The impending climate crisis is claiming ever-more attention on the political level. Part of the solution to it will be to spend what’s estimated to be trillions per year on cutting and mitigating emissions. The ability of the financial industry to raise and allocate money has got the political classes’ attention. Former US presidential candidate John Kerry – now the United States’ first-ever special presidential envoy for climate – and Luxembourg financial minister Yuriko Backes on Wednesday discussed Luxembourg’s role.
Various estimates, from the International Energy Agency to the UN are projecting trillions to be spent on the transition every year. The UN report on finance says it will be between 2.5 to 4.5 trillion. “Most people will tell you it’s definitively at the upper end of those trillions,” said Kerry, in a recorded video.
“And most people will tell you, it is definitively at the upper end of those trillions,” he continued. “So here’s the basic truth. No government on the planet can fully fund that transition. No government has that kind of money. But the fact is the private sector can. The trick is we have to draw that private capital to the table by creating bankable opportunities.
Recognising contribution
“I recognise Luxembourg’s contributions to solving the climate crisis through your Green Stock Exchange,” said Kerry, speaking on Wednesday in a Luxembourg For Finance sustainability webinar. “And as a centre for international sustainable finance.”
Countries also have a role to play, especially in the area of “de-risking” the kind of transactions.
“We understand there are risks and the government can help to de-risk those transactions, whether it’s currency risk or political risk, force majeure, or whatever it is,” he said. “Those transactions in emerging markets in developing economies are going to require a risk reduction, we need more people involved in that effort.”
Releasing capital
He spoke of efforts to release capital through multilateral climate funds, like the Clean Technology Fund or prioritising climate in agencies like the US Development Finance Corporation. He also raised the idea of reforming the multilateral development banks so they could lend far more money.
“We’re now working very hard and supporting innovative solutions,” Kerry said.
Kerry emphasised that the greatest risk we collectively face is if we continue to just talk about risk rather than on taking action to move forward with the transition. “If you really want to face a future that is bleak and costly, we can continue that business as usual,” he said. “I think all of you know that’s just not acceptable.
ESG funds rising
Luxembourg finance minister Yuriko Backes, also appearing in an edited, pre-recorded video congratulated the continued strong performance of ESG funds, with Luxembourg-domiciled ESG funds registered 2.2 trillion euros in total assets at the end of June 2022. She mentioned a study by the Luxembourg Sustainable Finance Initiative showing that assets under management in ESG funds represent more than half of Luxembourg UCITS assets.
“At the ministry of finance level, we are committed to support the financial sector in this transition towards increased sustainability,” she stated, before explaining about the Luxembourg Sustainable Finance Initiative. “The Luxembourg Sustainable Finance Initiative which we have jointly set up with the sector and civil society has at its core mandate to support the financial sector in its sustainability efforts, notably, by raising awareness but also by assisting in the setting of targets and measuring progress.”
Proud institutions
Backes also name-checked the LuxFlag labelling agency and the Luxembourg Green Exchange. She proudly mentioned that the exchange has made voluntary reporting standards as well as post-issuance reporting on proceeds a mandatory requirement for issuers.”
Backes acknowledged the call to pass from commitment to implementation, and set out four areas that the financial sector must address. Financial institutions need to set clear, measurable goals and targets for their sustainability efforts. The financial sector must be transparent about its sustainability efforts.
“The sector should engage with its clients, with its investors, regulators and civil society to create shared value and drive sustainability outcomes,” she said. The financial sector should also, in her view “leverage innovation and technology to drive sustainability outcomes.”
Backes also discussed Luxembourg’s long-standing expertise in “using blended finance to mobilise private sector investments”. She added that her ministry is looking to support innovation in the area of the kind of closed ended and long investment periods that are a barrier to impact investment.