Green Finance

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Settling Climate Accounts: Navigating the Road to Net Zero

Thomas Heller & Alicia Seiger

233 pages, Palgrave Macmillan, 2021

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In the first two weeks of November 2021, delegates from nearly 200 countries traveled to Glasgow for the decades-old ritual of global climate negotiations. With fires, floods, heat, and drought increasing in frequency and severity, the 26th Conference of the Parties (COP) was hailed as the world’s last best hope to limit the devasting impacts of a warming planet. The Glasgow Climate Pact, the consensus and non-binding final agreement, made promises to phase-down coal use and clarify carbon trading rules. Depending on where you live, COP26 either met, slightly exceeded, or crushingly failed to meet expectations.

To find ambition and hope, one must look beyond the formal negotiations to where government officials have been replaced with a new cast of characters from NGOs, philanthropy, business, and finance. COP26 delivered progress from this voluntary stage, including promises to limit methane and deforestation and drive $130 trillion toward decarbonization. These victories—if we can call them that—reinforce the dominance of Net Zero (and its reliance on private actors and self-governance) as the new organizing principle for climate action.

Settling Climate Accounts: Navigating the Road to Net Zero probes the emerging practice of Net Zero finance, elucidating both the state of play and a set of directions that help form judgments about whether Net Zero is going to carry climate action far enough. The book, an edited volume of essays by Stanford researchers, offers technical analysis wrapped in narrative accounts of climate action past, present, and future. 

The excerpt that follows is from the book’s introduction, where we account for the last decade of climate action in the context of three significant “turns” in the drive toward climate stabilization. Understanding history, and these turns in particular, through a narrative that both organizes and explains how climate action has oriented and reoriented over the past three decades, will be critical to successfully navigating the terrain ahead. We hope readers of this book will be better equipped to ascend the road ahead because navigating the next turns will determine how the story ends.—Alicia Seiger and Thomas Heller

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The “Turn to Green Finance” was the earliest, simplest, and most consistent with the assumptions inter-woven in the first stage of climate action. It arose in the face of disappointment with multilateral legal regimes post-Copenhagen and the austerity programs adopted by advanced and emerging market governments after the financial crisis and its associated recessions. The Turn to Green Finance, despite these twin setbacks, reaffirmed the belief that climate progress could be assumed on a type of autopilot in which falling technology prices, a cyclical (rather than a structural) resumption of economic growth, and efficient private market operations, even in the absence of expected state action, would propel the world on the path to a low-carbon transition. The optimism of Green Finance centered on the perception that falling prices would make it easy to build (only) green. 

Green Finance has three central tenets: (1) as long as demand sustains growth and capital markets are efficiently informed and economically motivated, each increment of investment advances transition to a low-carbon system; (2) replacement of higher cost fossil with lower carbon assets yields job growth with only a marginal reliance on taxes and public subsidies, which could sunset as market penetration increased; and (3) financial market regulation and the facilitation of built-to-purpose financial vehicles to reduce organizational inertia might accelerate Green Finance, but neither the limitations of public budgets nor the need for substantial reform of public policy will impede the transition. These revised articles of climate faith are consistent with the ongoing experience in Northern European and North American renewable energy markets with private capital, light doses of carbon prices or public tax incentives, scheduled retirements of aging (and fully amortized) fossil generation, and flexibility services from abundant gas and dispatchable hydro-electricity sources. This evolved version of climate doctrine has been, since the COVID-19 pandemic, reinforced in these same OECD economies under the rationales for increased public debt and infrastructure investment in the Build Back Better and Green New Deal rubrics. Outside of US and European electricity markets, the basic tenets of the Green Finance faith may prove more problematic.

Even in advanced economies, where falling costs of renewable energy projects have attracted mainstream investors, questions of systems integration and the uneven rates of technical innovation across carbon-intensive activities call into question the ability of a market-driven transition to meet the necessary pace. For example, in the power, mobility, and agriculture sectors, it has become apparent that the capacity to scale new low-carbon technologies toward agreed emissions goals depends upon reforms in market design, business organization, and financial mechanisms retooled around differentiated patterns of risk and return (more on this in Chapter 4.) When added to the increasing recognition of innovation gaps in harder to abate activities like industrial processes and heat, as well as in emissions removals like carbon sequestration, the limitations of Green Finance as a sole savior, at least in the short run, are clear. 


Where Green Finance focuses on a low-carbon transition driven by the economic incentive to deploy new, cheaper technologies, the “Turn to Risk” inverts the lens. The focus on risk followed the rise of the Green Finance narrative by several years. The risk narrative noted that while most new energy investment in advanced economies was in clean technologies, the slow pace of dirty infrastructure retirements in low macro-growth conditions was not aligned with expected trajectories to global decarbonization. To reframe climate action around its risks, rather than its returns, highlighted the downside of transition (who gets left behind and who bears their losses), and shifted the focus of the story from economics to political economy and finance. 

From the abstract heights of theory, a climate risk frame compensates for the broad failure of governments to enact realistic carbon prices, since a proper assessment of risks could reprice assets accounting for climate. Green Finance assumed that the increased productivity and job creation of low-carbon energy would, over time, yield benefits to compensate for the sum of downside losses. The Turn to Risk addresses the problems that arise when Green Finance is not enough. (A hotter planet is both more expensive to maintain and less hospitable to growth.) The focus on risk also brought attention to the problem of political motivation. Embedded fossil interest groups aim to stall the transition. Their lobbying has been reinforced by the widespread realization among sovereigns that, unlike the benefits of transition, which would be diffuse and decades away, the cost of meaningful climate action would be near-term and concentrated. The Turn to Risk attracted attention because it explained, as Green Finance did not, the reasons for re-thinking the value of government policy, the institutions and mandates through which nations might engage with climate change, and the nature of the analytical models that would be needed to do so.

The Turn to Risk successfully brought to the post-Paris depleted climate armory new vehicles and instruments that may ultimately breed the institutional capacity for the coordinated management of transition risk, as exemplified by the recent organization of central banks and regulators into the Network for Greening the Financial System (NGFS). Along this alternative route to effective climate action, there lie both political issues, such as contestable political mandates, and technical questions, such as how to combine financial and macroeconomic modeling with new data-intensive methods capable of managing radical uncertainty. There also lie significant issues of equity. The irony, if not the limits, of an NGFS driven by European Central Banks, with likely US Federal Reserve backing in the offing, is that transition risk in these nations is relatively light. The bigger risks lie in South Africa and across Asia, where infrastructure fleets are young, natural gas is too costly, and where Central Banks are less independent and less enabled.

The Turn to Risk has revealed both methodological and institutional puzzles that may already be constraining its application. First, while its central focus has been the downside risks to companies, investors, communities, and governments of losses incurred from winding down carbon-intensive production, there are a largely unexamined set of risks associated with the timing and value of the replacement of these activities. A more accurate estimation of transition risks will depend on the pace and quality of the implementation of new production systems. That is very difficult to calculate. Second, the efficiency, order, and fairness of winding down a high-emissions dependent economy implies risk metrics and management that are methodologically closer to bottom-up financial rather than top-down macroeconomic models. These financial models require dynamic, bespoke, and costly risk analytics not typically found in the climate modeling community. Lastly, both physical and transition risks are highly subject to strategic and political economic behavior. The final risk tally will depend on the comparative ability of firms and investors to defer policy measures or transfer prospective losses to the government in the form of disaster relief, unemployment benefits, and other bailout schemes.

Another source of resistance to the Turn to Risk is the depressing emphasis on what may well go very wrong. Downside risks are less likely to win politicians’ votes than green rebuilds. Moreover, at the societal level, effective response to climate risk requires a non-market ultimate bearer of risk (e.g. the government), which either itself takes on new risk or governs its allocation, timing, and distributive effects. Politically, the Turn to Risk implies institutional mandates within governments for monetary policy (e.g., green and dirty subsidies such as collateral interest paid on returns and asset support programs like QE2), and prudential (reserves) regulation. These mandates, if extended from classical macroeconomic policy goals like financial stability and full employment, can both justify the recent engagement of central banks, and create confusion over federal divisions of authority. Turning to Risk therefore implies a structure and a process of governance that is hierarchical before it is market-driven and self-enforcing.

Perhaps its greatest disadvantage is how far the Turn to Risk may depart from issues of equity and justice. Those who stand to suffer the most from climate impacts, including black and brown communities in the US and poor countries and citizens around the world, typically find access to a non-market ultimate bearer of risk only after enduring physical disaster or suffering financially through inadequate provisions of social insurance. The COVID-19 pandemic has made matters worse. The Turn to Risk has the potential either to attend seriously to communities and nations who bear the downsides of climate risk or, to create a new wave of climate red-lining, further exacerbating injustice and the pain of loss.

Net Zero

The “Turn to Net Zero,” characterized by disclosure and targets for emissions reductions, has amalgamated themes developed in both Green Finance and Risk, but with its own particular added references and emphases. It extends the Green Finance narrative of climate action heroes from private corporations to assign primary, if not disproportionate, roles to financial institutions and financial markets. In this way, the Turn to Net Zero is similar to the Turn to Risk. But, at the same time, it situates its climate frame in a wider ambit of socio-economic transition and adds the appeal of a more mainstreamed coalition to the politics of climate. Net Zero then contrasts a deadlocked, and state-driven multilateral process with an implicit nod to the upside future of low-carbon production. The inclusivity of Net Zero pledges from companies, banks, asset owners and managers, cities, provinces, and countries, mirrors the fourth industrial revolution storylines of “Here Comes Everybody” (Shirky, 2008), and the effective engagement of everyone through platforms and crowds. The Turn to Net Zero both reanimates post-Paris climate politics through its allusions to the politics of democratization and equality, while capturing the upside growth promises of Green Finance and the regulatory (financial) apparatus of the risk-focused climate frame. 

The history of Net Zero has many founts of origin, as any movement to decentralization should, but there are useful links to the widely recognized and well-regarded Task Force on Climate-related Financial Disclosures (TCFD). While processes for monitoring, reporting, and verifying (MRV) greenhouse gas emissions have been a core endeavor of multilateral attention since the beginning of the UNFCCC regime, the negotiation of those rules always concentrated on national carbon levels to be carried on as state obligations. In contrast, the TCFD, chartered by the G20 Financial Stability Board (FSB), is comprised of private financial banks, insurers, corporates, accountancies, data users, and data preparers. The TCFD framework describes standards around four areas of climate-related action: governance, strategy, risk management, and metrics and targets. TCFD has attracted widespread global adherence and is held up as a credible manual of Net Zero content and practice. 

Net Zero has emerged as the predominant focal point of this book because of its trending adoption to describe and organize climate commitments at all levels, from the UNFCCC’s Glasgow convening to Fortune 500 companies, local banks, and city neighborhoods. It combines the Green Finance frame, with recorded and prospective clean technology installations serving as proxies for emissions, and the Turn to Risk, with recorded and prospective emissions serving as proxies for risk. Net Zero steers around the principal difficulties in the other two Turnssliding past systems transition risks on the upside and the granular and strategic nature of downside risk. While Net Zero seeks an outcome that eliminates, or manages, emissions in the real economy, it borrows from the divestment movement by putting heavy emphasis on financial institutions impacting their real economy counterparties. Undergirding this turn, and critical to its success, are disclosure accounting conventions. Yet a notable feature of Net Zero disclosure accounting in practice is the absence of scenarios, granularity, strategy, and management that would be hallmarks of the Turn to Risk. Of the two main tracks that might have emerged from the TCFD disclosure warehouse, the upside and more optimistic practice of aligning emissions with normative climate goals (which can be achieved through creative accounting) seems to be in the driving position, ahead of the more costly, and more depressing, metrics and management of confronting transition losses. In other words, Net Zero is at risk of taking the easy road and, in so doing, missing its desired destination.