Hall & Lindsay, April 2018: Click here to read the report.
The transition by financial markets to a low-emissions global economy has already begun (see §1.1). Global capital is increasingly being channelled in directions that prioritise and enable climate-aligned projects to deliver mitigation and adaptation benefits. These capital flows are what we call climate finance; that is, investment and expenditure – public and private, domestic and transnational – that demonstrably contributes to climate mitigation, adaptation or both (see §3.1).
As a country that operates openly in the global economy, New Zealand faces immediate, medium- and long-term decisions about how to engage with this transition toward a low-emissions economy, in a way that maximises the advantages of our unique geographic, cultural and political circumstances. Although this transition will require new kinds of investment, this climate-aligned expenditure provides opportunities to create new jobs and industries, to spur growth in different parts of the economy, and to crowd-in new capital from diverse sources through emerging frameworks of impact investment (see §1.2–4).
At a global level, various analyses reveal a significant gap between the level of current global climate investment and the level of expenditure required. For example, it is estimated that current global climate finance flows are around US$391–714 billion annually, yet it is also estimated that, over the next 15 years, investments of US$900 billion annually will be required to meet the national pledges made in the 2015 Paris Agreement, or US$1.13 trillion annually to limit global temperature increase to 2°C (see §3.2). There is growing pressure at all levels to address this global investment shortfall.
The Paris Agreement imposes a range of obligations and expectations upon signatory nations, including New Zealand (see §2.1). Alongside the national and collective commitments to reduce net greenhouse gas emissions, Article 2(1) of the Paris Agreement commits parties to: “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development”. This goal encompasses all finance flows, transnational and domestic, and creates an expectation upon New Zealand to undertake activities that in the short- and medium-term will redirect climate finance flows toward low emissions and climate-resilient outcomes.
The primary focus of this report, however, is domestic climate finance – that is, finance flows that are internal to New Zealand by having domestic use-of-proceeds for climate-aligned projects and activities. (This contrasts with international climate finance, where investment flows from developed to developing countries to support sustainable, climate-aligned development.) This report shows that there are already a range of financial flows within New Zealand that meet climate finance definitions (see Section 4). Nevertheless, there are significant opportunities to increase the volume and effectiveness of climate finance flows in order to better align with New Zealand’s international obligations and expectations, not least the collective agreement to reach global net zero emissions by the second half of this century. Improving the quantity and quality of climate finance is not only a challenge for New Zealand but for all signatories to the Paris Agreement, due to the major global shortfall of adequate climate investment. However, creating a more enabling environment for climate finance flows will not only help New Zealand to meet its international obligations, it will also position New Zealand favourably within the global economy as the transition to lower emissions activities gathers pace.
This report further examines domestic climate finance through the lenses of natural capital and impact investing. These ideas can contribute to a more systemic approach to climate policy which recognises the rich value stack of social, environmental and economic benefits from climate-aligned projects; and also, the wide spectrum of actors – impact investors, institutional investors, venture philanthropists, corporate sustainability managers, bond issuers, and so on – that the New Zealand Government could coordinate with to promote effective, self-sustaining, climate-aligned investments. The potential here is captured by the motto: blended finance for integrated impacts. Finance is blended in the sense that public investments are used to catalyse private investments (or vice-versa); and integrated in the sense that finance is directed towards combined social, environmental and economic benefits.
From this perspective, New Zealand Government can play any combination of at least four roles: (1) direct investor, (2) investment manager, (3) market maker and (4) trailblazer (see §1.3). (These roles should be regarded as a complement to – and not a substitute for – other key roles that the New Zealand Government plays within climate policy more widely, which includes regulator, protector and steward.) As a direct investor, the New Zealand Government already provides multiple grants in areas like energy efficiency and sustainable land management (see Section 4). These grants constitute the majority of public finance flows and are useful for providing a first step in project trajectory or overcoming early-stage market failure. However, there is potential for the New Zealand Government to maximise the impact of its direct investments by giving greater priority to the other three roles. An investment manager role would emphasise the importance of financing pipelines for climate-aligned projects and companies to nurture innovation to maturity, to provide growth capital for ideas that work. A market maker role would recognise the New Zealand Government’s capacity to support climate-aligned projects and companies by being first purchaser, or a large-scale purchaser, of climate-aligned goods and services. And a trail blazer role would recognise the New Zealand Government’s capacity to lead the way globally, especially in those sectors where New Zealand has unique mitigation opportunities, such as land use and transport powered by renewable energy. To enhance New Zealand’s climate finance system, this report identifies ten recommendations (see Section 5) – from low-hanging fruit to more elaborate interventions – that would create a more facilitative enabling environment for climate finance. These are:
Finally, this report sketches two hypothetical climate finance instruments that embody the principle of blended finance for integrated impacts (Section 6).
Firstly, the Low Emissions Accelerator Fund (LEAF) is an example of a hybrid equity instrument that provides strategic financing solutions to hurdles for green technology uptake, especially in energy efficiency and fuel switching. This fund is an example of prioritising an investment manager approach, where public funds are used to support climate-aligned companies through an equity stake, in order to overcome the limited access to capital frequently experienced by companies beyond the start-up stage but not yet fully mature. By de-risking climate-aligned investment for private investors, LEAF is designed to precipitate a “culture change” in the investment community, by creating opportunities for investors to become familiar with climate-aligned impact investment.
Secondly, the Permanent Forest Bond is a debt instrument issued by a non-sovereign intermediary that provides upfront capital for the establishment of permanent native forest. It is an example of an Integrated Impact Bond that delivers a rich climate-aligned value stack of environmental and social benefits by unlocking private capital through pay-for-performance contracts, backed by government’s commitment to pay for successful climate-aligned outcomes.