What Davos delegates missed when they discussed green finance for business

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What Davos delegates missed when they discussed green finance for business
<span class="caption">Addressing the climate crisis was one of the key themes at the World Economic Forum in Davos.</span> <span class="attribution"><a class="link " href="https://www.shutterstock.com/image-photo/davos-switzerland-january-19-2019-congress-1289440672" rel="nofollow noopener" target="_blank" data-ylk="slk:Rustam Zagidullin/Shutterstock;elm:context_link;itc:0;sec:content-canvas">Rustam Zagidullin/Shutterstock</a></span>
Addressing the climate crisis was one of the key themes at the World Economic Forum in Davos. Rustam Zagidullin/Shutterstock

Every year, leaders from politics and business come together with economists, investors and even celebrities at the World Economic Forum in the Swiss resort of Davos. One of the five key themes of this year’s event was safeguarding the planet. The forum’s own figures suggest that human-caused climate change has cost the planet US$3.6 trillion (£2.9 trillion) in damage since 2000 alone.

Many of the sessions at Davos focused on climate change, which was especially pertinent after US president Donald Trump’s decision to abandon for a second time the Paris Agreement – a framework to keep the warming of the planet to 1.5°C above pre-industrial levels by the end of the century.

In an online address to Davos delegates, Trump even argued that the oil-producers’ group Opec should reduce the price of oil. This is in stark contrast to the views of many other governments – exemplified by UK energy and climate change secretary Ed Miliband’s assertion that net zero is “unstoppable”.

But one of the less discussed elements of the path to net-zero by the year 2050 (a key target to keep the Paris Agreement on track) is the role of the financial sector.

As economists, we believe that banks and financial institutions should play a key role in making the green transition happen. Companies that produce goods and services will need to invest in equipment and technology – either to make new greener products or to ensure that they pollute less.

But this will cost money – likely money that firms do not actually have on their balance sheet or under their mattress. When banks assist in providing funding for this type of investment, it is known as green finance.

Green finance from banks can take two forms. Either the banks underwrite corporate bonds, which means they sell bonds to investors in exchange for a fee. Or they become involved in the provision of a syndicated loan, which is when they collaborate with other banks to lend money.

But both options are constrained by the rule that a bank will only provide finance out of self-interest. This means they act only when the profit they earn is proportional to the credit risk they take on. But this was in contrast to the message from Davos that businesses should take the lead, with the aid of finance from banks, in mitigating the risks of climate change.

car park and car charging station with solar panels on the roof
With easier access to finance, more firms could invest in innovative ways to go green like this car park with inbuilt solar panels in Leeds. Clare Louise Jackson/Shutterstock

Sources of credit for businesses to make green investments include philanthropists, public finance and the private sector (that is, commercial banks). However, it is arguable that charity and public money are best used in partnership with private banks, to finance projects that are perceived high risk and low return. Banks alone would not support these because of their promotion of self-interest.

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