What the World Bank can do about climate change

What the World Bank can do about climate change

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What the World Bank can do about climate change

8 May 2023

NEW HAVEN — Few institutions have shown as much versatility and adaptability as the World Bank. Initially founded to address global capital-market imperfections after World War II, the institution’s primary mission evolved over time to focus on fighting extreme poverty. But now that the World Bank is welcoming a new president this July, it should adapt again, this time to address climate change.

Poverty reduction, of course, should remain a high priority, considering that the COVID-19 pandemic has left many low-income countries in dire straits. But climate change has emerged as an equally important threat to these countries’ futures, as well as to the entire planet. Poverty reduction therefore must go hand in hand with the goal of addressing climate change.

But grounding these efforts in evidence-based research is easier said than done. One often hears that low-income countries should focus on climate change because they have the most to lose from its consequences (natural disasters, soil degradation, water shortages, and so forth). That conclusion may be right; but the argument is flawed, because it is based on a spurious comparison.

Policymakers in poor countries do not care whether they have more to lose compared to richer countries. Rather, their focus is on weighing policies that promote growth but harm the environment against green policies that may imply slower or even no growth. To paraphrase what one such official once told me when I questioned the wisdom of his government’s strategy to encourage oil and natural-gas extraction: “Who cares what the long-term trend is? We can do this for ten years, grow rich and then move on to other activities while using the proceeds to clean up.”

The wastefulness of this approach is self-evident, as are the large negative externalities it entails for the rest of the world. But the tradeoff for many low- and lower-middle income countries is real, especially when, like India and Indonesia, they are rich in coal deposits or, as in Nigeria, oil reserves. Giving up on growth in return for a cleaner, greener future is not something that many policymakers in such countries find acceptable.

Still, there is scope for considerable improvement, and the World Bank has the financial resources, credibility and convening power to make a substantial contribution. To do so, it must ensure that decisions are based on the best available evidence, rather than on untested claims or first principles. Policymakers and advisers should study the experiences of countries that have successfully reduced greenhouse-gas emissions, as well as absorbing the emerging body of academic research focused on developing countries.

For example, the US experience shows that emissions reductions were the result of stricter environmental regulation, not the outsourcing of “dirty” production activities to developing countries (the so-called pollution-haven hypothesis). This implies that carbon border adjustment taxes, often justified on a notional “leakage” hypothesis, will do little to improve emissions in advanced economies. Worse, they may deal a severe blow to some low-income countries’ exports. The lesson from the United States, then, is that a path to a greener planet should start with stricter environmental regulation.

Recent research by the Nobel laureate Economist Esther Duflo and co-authors offers a second, related lesson, based on data from one of the biggest polluters in the world: India. Contrary to what many may think, India has some of the strictest environmental regulations in the world. What it lacks is the ability to enforce them. Weak state capacity, reflecting inadequate institutions, unreliable contract enforcement, or outright corruption, can nullify the effectiveness of environmental regulations.

Duflo’s team shows how devising proper mechanisms to address these constraints can significantly improve emission outcomes. It is precisely here, in the design and implementation of policies to address institutional shortcomings, that the World Bank could add enormous value.

Another recent paper reports on a bold, decade-long effort by a team of researchers, in cooperation with the Indian state of Gujarat, to introduce India’s first cap-and-trade programme (it also happens to be the world’s first market-based programme to regulate particulate emissions). Remarkably, they find that the programme functioned smoothly and produced significant emissions reductions as well as cost savings (relative to an alternative, command-and-control-based regulation).

Such results are extremely promising. Interventions to create “markets” for emissions have proven successful in the US and Europe. If such programmes can take root in developing countries, a truly global solution to climate change will be within reach. Moreover, if just a couple of research teams can make so much progress, imagine what the World Bank could achieve with all its resources, expertise, and access to top policymakers.

Perhaps the most encouraging message from recent research is that interventions that meaningfully improve environmental outcomes in developing countries need not be excessively expensive. Another recent paper examines why India, with its generally warm climate and plentiful sunshine, has been slow to deploy solar panels. It turns out that local governments’ inability credibly to commit to the contracts they sign with producers impedes investment. Once investments in a solar plant are made, state governments have a strong incentive to renegotiate. Because solar suppliers anticipate this, investment in green energy ultimately falls short of where it could be. Intermediation by the federal government could help, resulting in much higher solar adoption.

Such examples show that substantive progress toward de-carbonisation in low- and middle-income economies is feasible without bankrupting the country or halting growth. But success requires knowledge, perhaps even more so than money. Hitting poorer countries with punitive carbon taxes, which even advanced economies like the US have been reluctant to adopt, should be a non-starter. Encouraging the green-energy transition with policies tailored to the institutional constraints prevalent in low-income settings is much more promising.

The World Bank has always prided itself on being not just another “bank”, but rather a “knowledge bank”. As it develops its climate agenda, it must remain true to that credo by adhering to the lessons of rigorous research and evidence.

Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is professor of Economics at Yale University. Copyright: Project Syndicate, 2023.

 

 

www.project-syndicate.org

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Are UN Sustainable Development Goal ETFs fit for purpose?

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ETF Stream‘s question: Are UN Sustainable Development Goal ETFs fit for purpose? It seems incongruous, but only the reply can justify such interrogation.   

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Are UN Sustainable Development Goal ETFs fit for purpose?

 

The goals look ready-made for thematic funds, but can they be properly aligned to an investment framework?

By Theo Andrew

The Sustainable Development Goals (SDG) continue to capture the imagination of ETF issuers but questions have been raised about the ability to properly align them to an investment framework.

Used by both active and passive funds, they were thrust into the spotlight again in January after DWS launched a seven-strong range of thematic ETFs targeting the SDGs it believes “present a growth story”.

Other ETF issuers have also launched products tracking SDGs, albeit not so inextricably linked to the goals, including the L&G Clean Water UCITS ETF (GLUG), the iShares Global Water UCITS ETF (IH20) and the BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF (REUSE).

The goals comprise 17 interlinked objectives, including no poverty, zero hunger and clean water and sanitation, which aim to serve as a blueprint to advance global progress for “peace and prosperity” for the planet.

However, while offering a strong narrative to pitch to investors, many have questioned the validity of using the SDGs as an investment framework.

Kenneth Lamont, senior fund analyst at Morningstar, said he understood some of the concerns around using SDGs as an investment framework but added it was part of a broader problem around impact investing with ETFs.

“The question mark hanging over SDGs is part of the broader question of whether you can use ETFs to invest impactfully. Investors need to be able to measure that impact, that is the goal of the investment,” he said.

“Generally, it is questionable whether investors can ever have a real impact by investing in listed stocks.”

Stuart Forbes, co-founder at Rize ETF, agreed, adding the SDGs were not designed for public or private market investment.

“The way the goals are measured is through a series of indicators such as decreasing deforestation and habitat loss. It would be almost impossible to assess a company’s contribution to forestation in Brazil or Indonesia,” he said.

“The further you go with SDGs from an investment and thematic perspective, it is just not possible to align.”

Forbes said Rize ETF explored the idea of launching products linked to the goals, looking at SDG alignment tools, but that they “just do not make any sense”.

“Looking at what the funds are holding, they are almost all developed market economies, they are not servicing an underserved region of the world or having a significant social impact,” he added.

For example, DWS uses MSCI’s SDG alignment tools designed to provide a “holistic view” of companies’ net contribution towards addressing each of the SDGs.

However, Lamont added the thematic element of the SDGs is what makes them attractive. For example, he noted GLUG’s thematic approach, investing in companies’ infrastructure and technology.

“I find GLUG interesting because it does focus a lot on water technology. It is a completely different set of stocks that are actually trying to solve the problem. It is much more of a thematic approach than the traditional water sector fund.”

DWS also includes a thematic element to its SDG range, with sustainable revenue accounting for 75% of the MSCI indices it tracks, while the remaining 25% will be calculated using forward-looking thematic metrics.

Speaking to ETF Stream ahead of the launch in January, Olivier Souliac, senior Xtrackers product specialist at DWS, said it chose not to do all 17 SDGs due to the inability to align them all within an investment framework.

“The reason we have a revenue-based approach is that some of the SDGs such as zero hunger and education can only really be filled by society and governments and are not themes in the sense of being growth stories,” he said.

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Call for applications to finance projects in 7 Mediterranean countries

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Call for applications to finance projects in 7 Mediterranean countries

 

Green Economy: UfM launches call for applications to finance projects in 7 Mediterranean countries

The above image is of UfM

(TAP) – On 16/03/2023, TUNIS/Tunisia. The Union for the Mediterranean (UfM) launched a call for applications to finance projects aimed at promoting employment and entrepreneurship in the green economy sector. The aim is to support the environmental transition of the economies of 7 Mediterranean countries, including Tunisia.

 

According to information published Thursday by the UfM, this call for applications is intended for NGOs working to support vulnerable populations disproportionately affected by the consequences of climate change and by the evolution of the socio-economic context.

 

Eligible for this call for applications are non-profit NGOs active in the field of environmental transition of economies in an inclusive manner and with respect for social justice. These NGOs must be based in Algeria, Egypt, Jordan, Lebanon, Morocco, Mauritania, Palestine or Tunisia, with priority given to regional projects. The deadline for applications is May 29, 2023.

 

The selected candidates will benefit from financial support ranging from 150,000 to 300,000 euros (which represents a sum varying between 500,000 and 1 million dinars) per project, as well as from the UfM’s technical expertise, which will give them greater visibility.

 

Funded by the UfM with the support of the German Development Cooperation (GIZ), on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and the Spanish Agency for International Development Cooperation (AECID), this initiative, in its first edition, launched in 2020, helped 18,000 people, mainly young people and women, from seven UfM member states (Greece, Italy, Jordan, Lebanon, Malta, Morocco and Tunisia).

These projects address employment challenges in the areas of entrepreneurship, women’s empowerment, sustainable tourism, and education and research.

The green economy, as well as “green” jobs, are set to play a key role in the sustainable recovery of the Mediterranean region from the COVID-19 pandemic.

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The finance sector can accelerate the transformation to a net-zero built environment

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The finance sector can accelerate the transformation to a net-zero built environment – Here’s how

13 Mar 2023

Real estate is the world’s most valuable asset class representing two-thirds of global wealth. With more than 13% of global GDP related to construction and 12% of employment, its size means it is responsible for an astonishing 40% of global energy-related carbon emissions (14 Gt per year). This is because it makes up over one-third of global final energy use and consumes 40% of raw materials globally. Achieving net-zero carbon emissions in the built environment by 2050 will require investments of USD $1.7 trillion annually and will create half a million more direct jobs.

Real estate assets are a valuable and growing component of institutional investment portfolios. At the same time, ambitious policies and regulations, changing public awareness and radically shifting demand drivers are pushing finance sector stakeholders to focus on sustainability in their portfolios because it affects business in the short, medium and long term. When put together, the finance sector has a unique opportunity to shape demand and drive transformation in the built environment.

Achieving net-zero emissions in the built environment by 2050 is the last stop along an arduous path. The specific targets all actors need to aim for are for all newly constructed buildings to have net-zero operational emissions by 2030 and for all buildings – including existing ones – to have net-zero emissions by 2050. And embodied carbon emissions – emissions from material production and construction processes – must be at least 40-50% lower by 2030 than today and net zero by 2050. Unfortunately, we are not on track.

Halving emissions by 2030 is, therefore, the first stop and must effectively happen today. This is because the lead times in typically built environment projects can easily be 8 to 10 years, so companies planning and designing projects today must already include these targets for 2030.

Achieving this massive transformation at the speed and scale required means that all actors have to share the same vision of halving emissions by 2030 and reaching net zero across the entire life cycle by 2050. They also must deeply and radically collaborate to realize this vision – across governments, the finance sector, businesses along the full value chain, science and civil society. The collaboration needs to focus on the following three critical levers for market transformation (WBCSD and GlobalABC, 2021):

  1. Adopt whole-life carbon (WLC) and life-cycle thinking and concepts across the value chain and the market to align on key indicators, metrics and targets consistently.
  2. Treat carbon like cost: Internalize the WLC emissions costs and reflect them in the price of products and services throughout the value chain, including in governance mechanisms, procurement and taxonomy, from governments and the financial sector.
  3. Foster a positive and reinforcing supply and demand dynamic that incentivizes low-carbon solutions along the value chain. This requires signals from government and finance and, most importantly, collaboration between industry players along the whole value chain.

The role of the finance sector

Finance sector stakeholders strongly influence built environment impacts through loans and investments in built assets and – indirectly – investing in value chain businesses. When mobilizing financial capital, they can set requirements for low-carbon solutions in building projects and across the value chain. Investors, asset managers, banks, advisors and insurers all influence if and how buildings are constructed. They play a crucial role in the very early stages of buildings when decisions significantly impact their future emissions. This includes the energy performance of buildings and setting requirements to reduce emissions from building materials and the construction process.

To understand how the finance sector can exert this influence, let’s look at what holds us back today.

Challenges and opportunities

The transition’s challenges are many and complex. For instance, there is a lack of true collaboration and understanding between the construction, real estate and finance sectors, despite their deep link and reliance. Poor data availability, quality, and limited transparency are holding up measurement, benchmarking, and target-setting processes for net-zero emissions pathways. The built environment and finance sectors are facing a skills shortage in terms of understanding, writing and using reporting and disclosure documents effectively to determine how the results could drive investments. And financial services organizations have traditionally prioritized short-term financial returns over positive, but more difficult to assess, environmental, social and governance (ESG) returns.

However, in all of these, there are opportunities. Stakeholders can find new ways of working together, and legally binding contracts, for example, can help ensure the right incentives, procurement methods and metrics to support net-zero emissions goals for project delivery (see WBCSD’s Decarbonizing construction – Guidance for investors and developers to reduce embodied carbon).

Alignment on the growing number of guides, standards, tools and certifications for assessment and reporting would ensure data availability, quality and transparency (note World Green Building Council’s (WorldGBC) BuildingLife project, the RICS professional statement on whole life carbon, and the Ashrae-International Code Council (ICC) Whole Life Carbon Approach Standard).

Training and upskilling on sustainability-related disclosures and strategies to align with the Paris Agreement would ensure investors and built environment professionals see the value in these documents from both sides. They would become part of the central decision-making process for investments, linking non-financial concerns with financial impact. The Urban Land Institute (ULI) Europe’s C Change project, which is currently addressing transition risk in valuation, is an example of progress in this area. Changing the corporate culture will further the idea that the ultimate goal is to ensure strong returns on investment while creating value beyond shareholders, managing the multifaceted risks of transitioning to net-zero emissions and safeguarding people and the environment.

Understanding these and other challenges and opportunities will help the sector adapt strategies and solutions that will be the key to achieving net-zero emissions.

No-regret actions for finance sector stakeholders

Four specific interventions sit at the core of strategies to reduce the full life-cycle emissions of projects in the built environment: Accountability, Ambition, Action and Advocacy.

  • Finance stakeholders in the built environment can achieve accountability through standardized data measurement and transparent reporting.
  • In setting credible, science-based net-zero emissions targets, they raise ambition.
  • They take action by developing climate transition plans and placing whole-life carbon at the center of decarbonization strategies and decisions.
  • By working with the public sector and organizations like WBCSD and its partners in the BuildingToCOP Coalition and Global Alliance for Buildings and Construction (GlobalABC), they place advocacy for policies and regulations targeting sustainable finance at the heart of efforts to level the playing field for the market.

For asset owners and investors, achieving the transition means setting clear portfolio- and asset-specific targets and timelines. They also must embed critical climate and ESG factors into requests for proposals, investment mandates, manager selection and stewardship engagement with portfolio companies and incorporate the related risks (and opportunities) into valuations and, ultimately, into investment decisions.

For asset managers, the lack of consistent, comparable and decision-useful information on climate impact is still a barrier to better implementation. However, growing demand and regulatory pressures motivate every firm to overcome data challenges through proprietary work or third parties. Standardized frameworks and local/regional taxonomies help the asset management industry with enhanced tools for assessment, benchmarking and reporting. WBCSD’s Net-zero buildings – Where do we stand? report lays the basis for a harmonized whole-life carbon assessment and reporting framework.

Finance providers can acquire a better understanding of the emissions from the products they are financing using adequate data, tools and standards, including the cost of carbon and transition risk considerations. The ability to accurately measure and standardize (whole life) carbon emissions could help them link their financial offerings to carbon targets and potentially provide lower costs for low-carbon projects. For that to happen, they need clear and transparent information to reliably assess the business case and build trust with the market.

For insurance providers, it means developing methodologies to assess and quantify different climate change scenarios and integrating both physical and transition risks into decisions to enter or exit an underwriting.

Lastly, investment advisors and data providers can facilitate top-down learning as they share and spread best practices and become significant players in the standardization and harmonization of data and target-setting (including but not limited to the Carbon Risk Real Estate Monitor (CRREM), Science Based Targets initiative (SBTi) and GRESB).

What’s next? Achieving a breakthrough in buildings

To reduce built environment emissions globally from 14 Gt per year to 7 Gt per year seems to be a daunting task. However, with a clear focus on whole-life carbon emissions alongside cost, the finance sector can help accelerate this transition. There is evidence that we can reduce construction emissions by half today and cost-effectively. And evidence is also emerging that retrofitting building portfolios to net-zero emissions can be achieved competitively.

What needs to happen next is for all stakeholders – finance, national and local governments, and businesses along the value chain – to come together and co-develop roadmaps for a net-zero built environment that identify a clear vision, actions and accountability. Building on the aforementioned built environment market transformation levers, they can drive a united response and decisive action, thereby overcoming the fragmentation of efforts seen so far. The emerging Buildings Breakthrough with national governments committed to transforming their built environment will provide a platform to join efforts and collaborate to achieve a future in which the built environment turns from a problem into a solution to tackle climate change.

We cannot wait – because for the built environment, 2030 is today.

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Breakthrough – or Another Empty Climate Promise

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Is it a Breakthrough – or Another Empty Climate Promise from COP27? Wonders Adil Najam of Boston University.

 

 

COP27’s ‘loss and damage’ fund for developing countries could be a breakthrough – or another empty climate promise

 

By Adil Najam, Boston University (Picture above)

 

Egyptian Foreign Minister Sameh Shoukry closes COP27 in the early hours of Nov. 19, 2022.
Christophe Gateau/picture alliance via Getty Images

 

Developing nations were justifiably jubilant at the close of COP27 as negotiators from wealthy countries around the world agreed for the first time to establish a dedicated “loss and damage” fund for vulnerable countries harmed by climate change.

It was an important and hard fought acknowledgment of the damage – and of who bears at least some responsibility for the cost.

But the fund might not materialize in the way that developing countries hope.

I study global environmental policy and have been following climate negotiations from their inception at the 1992 Rio Earth Summit. Here’s what’s in the agreement reached at COP27, the United Nations climate talks in Egypt in November 2022, and why it holds much promise but very few commitments.

3 key questions

All decisions at these U.N. climate conferences – always – are promissory notes. And the legacy of climate negotiations is one of promises not kept.

This promise, welcome as it is, is particularly vague and unconvincing, even by U.N. standards.

Essentially, the agreement only begins the process of establishing a fund. The implementable decision is to set up a “transitional committee,” which is tasked with making recommendations for the world to consider at the 2023 climate conference, COP28, in Dubai.

Importantly for wealthy countries, the text avoids terms like “liability” and “compensation.” Those had been red lines for the United States. The most important operational questions were also left to 2023. Three, in particular, are likely to hound the next COP.

1) Who will pay into this new fund?

Developed countries have made it very clear that the fund will be voluntary and should not be restricted only to developed country contributions. Given that the much-trumpeted US$100 billion a year that wealthy nations promised in 2015 to provide for developing nations has not yet materialized, believing that rich countries will be pouring their heart into this new venture seems to be yet another triumph of hope over experience.

2) The fund will be new, but will it be additional?

It is not at all clear if money in the fund will be “new” money or simply aid already committed for other issues and shifted to the fund. In fact, the COP27 language could easily be read as favoring arrangements that “complement and include” existing sources rather than new and additional financing.

3) Who would receive support from the fund?

As climate disasters increase all over the world, we could tragically get into disasters competing with disasters – is my drought more urgent than your flood? – unless explicit principles of climate justice and the polluter pays principle are clearly established.

Why now?

Acknowledgment that countries whose excessive emissions have been causing climate change have a responsibility to pay for damages imposed on poorer nations has been a perennial demand of developing countries in climate negotiations. In fact, a paragraph on “loss and damage” was also included in the 2015 Paris Agreement signed at COP21.

What COP27 at Sharm el-Sheikh, Egypt, has done is to ensure that the idea of loss and damage will be a central feature of all future climate negotiations. That is big.

Seasoned observers left Sharm el-Sheikh wondering how developing countries were able to push the loss and damage agenda so successfully at COP27 when it has been so firmly resisted by large emitter countries like the United States for so long.

The logic of climate justice has always been impeccable: The countries that have contributed most to creating the problem are a near mirror opposite of those who face the most imminent risk of climatic loss and damage. So, what changed?

At least three things made COP27 the perfect time for this issue to ripen.

First, an unrelenting series of climate disasters have erased all doubts that we are now firmly in what I have been calling the “age of adaptation.” Climate impacts are no longer just a threat for tomorrow; they are a reality to be dealt with today.

Second, the devastating floods this summer that inundated a third of my home country of Pakistan provided the world with an immediate and extremely visual sense of what climate impacts can look like, particularly for the most vulnerable people. They affected 33 million people are expected to cost over $16 billion.

The floods, in addition to a spate of other recent climate calamities, provided developing countries – which happened to be represented at COP27 by an energized Pakistan as the chair of the “G-77 plus China,” a coalition of more than 170 developing countries – with the motivation and the authority to push a loss and damage agenda more vigorously than ever before.

Activists from developing nations pressed for a loss and damage fund during the COP27 U.N. climate conference, the first held in Africa.
AP Photo/Peter Dejong

Finally, it is possible that COP-fatigue also played a role. Industrialized countries – particularly the U.S. and members of the European Union, which have traditionally blocked discussions of loss and damage – remain distracted by Russia’s war in Ukraine and the economic effects of the COVID-19 pandemic and seemed to show less immediate resistance than in the past.

Importantly, for now, developing countries got what they wanted: a fund for loss and damage. And developed countries were able to avoid what they have always been unwilling to give: any concrete funding commitments or any acknowledgment of responsibility for reparations.

Both can go home and declare victory. But not for long.

Is it just a ‘placebo fund’?

Real as the jubilation is for developing countries, it is also tempered. And rightly so.

For developing countries, there is a real danger that this turns out to be another “placebo fund,” to use Oxford University researcher Benito Müller’s term – an agreed-to funding arrangement without any agreed-to funding commitments.

In 2001, for example, developing countries had been delighted when three funds were established: a climate fund to support least developed countries, a Special Climate Change Fund, and an Adaptation Fund. None ever reached the promised scale.

Writing prior to COP15 in Copenhagen in 2009, Müller boldly declared that developing countries would never again “settle for more ‘placebo funds’.” I very much hopes he has not been proven wrong at Sharm el-Sheikh.

Adil Najam, Professor of International Relations, Boston University

Read the original article.

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