How to mobilise capital and achieve net zero

UBS estimates that converting the global energy system to low carbon will need up to $US160 trillion of investment by 2050. Photo: Kevin Frayer/Getty Images

Long before Covid-19 took a grip on our society, the risks presented by a possible global pandemic were well known. And yet the world as a whole proved unprepared to deal with the situation.

We can learn from this by taking better precautions against other potentially catastrophic risks we already know we face. I’m thinking in particular of climate change.

The Paris Agreement seeks to avert potentially catastrophic and irreversible damage to our ecosystem by limiting the global rise in temperature to well below two degrees Celsius above pre-industrial levels. But achieving its objectives won’t be easy. In fact, it will require a fundamental transformation of the global economy.

China is making an essential contribution to these efforts with its dual carbon goal. This commitment sees their carbon emissions peaking before 2030 and the country achieving carbon neutrality before 2060. But this kind of energy transition, both in China and around the world, will require massive amounts of capital.

The scale, pace and geographical range of growth needed in green capital markets to provide the necessary capital is unprecedented. UBS estimates that converting the global energy system alone will need the cumulative investment of between $US120 trillion and $US160 trillion by 2050. This is equivalent in size to the current capitalisation of the global stock market.

Sustainable finance is gaining momentum everywhere. Last year, for example, global green and sustainable development-related bond market issuance was up 112 per cent year on year. And China’s green bond issuance is already the second largest in the world after the US, even though the official statistic only accounts for half of the total green bonds issued in China.

It’s clear that significant progress has been made. But I see three prerequisites for sustainable finance to continue growing in the long term.

First of all, financial markets must be open to foreign investors and foreign financial institutions, as the capital available does not match the investment needs of all countries. For example, around half of the total investment needed to meet the Paris Agreement’s climate targets is in Asia. That’s more than the combined investment needs of Europe and the US.

China’s plans for further financial market opening will help pave the way for global banks to make a greater contribution to the country meeting its investment needs by bringing in both their expertise and international investors.

Professional knowledge and global rating systems can, for example, help Chinese firms to improve their ESG ratings and catch up with global peers. At the same time, global banks can give responsible Chinese investors access to sustainable investment opportunities outside of China that are still, to a large degree, out of reach due to current regulatory restrictions.

Secondly, there’s an urgent need for international co-ordination and the alignment of standards for climate risk-related regulation – in particular climate risk disclosure standards for corporate issuers, financial institutions and financial products. Regulatory fragmentation causes high implementation costs. And we must ward against the risk of turning sustainable finance into a compliance exercise or a significant obstacle to cross-border capital flows, precisely at a time when such flows are so critical.

China is playing an important role in initiatives that improve international co-ordination and facilitate crucial international capital flows.

The IFRS International Sustainability Standards Board announced at COP26 may have an office in Beijing. The People’s Bank of China (PBoC) is a founding member of the Network for Greening the Financial System. And the G20 Working Group on Sustainable Finance was launched during China’s G20 presidency in 2016 and is now co-chaired by the PBoC and the US Treasury.

The third prerequisite is that while financial markets and financial institutions play an important role in the transition as an intermediary between the supply and demand of capital, the main impetus for the real economy to embark on the necessary transition must come from government policies and incentive structures – above all a single and comprehensive price for carbon.

In fact, a carbon price is the only way to reach our ambitious climate goals, as a price mechanism works far more efficiently than directives, restrictions, and subsidies.

Nevertheless, policies and regulation have a role to play in encouraging innovation, as new technologies – some of which are yet to exist – will be crucial to reducing carbon emissions.

UBS sees China particularly well positioned in fields such as renewables equipment makers and operators, energy storage operators, electric vehicle makers, battery makers, grid equipment makers and hydrogen gas providers. And increasing domestic and global investment demand for these technologies represents a significant growth opportunity for China.

The national emissions trading system launched in 2021 is already the largest in the world and covers approximately 40 per cent of China’s total emissions. The country is also a major voluntary carbon project developer. International demand will shift focus increasingly towards nature-based solutions, carbon capture and storage capacity: this creates a significant opportunity for China to develop additional carbon offset projects. The recently introduced carbon emission reduction facility of the PBoC will further help to finance efforts to achieve the dual carbon goals.

The road to net zero is long and challenging. And the reduction of carbon emissions is one of the defining challenges of our time. UBS has long been at the forefront of sustainable finance.

As the world’s largest manager of private wealth, we’re ready to enable and facilitate the transformation towards a more sustainable future. So are our clients, as evidenced by the large growth of our ESG investor base. If the official sector provides the proper regulation and incentives, then I’m convinced that, together, we can avoid the worst effects of climate change.

Axel A. Weber is the chairman of UBS board of directors.