Sir Suma Chakrabarti, EBRD President
Royal Society, London
The Stern Review +10: new opportunities for growth and development
Thank you very much for the invitation to speak on this very significant anniversary.
Ten years ago the Stern Review defined the task at hand with a crystal clear sentence right at its start.
It read: “The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent response.”
Most crucially, the Review outlined the economic impacts of climate change and emphasised what are without doubt the complex challenges of managing the transition to a low carbon economy.
It is a double, indeed a triple, privilege and pleasure to address you a decade further on.
- First, because of the fundamental importance of the topic which brings us together today. Climate change is the ultimate challenge for our time. We are all aware of the way the Review enhanced our understanding of it and focused our attention on the need for action.
- Second, because the EBRD has transition at the very core of its mandate. That includes transition to a low carbon economy.
- And third, because Nick is a close friend of the EBRD’s and had a huge influence on the Bank I am now President of during his time there as Chief Economist.
Today I intend to look at three core challenges arising from the Stern Review and outline what the role of the MDBs can be to address them.
I will be basing my remarks in particular on the broad experience of sustainable infrastructure financing gained by the EBRD in the ten years since the report was published.
The three challenges I will be focussing on are: scale, reach and urgency.
- Scale because of the sheer size of the climate change challenge, which is literally global.
- Reach because addressing the scale of that challenge requires a broad and inclusive approach involving all countries across all sectors of the economy.
- Urgency because, to be brutally frank, time is not on our side.
So let us turn to scale first. The numbers are by now well known, particularly from the work of the Global Commission on the Economy and Climate, with Nick as its co-chair.
- The infrastructure investment requirement over the next 15 years is in the region of US$ 90 trillion.
- The Global South accounts for two thirds of world infrastructure investment needs at US$ 4 trillion per year.
- The shift to low carbon infrastructure would increase investment needs by as little as 5 percent, with higher capital costs potentially fully offset by lower operating expenses.
- Current annual infrastructure investment is running at a little over half the estimated requirements, with the gap being much higher in a large number of countries, particularly in poorer developing ones.
- Dependency on public finance is very high in developing countries at around 60 percent of infrastructure investment.
- In advanced economies the relative breakdown is reversed, with the private sector accounting for 60 percent.
Given all that, the US$ 100 billion a year for climate finance agreed by the Copenhagen conference looks very modest indeed.
- Reach across countries and sectors
Now, to achieve scale, climate action needs to have broad reach across geographies, sectors, instruments and financing sources.
And the Multilateral Development Banks, the MDBs, are well placed to deliver that reach. I have a lot to say about how the MDBs can and must deliver that reach.
Starting with the view that climate action needs to impact all countries, whether developed, developing or emerging economies:-
- Developed countries because some of them still have some of the world’s highest carbon per capita ratios.
- Developing and emerging economies because they often confront the double challenge of pursuing growth while trying to contain carbon emissions growth and, in some cases, are already facing complex climate adaptation issues.
Taken together, the MDBs have very wide geographic coverage, including developing countries and emerging economies in particular.
For example, the EBRD works everywhere from advanced transition countries which are part of the EU to small, poorer economies in Central Asia.
Climate action also needs also to be deployed across all sectors of the economy.
While the focus has often been on energy sector decarbonisation, the transport and agriculture sectors present perhaps even more complex challenges.
The work of the Global Commission on Economy and Climate has neatly structured these three themes as: energy, cities and land use.
The MDBs also have significant sector knowledge across their countries of operations.
And sector knowledge is a key ingredient of climate action, linking policy, the development of investment and financing plans and the mobilisation of public and private actors in order to deliver actual results on the ground.
The EBRD has invested significant resources, for example, in developing a specific range of energy efficiency financing products at the sectoral level.
The sectors involved include industry, energy, municipal infrastructure, buildings and banking.
This has been key in scaling up our energy efficiency activity which today accounts for over €2.5 billion a year, about a quarter of our total annual investment.
The Stern Review noted the importance of policy for climate action ten years ago and this is further emphasised in the latest New Climate Economy report.
The MDBs are acutely aware of the close link between policy and financing.
In fact, in many sustainable infrastructure areas, without such policy activity, there would be no projects and therefore no finance flow.
Reflecting this, some MDBs have developed policy loans, linking the implementation of specific climate policies with financing.
In the case of the EBRD, our policy work aims to reduce market distortions and open new market opportunities, while project work informs policy priorities and formulation.
Policy work operates at many levels:-
- At a high level, examples include supporting a government to define its renewable energy framework or working on enhancing cost recovery in the energy sector.
- At a more technical level, it may include work with Central Banks to enhance green financing through the banking system or defining energy efficiency standards in the residential sector.
- While technical in nature, policy work can be a powerful driver of new market development. For example, by encouraging the involvement of local commercial banks in sustainable infrastructure financing and setting the basis for the development of a residential energy efficiency market.
Given the imminent entry into force of the Paris Agreement, significant focus is also being placed on the development of the nationally determined contributions - NDCs in the jargon - and of related sustainable infrastructure project pipelines.
It’s worth highlighting here the NDC Invest initiative launched by the Inter-American Development Bank earlier this month.
- Financial reach
All of us understand by now that public funds will not be enough on their own to address the scale of required climate action.
And that we need access to private funds from capital markets and institutional investors if we are to have the impact we need.
Sustainable infrastructure financing needs therefore to operate effectively across both the public and private sectors, using a broad range of financing instruments.
So just as the EBRD focuses on policy, we also devote significant effort to improving the investment climate in the countries where we work.
This is absolutely essential to facilitate the flow of financing to the private sector.
And we’ve placed special emphasis on developing the private sector component of our own climate finance activity.
As a result, over 60% of our cumulative climate finance of € 20 billion is in the private sector.
In general, a lot of work is underway on greening the financial system, seeking to attract ever larger amounts of private finance from capital markets, pension funds and the insurance industry.
Multilateral Development Banks, for their part, have been at the forefront of the growth of the green bonds market.
Earlier this month, in the run up to next month’s COP22, the EBRD organised an event on the development of green finance in Africa through the banking system with a major Moroccan commercial bank.
The conference connected Central Banks and commercial banking associations in Africa with the sustainable infrastructure practice of individual commercial banks and private entrepreneurs in the region.
It was a great way to link sustainable infrastructure policy discussion with action and results on the ground!
And you can already see progress from the Multilateral Development Banks on a much broader front.
While operating at an international level, MDBs are flexible enough to do everything from supporting a US$ 500 residential energy efficiency loan to a family in the Kyrgyz Republic to financing a large supply side energy efficiency project worth several hundred million dollars.
Indeed, using common accounting methodology, the MDBs will have financed over US$ 130 billion in climate action in developing and emerging economies from 2011 to 2015.
In 2015 alone MDB climate finance reached US$ 25 billion.
Including co-financing, total climate finance reached more than US$ 80 billion over that period.
In the build up to last year’s COP21, MDBs set themselves the objective of further increasing their environmental financing activity.
And the EBRD set itself the ambitious target of increasing its share of green financing as a proportion of its total annual investment to 40% by 2020.
Those numbers are impressive and the ambition is laudable.
But, when compared to what is needed, they are still modest.
Moving from billions to hundreds of billions of sustainable infrastructure funding will require much broader mobilisation of private funding sources, particularly in developing and emerging markets.
Besides policy, scaling up such financing is also dependent on a strong pipeline of bankable projects.
This is another area we have been active in, having set up an Infrastructure Project Preparation Facility to accelerate the development of precisely such a pipeline.
To summarise, we’ve seen that MDBs can be a powerful driver of sustainable infrastructure financing thanks to their:
- country and sector knowledge,
- their ability to combine financing, policy and capacity building,
- their project preparation and implementation experience
- and their ability to develop bankable projects with the private sector.
Before moving from scale and reach to urgency, there are a handful of other factors we need to bear in mind, among them:
- the need to develop local currency financing capacity given that the revenue base of a significant portion of infrastructure generates local currency flows. This is particularly challenging in developing countries;
- the related need to develop local capital markets to provide this local currency, which is why, since the financial crisis of the last decade, we’ve launched a programme to develop local capital markets in the countries where we work and increase the share of our own financing in local currency;
- the need for a sharp focus on financial management and cost recovery at project level. This is key to the financial soundness of projects, to their ability to attract private sector financing and to fund maintenance and operations once assets are built;
- and one fundamental issue not to lose sight of is the way environmental externalities have been internalised in so limited a way. That’s true of the energy sector. It’s even truer of the water sector. It is no accident that Nick has described this as the 'largest market failure the world has ever seen'.
In the real world, this means that concessional funding will remain an important component of sustainable infrastructure development wherever and whenever price signals are weak and the policy context is deficient.
In this respect we hope that that the recent appointment of the new Executive Director of the Green Climate Fund secretariat will allow the GCF to become an important contributor to sustainable infrastructure development.
Finally, ten years ago the Stern Review instilled an acute sense of urgency about the challenges we face.
A decade further on, that urgency has become that much more urgent.
Nick’s latest book has the poignant title: 'Why are we waiting?'
It sets out, and I quote, ‘to show that the case for urgent and radical action is extremely strong, and that the tools to make it happen are firmly within our grasp’.
The decade since the Stern Review launch seems both a long and a short time.
Long if you consider all that has happened since, including a major financial crisis and Copenhagen, but also the SDGs, the Paris Agreement and the brand new deal to phase out HFCs, to mention a few major recent events.
But short if you consider the urgency of achieving a sharp inflection of carbon emissions.
Remember the sentence in the Stern Review: ‘The earlier effective action is taken, the less costly it will be’.
Saving our climate is a question of scale and timing.
We need to work much, much harder if we are to see a significant reduction in carbon emissions by the time we meet to mark the Review’s 20th anniversary.
In closing, let me express my personal appreciation to Nick for all his inspiration and contribution to the EBRD’s climate action.
It is no coincidence, I feel, that the publication of the Stern Review coincided with the launch of the EBRD’s Sustainable Energy Initiative in 2006.
And ten years on we are resolved more than ever to deliver on the sustainable infrastructure financing imperative.
In the case of the EBRD, I can assure you that, to paraphrase the title of Nick’s latest book, we are definitely not waiting.
Thank you very much.