Greening finance

Christine Milne and Jeremy Burke

To meet our environmental challenges, everything we do, and everything money is used for must be green. For us, this creates an opportunity. As we green our economy we can also democratise our financial and energy systems.

We can, and must, ensure environmental concerns are at the heart of our economy. As Greens, we want to propose and implement solutions to the ecological emergency we now face; an emergency created by an economic system expecting to exploit nature without limitation or financial cost.

Economic systems and investment behaviour need to change

The fundamental problem is a 'business as usual' approach that sees our political systems as slavish adherents to the gods of money and markets, and it is our responsibility to do something about it.

The problem is an unholy combination of a flawed economic system and destructive investor behaviour. Economics fails to value that which truly matters, treating the Earth's systems and resources on which we depend as externalities, while investor behaviour is too short-term focused; rewarding companies that game the system rather than those that act in a rational, long-term manner. Both have to change.

Economics is a human construct, a tool that is broken and needs to be redesigned. We need to ensure both ecosystem limits and environmental damage are factored into decision making, and that planning schemes incorporate no development options as well as the polluter pays. Alongside this we need to design and implement measures other than GDP to measure economic wellbeing, rewrite tax laws, export financing and trade agreements to deliver fair trade and the list goes on.

Redesigning economics to reduce the gap between rich and poor and to safeguard the planet should be central to Green politics and this is why Green parliamentarians need to take finance, treasury and energy portfolios as well as environmental ones. 

We also need a financial sector that serves people and planet, and that aligns incentives for individuals and organisations to deliver a stable climate with robust environmental protections, alongside reasonable returns for genuine risk taking. Currently there is too much concentration among big banks and too large a gap to what the public, customers, and shareholders want.

Change is coming

Investor understanding of the severity of issues at play is increasing. Change is coming as investors focus on medium and long-term responsibilities, which can dramatically impact returns. In fact, we may be entering an age of fiduciary responsibility where investor and money managers' legal obligations are permanently redefined in a broader sense than simply short-term returns. The divestment movement and respected legal opinions are ensuring Boards, Trustees and investors can no longer ignore climate risk.

In time, as carbon-intensive assets are no longer profitable, and become stranded, there will be a rush for the exit as investors focus on self preservation. We should use this herd mentality in our favour, by aligning investor self interest with environmental issues. If investors recognise the need for a just transition we can achieve complex system-wide changes, without a fight to the death over redundant assets and technologies. Already, outside Australia, this is being seen with coal power plants. As asset stranding becomes a clear and present danger we will see it more regularly.

Achieving meaningful behaviour change requires corporations to recognise their long-term climate responsibilities. In a landmark speech, Mark Carney, the Bank of England Governor, stressed that the business cycle, the political cycle, and the horizon of regulators are all too short to deal with climate change. He spoke of the need to take action today and to recognise that we have a carbon budget that is fast depleting.

Following this speech, former New York Mayor Michael Bloomberg established a Taskforce on Climate-related Financial Disclosures. The Taskforce's recommendations report has a particular focus on climate-related scenario analysis and an organisation's resilience. While the disclosures are voluntary, expectations are that companies will now quantify the impact on their business of a two degree warming scenario – across policy, technology, market and reputation - and across transition and physical risks. This will allow investors and campaigners to come together to demand positive actions are taken. It will also signal the speed and degree of change necessary to pursue 1.5 degrees.

Technology cost reductions may come, just in time

Alongside incumbents assessing the business impact of a two-degree world, we are seeing magnificent drops in low-carbon technology costs. Renewables are winning the cost battle and giving us a chance to build out low-carbon solutions at scale. Well publicised cost reductions in solar, onshore wind and offshore wind make renewables the first choice for new electricity production. Cost reductions in batteries, low emission lighting and energy efficiency solutions will break current electricity market structures that allow price gouging by thermal producers. In many instances, cost effectiveness now leads government policy – as South Australia has demonstrated with their Tesla battery proposal.

This is delivering environmental results and further opportunities will come forward as supply chains develop and renewable energy moves from niche to norm. In 2016, we again saw more investment in low-carbon energy than in fossil fuels globally, and for the first time this was the case in the USA. For the third year in a row, global energy-related carbon emissions were flat. Next they will start to fall.

So that's the good news, but we need to recognise the scale of the challenge. Globally, we are forecast to invest some 90 trillion US dollars in infrastructure by 2030, with current investment levels around a quarter of what is needed. Sixty percent of that investment will be in emerging and developing countries and it all needs to be green.

Alongside large infrastructure projects, we will need massive investment and focus on other parts of a low-carbon economy; areas that are more disaggregated and more difficult to implement. This encompasses things like energy efficiency, electrifying transport and rolling out electric vehicles, more climate-resilient agriculture, cutting levels of consumption and travel and reducing air and shipping emissions. Ultimately we need nothing short of systemic change – and we need to deliver it fairly, ensuring local communities' voices are heard.

Government must deliver

So, who has responsibility for delivering energy, water, food and sustainable cities for the estimated nine billion people expected to be alive in 2050? And how will they do it within the boundaries of what the earth can sustain?  

Those in Government at every level are responsible; politics is the mechanism. Non-government organisations, communities and businesses can bring pressure to bear but ultimately decisions on the rules of our engagement with nature and each other are made by Governments.

We know that investors and business take their lead from Government. That's why we also need government to define our economic direction; Government action, not just intervention. Governments have the ability, and responsibility, to outline a clear, long-term vision that encourages responsible investment. The importance of political leadership cannot be overstated.

At an international level, the Paris Agreement, with a commitment for 'well below 2 degrees and to pursue 1.5 degrees', is an example of global political commitment in action. It is the first nod to the clear science of the climate emergency we face. Yet current national emission reduction promises, if actually met, deliver 3 degrees of warming. Individual countries simply aren't delivering, as the recent decision by President Trump has so clearly underlined.

While our Government ratified the Paris Agreement last year, it is subsidising the Adani mine in the Galilee basin. The emissions from burning that coal would make that region the seventh largest emitter on Earth if it was a country. This is despite the project being uninvestable to over twenty banks, coal demand being likely to peak in the next five years, and Adani wanting greater subsidies from the National and Queensland governments.

Instead of this short-term approach to governing and infrastructure development, we need to redefine what our economy is for, how we measure economic success and how investors work with government; one that appreciates the crucial role for government, but doesn't see government involvement as the sole solution.

We need to ensure government decisions give power to individuals and communities, and resist rent-seeking from incumbents and new entrants. We need a low-carbon future as the core focus of the economy, not some awkward side issue. And we need to green our economy with a 21st century industrial strategy that recognises the seismic changes of artificial intelligence and automation on the workplace.

Put simply, we need solutions from government that connect renewable and emerging technologies to the real economy and people's lives, which rapidly encourage cost reductions and change finance and financial system behaviour. Thankfully, examples are emerging internationally:

• Germany's Siemens has opened an offshore wind turbine facility in Hull, bringing more production benefits into the UK;
• Turkey required bidders for a solar auction to build a module production facility to support the development of local industry;
• France's 2015 law mandating climate risk reporting led the world; and
• China, which co-chaired the G20 Green Study Group, is playing a leading role in green finance and looking to establish green banks.

Opportunities and Action

In Australia there are many opportunities to build our positive vision of the future.

In redefining economics, we must continue our efforts exposing corruption and demanding transparency in government decision making, strengthening freedom of information, and establishing anti corruption bodies, watchdogs for money laundering, and bribery. Of course, we also have to continue to tackle tax avoidance and the loopholes that are too easily exploited, and we need to ensure there are more companies which have a social purpose at their core.

To get the clean energy future we want, we must ensure we capitalise on our solar and wind resources and build out a more democratic, more resilient, decentralised energy system that is governed appropriately. The National Electricity market rules need to be completely rewritten to incorporate systemic change. Equally we have to keep pushing to eliminate fossil fuel subsidies so we aren't wedded to a high-carbon future.

To ensure transparency for investors, we have to ensure climate reporting becomes mandatory and Australia doesn't lag other nations simply for convenience or to avoid embarrassing disclosure. We need to ensure green bonds become mainstream so funds are directed to low-carbon projects, and we have to protect, and enhance, the Australian Renewable Energy Agency and the Clean Energy Finance Corporation, which are leading Greens legacies from when we held the balance of power.

To democratise finance, we have to promote alternatives to the big banks, including peer-to-peer lending and community investment; we can give individuals power over their investment impacts.

None of this will be easy. The vested interests of the old order will fight with every weapon at their disposal to maintain their wealth and power. Whether we like it or not, our policies will come under greater scrutiny than the status quo; we can't shy away from that. In fact, we should regard paradigm shifting new policies as our hallmark – because that is what it will take to create an economic system that respects our ecological limits.

Christine Milne is Australia's Global Greens Ambassador. She was the leader of the Australian Greens from 2012 to 2015 when she successfully negotiated for the introduction of the Clean Energy Package in 2012 which saw a carbon price set in Australia, as well as the establishment of a Green Bank (CEFC), a Renewable Energy Agency (ARENA) and the Climate Change Authority. Watch and read Christine's speech from the Global Greens Conference.

Jeremy Burke has been at the forefront of green investment for the past decade and has recently returned to Melbourne with his young family. He setup the UK Green Investment Bank, as the inaugural Finance Director then Director, Strategy and is a trustee of CDP Worldwide, the world's leading environmental disclosure platform. Hear Jeremy at the Global Greens Conference on the European Greens podcast covering “Divest from Fossil Fuels, but invest in what instead?”