FII: Drive to find solutions to fund net-zero transition picking up pace, HSBC chief says

Capital flows from the developed world to developing nations need to increase significantly to achieve climate goals, panellists say

Traffic passes through hazy weather thick with smog in Lagos, Nigeria. Experts at the FII say developing nations need help in dealing with climate challenges. EPA

The momentum to find financing solutions for the transition to carbon neutrality has picked up pace but public and private capital flows from the developed world to emerging nations has to take off significantly for the world to achieve its climate goals, senior executives told the annual investment forum in Saudi Arabia.

“We have to find means to transmit capital from the developed to the developing [countries],” Noel Quinn, group chief executive of the HSBC, told the Future Investment Initiative conference on Wednesday in Riyadh.

“Capital in one part of the world needs to find a project in another part of the world for nature-based solution”, as nature is part of the broader climate agenda, he said.

Covid-19 intensified the drive to find funding solutions for the transition to a greener economy and was a wake-up call that made policymakers realise how a natural event can have a “devastating impact on the global economy”, Mr Quinn added.

However, the technological innovation required for the world to transition to a net-zero carbon economy requires scaling up and significant capital investment that cannot be fully funded either by the public sector or private sector alone.

“It has to be [both] public and private sector on a blended finance basis,” Mr Quinn told the forum.

Saudi Arabia’s Public Investment Fund’s global head of Capital Finance Fahad Al Saif, chief executive of Gabon’s sovereign wealth fund Akim Daouda, chief executive of the London Stock Exchange Julia Hoggett and John Green, chief commercial officer of asset management firm Ninety One, also joined the discussion.

“I’m an optimist, and I’m basing my optimism on the conversations I’m having with my own customers and governments. I believe, acceleration [to deal with climate emergency] is taking place,” Mr Quinn said.

Even investors are eager to see the change and 60 per cent of client conversations are dominated by “what are you doing to decarbonise portfolios, what are we doing about transition, how we are going to meet our net-zero goals,” Mr Green, whose company manages more than $130 billion in assets, said.

However, there is a lot more to be done both on policy and financing fronts for the world to be able to achieve its carbon emission goals by mid-century, he said.

Total spending on climate finance in 2019-20 reached nearly $650bn, a 13 per cent annual increase against the target of about $4 trillion by 2030, according to Global Policy Initiative report.

“Action in terms of real financing is not there,” Mr Green said. “We are not getting there in terms of climate spending.”

The developed world needs to help emerging nations deal with their climate risks as they accounted for only $150bn of the $650bn spending.

“Developing economies today account for more than 50 per cent carbon emitted … and they received less than 20 per cent of the financing, and most of that came from banks, [with] very little from private finance outside the banking system,” Mr Green said.

“There are problems in the way long-term capital is thinking about portfolio level metrics that is working against financial investment behind this problem. We have to change that.”

Companies, governments and regulators are facing increased pressure to invest in building back a greener economy in a bid to achieve net-zero carbon emission goals by 2050. Social and corporate governing standards are at the heart of investment themes and the regulatory frameworks being developed, as the world continues to face the challenges of the Covid-19 pandemic that pushed the global economy last year into its worst recession since the 1930s.

Multilateral organisations such as the International Monetary Fund are calling for greater investment to finance the transition. About $20tn in funding is needed over the next two decades for companies and countries to become carbon neutral by the middle of the century, the IMF said this month.

The PIF as an investor recognises the serious challenge and the need for massive capital that it requires, Mr Al Saif said. However, there are challenges, including standardisation.

“If I wanted to raise capital, there has to be standardisation [about] where I deploy this capital,” he said. “There are concerns of Greenwashing. How can we give the investor complete confidence and credibility that [a] sector is becoming very well regularised?"

The kingdom, the biggest Arab economy, he said, has set targets “from top down” in terms of its commitment to net-zero economy by 2060.

The PIF as a sovereign fund is at the forefront of "pushing and leading the change”, he said.

“The energy mix strategy of the kingdom: 50 per cent of that is renewable energy and 70 per cent of that is for the PIF to deliver between now and 2030. We are keen and eager to raise the bar in the region.”

Mr Quinn said financial institutions need to back projects and companies that are transitioning from their current technology base to a greener future.

“We, the financial sector – whether it is equity or debt; on balance sheets of banks or in capital markets, [we] have to get comfortable with transitioning corporates from where they are and where they need to be,” he said.

Last week, HSBC chief called for “a fundamental re-engineering” in the banking sector to support corporate activity in the transition to net-zero. He also predicted a rapid growth in the sustainable finance industry, which he said, is on track to reach “the first trillion-dollar year for green bonds”.

“In the first nine months of 2021, green social and sustainable bonds raised more than $777bn. That's more than 60 per cent higher than the same period last year,” he said at the time.