000 billion.

The report predicts that investment products directly linked to sustainability, emission reduction and financing of renewable energy will have a central role to play.

Physical hazards

The report pointed out that the IPCC issued its strongest warning to date that the climate is scientific fact and is driven by human activity, particularly greenhouse gas (GHG) emissions. The report noted that developments such as rising LNG and gas prices, energy supply shortages and extreme weather events are persuading people and governments of the need to invest in climate.

“Preventing more costly shocks in the future will require investments in adaptation measures, which is also likely to build popular and political support for faster investments in decarbonization, the cost of tackling the climate crisis, ”the report says.

Distribution of investments

The report breaks down the total investment required of $ 4 trillion per year into $ 2 to $ 2.5 trillion per year to upgrade energy infrastructure, including green production, grid storage and transportation.

An additional $ 0.5-1 trillion per year will be needed to cover the costs of reducing the economic, physical and social costs of climate change, such as flooding, displacement of people, and damage to buildings and food infrastructure . This process, called climate adaptation, aims to reduce the exposure and vulnerability of societies to these physical risks.

A final billion dollars to 1.5 trillion dollars per year will be needed to promote electrification and decarbonize the value chains of industry and production.

ESG investment

The report also warns that while the investment industry has the potential to raise money, it will require comprehensive reform of ESG practices and stricter regulation of green investments in order to prevent greenwashing.

Sustainable investors will want a closer link between their cash flow and the real long-term impact of their investment. The report warns that “the link between sustainable financial investment and investment that reduces CO2 emissions is not strong today”.

Indeed, at the present time, “if the focus is on financing companies or governments that comply with ESG standards or if you just want a low average CO2 emission, then the link with the actual investment in the real world will be indirect at best. “

This needs to change if sustainable investing is to reach the necessary levels and if investors are to be confident in things like green bonds are what they are and do not threaten to damage an investor’s reputation through greenwashing.

“As the costs of extreme weather disasters, adaptation investments and transitional investments begin to skyrocket, we believe investors will demand greater additionality (or marginal impact) from their sustainable financial investment. “

Stronger and more obvious relationships are needed between a green investment product and its impact on the energy transition in the real world.

“This suggests to us that it might be necessary to have a second strand in sustainable financial investment alongside ESG with a more direct focus on the financing of transition investments and a more pragmatic approach to the reputational risks involved. the call for something green or sustainable. The challenge for the financial sector is to continue to innovate and develop financing tools that strengthen such a link between savings and action in the real world “, indicates the report.

Green bonds

The report noted that emissions growth declined over the summer, with August 2021 registering only an 11% increase from August 2020.

However, even taking this into account, SEB expects total sustainable debt issuance to reach or exceed $ 1.5 trillion in 2021.

The report found that green bond issuance continued to grow, albeit more slowly than in 2020, with July and August issuance reaching $ 55.9 billion, up just 30% year on year. Total issuance through August reached $ 352 billion, nearly double the issuance of $ 163.78 billion during the same period of 2020. Growth was strongest in Asia and North America , while in Europe it stagnated, perhaps as investors waited for the EU’s new green bond. Standards, the report suggested.

Other types of bonds, such as social bonds with growth of 155% to $ 18.9 billion in July and August, and sustainability bonds with growth of 72% to $ 19 billion, experienced rapid growth from lower bases.

Multilateral support

Finally, the E3G think tank wrote in the report that the COP26 conference in Glasgow in November was the first opportunity for governments and global investors to take the first steps on the path to achieving the goals set out in the SEB report.

In particular, developed countries must meet the target of $ 100 billion per year in annual climate finance invested in the developing world, after missing $ 20 billion in 2020, according to figures from the OECD.

The E3G stressed that multilateral public finance has become an increasingly important component of global climate finance. Indeed, the IEA has calculated that 1 trillion dollars per year are needed for developing economies by 2030 for them to play a role in the global transition.

The E3G emphasized that these multilateral investment flows allow to take advantage of the higher risks facing private finance related to investment in developing economies.

Net zero

It may be possible to reach net zero by 2050, the report concludes.

“This will require a very substantial increase in investment levels. This is realistic because renewables have all the hallmarks of a classic technological revolution, including the learning curve effect: prices should continue to drop as we use more of it. However, at the current rate of investment, it would take too long to complete, ”the report says.

The findings echo UN Secretary-General António Guterres’ warning in August that the world faces a code red on climate change and must invest in phasing out existing coal by 2040, by immediately halting all further exploration and production of fossil fuels; and by displacing fossil fuels. renewable energy subsidies.

If this is to be done, then the emerging sustainable investment sector will need to mature.

“The financial sector will play a crucial role in helping to raise funds for these investments, including through sustainable financing solutions such as sustainability-themed bonds and loans,” said Gregor Vulturius, co-editor of the The Green Bond report and advisor at Climate. & Sustainable Finance at SEB.