One of the key goals of the EU action plan on financing sustainable growth, the European Commission’s sustainable finance strategy, as well as the strategy for sustainable development 2030 of the Federal Council is to reorient capital flows towards a more sustainable economy.
While the last few years have been characterized by the regulatory tsunami and the "mainstreaming" of ESG investing, it is now time to take a step back and re-focus. The question in today’s era of rising interest rates and increasing political instability is where the future opportunities in sustainable finance lie.
Financial institutions with a long-term perspective understand that the climate crisis is as urgent as ever and the capital demand to finance the necessary green transition by the real economy is enormous both in developed and developing markets.
In this publication we want to explore the opportunities for Swiss banks and asset managers in driving the transition to a sustainable economy and the challenges that lie ahead.
Exploring Transition and Blended Finance
What is Transition Finance?
While no standard definition has emerged yet, transition finance is commonly understood to be the use of financing strategies and instruments to facilitate the transition from a high-carbon to a low-carbon economy and therefore constitutes a very specific strategy or tool that financial institutions can deploy in the broader context of their sustainable finance strategies.
In developed markets, transition finance tends to be provided by means of “traditional” finance instruments such as bank loans or capital markets instruments.
However, the biggest impact to reach the global climate goals is achieved with investments in illiquid assets in developing markets, which typically do not meet the requirements regarding investibility for many institutional investors.
What is Blended Finance?
“Blended finance” instruments are a specific type of investment structure that have a key role to play in Transition Finance, especially for investments in developing markets.
Blended finance is the combination of both public and private funds through a common investment scheme or deal, with each party using their expertise in a complementary way.
Blended finance instruments use public capital to reduce risks and thus make projects worthy of investment for private investors. Ideally, a multiple of private capital can be mobilized in this way.
Transition Finance: Bridging the Gap to a Low-Carbon Economy
Climate change is a global challenge that requires a joint effort to overcome.
It is undisputed that the financing of such a sum is not possible without the mobilization of private funds.
By providing financing, financial institutions can make an important contribution to the upcoming transition of the Swiss and global economy to sustainable activities and thus to achieving the net zero target by 2050.
Experts estimate that the transition to a zero-emission and resilient economy by 2050 will require USD 2-4 trillion per year.
Ahead into the future of sustainable finance
Navigating the intricate world of transition finance presents various obstacles for financial institutions, governments, and businesses alike.
However, the potential for impactful change is substantial. By providing the right products and vehicles, the right framework conditions, and fostering collaborations between the public and private sectors, we can progress towards a low-carbon economy.
This shift in financing should not solely be focused on combatting climate change; it is equally about forging a future that marries social well-being with environmental sustainability.
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