Developing Low Carbon Financing Mechanisms

Listed Equity Solutions

Listed equity markets refer to publicly listed companies on stock exchanges around the world. The global market capitalization of listed equity companies is in excess of US$64 trillion and represents a large portion of global financial securities. As UNEP reports, there has been increased focus on the potential role that pension funds and asset managers can play in shifting financing towards low carbon, energy efficient assets products. Trends in “listed equity solutions” include:

  • Fund managers are developing products to invest in companies that make a positive contribution to addressing the climate change challenge;
  • Pension funds (Swedish AP4) and asset managers (French Amundi) are implementing new techniques to de-carbonize investment portfolios across passive equity portfolios;
  • UK asset manager Legal and General Investment Management has developed a pooled fund seeded by its client BT Pension Scheme, weighted in favor of lower carbon companies; and
  • Environmental indices have been developed as an alternative benchmarks for
    portfolios focusing on low carbon and climate resilience.

Green Real-Estate

Real estate account for more than a third of the total assets under management by the world’s 100 largest asset managers. As UNEP reports, there are estimates that the direct commercial real estate
transactional market will exceed US$1 trillion per annum by 2030, compared with 2012 annual volumes of nearly US$450 billion. From the perspective of financiers and investors, green real estate – defined as
energy efficient, low carbon buildings – has advantages over conventional buildings. It has lower energy consumption as well as lower operating and maintenance costs. Over the life-cycle of a building these savings often offset higher initial upgrade and retro fitting costs and result in lower C02 abatement costs.

For example, US finance and insurance company Prudential has implemented a framework for identifying energy efficiency solutions for its US$55 billion property asset portfolio. Prudential Real Estate Investors (PREI) created a proprietary manual of Sustainable Standard Operating Guidelines. It is based on an assessment of more than 200 properties and takes a bottom-line approach to identify efficient solutions for lighting, water, temperature settings, management of vacant space and self-assessments for potential.

Government regulation at the national and local levels have also been significant drivers for green buildings in developed and developing countries through implementing measures such as setting minimum standards for new construction through building codes; efficiency of existing buildings; transparency regarding efficiency rating; and phasing in escalating sustainability standards for all
residential and commercial buildings, which can have significant climate adaptation and mitigation benefits.

Re-Insurance 

Banks and insurance companies are developing financing solutions to support adaptation projects, primarily in developing countries, with significant potential for more financial institution involvement in partnership with governments, development banks and developing country agencies. UNEP reports that insurance and reinsurance companies are the most active participants in adaptation, as many responses require insurance solutions to help communities manage weather related risks. For example, the Swiss reinsurance company Swiss Re, the World Bank and Uruguay government partner to complete US$450 million hydroelectricity insurance transaction. The transaction uses rainfall data and oil prices for
settlement and provides the Uruguayan government compensation for the combined risk of drought conditions and an increase in the price of energy.

In terms of re-investment, Norwegian life insurance company KLP has launched a renewable energy co-investment program with Norwegian DFI Norfund aimed at investing US$160 million in developing
countries. KLP and Norfund each invested NOK 35 million in Scatec Solar’s two PV projects in South
Africa. KLP is the first institutional investor in Norway to make this type of investment. Scatec Solar
is the first investment in an agreement between KLP and Norfund aimed at co-investing NOK 1 billion
(US$160 million) in projects in developing countries to promote sustainable development. The investments will be made over a period of five years and will be based on commercial risk and return assessments with strict requirements for environmental and social sustainability.

While these developing low carbon finance mechanisms have not yet been incorporated into land trust funding models in the United States, as markets grow and enabling policies expand, opportunities to leverage such funding to support existing management efforts may be forthcoming.

Read more: Financial Institutions Taking on Climate Change, UNEP