We are happy to welcome you to this session of the Development CO.OP Lab. Your leadership has been revolutionary, and your recent announcement that companies with investments from BlackRock must display how they will meet their net zero emission goals is the kind of thinking that we need to applaud and promote!
How well we transition to net zero emissions will define humanity’s future. If we can connect policy and private agendas – bridging public regulation and finance with private flows – we can simultaneously reduce climate threats and build a stronger economy.
The COVID-19 crisis has demonstrated our undeniable interconnectivity. As the UN Secretary-General reminded us in stark terms speaking about the pandemic, we are only as strong as our weakest link. In 2020, we estimated a USD 700 billion drop in external private finance to developing countries as a result of impacts on global tourism, trade and other economic activity.
We must be clear: the net zero transition is non-negotiable and the sooner we embark on this transition, the more we stand to gain.
To do so, we need to get the policy, and the pricing, right. At the OECD, we are working on the evidence, policies, and common standards to support a successful transition. Let me highlight four key priorities.
First, we need to put a price on pollution. In OECD and G20 countries, around 70% of energy-related emissions are untaxed. Moreover the most polluting fuels, especially coal, are amongst the lowest taxed. Energy tax and subsidy reform is key to achieving the triple objectives of decarbonisation, domestic revenue mobilisation, and access to affordable energy.
Second, we need a system to prevent green washing. Interest in Environmental, Social and Governance (ESG) investing and broader sustainable finance has rapidly increased in recent years. Climate focused and ESG indices were less volatile and suffered lower outflows than non-ESG peers in the last year, even in the rockiest months of 2020.
We currently lack coherent, common frameworks, and ESG information is often not comparable between investments. A recent OECD report, ‘ESG Investing: Environmental Pillar Scoring and Reporting’, found that there is no common approach to weighing the importance of carbon emissions exposures in the E-score, or to actually track companies’ implementation of their transition plans. This needs to improve.
Third, we need to better identify, disclose and assess climate risks. Eventually, we will need to make major transitions in the composition of portfolios and valuation of financial assets. Policy actions could have a stabilising or destabilising effect on this. To support an orderly transition, we must work towards strengthening the tools and methodologies that underpin disclosure, valuations, and stress testing in financial markets, and traded products associated with climate.
Last but not least, we must zero-out fossil fuel subsidies. If it is to succeed, the net-zero agenda must transcend national borders. We need to expand commitments beyond countries that are part of – and serviced by – financial markets. This is key to incentivise sustainable infrastructure investments and reduce the risk of stranded assets and debt in developing countries. While OECD countries have roughly doubled development finance flows to support renewable energy since the 2015 Paris Agreement, this continues to be undermined by total development finance flows from all sources for fossil fuels amassing roughly USD 6.8 billion per year. Furthermore, of the $152 billion in annual Official Development Assistance, only 20% includes a focus on climate change.
Beyond ODA, a major shift in all capital flows to emerging and developing economies is critical. The SDG finance gap is estimated to have grown to $4.2 trillion per year for developing countries. But we know that the trillions are in the system. We estimate shifting about 1% of global assets could be enough to fill the gap. We have recently released joint work with the UN on a Framework for “SDG-Aligned Finance,” to promote more sustainable and resilient investments. We are also working to develop international impact standards to improve the effects of these investments.
While the road to net zero is daunting, barrier-breaking leadership like yours, Larry, is the way forward. We need to work together, towards a clear, common approach, one that can bring together agendas and momentum. Fighting climate change is our greatest intergenerational responsibility! Count on the OECD as your partner in this imperative task.