DNB published a study that identifies a wide range of policy options aimed at scaling up climate investment. These policy options include pricing of emissions, government support for sustainable techniques and infrastructure, and regulation of capital markets, climate reporting, and financial institutions. DNB also notes that a large share of the climate investment will need to be made by private parties, while governments must create favorable conditions by pursuing appropriate climate policies.
Each of the policy options are briefly discussed as follows:
- Pricing of emissions. The strongest incentives that governments can provide to make the wider economy more sustainable are improved pricing of climate and environmental damage and the reduction of harmful subsidies. Carbon pricing will preferably be coordinated at the international and European levels to protect competitive positions and limit emission leakages. The European emissions trading system (ETS) must be strengthened. This can be done, for example, by lowering emissions ceilings and further refining the market stability mechanism. The ETS could also be expanded to include more sectors, such as mobility and the built environment. In addition, taxes at national level should be aligned more closely with the extent of pollution.
- Supporting sustainable technologies and infrastructure. Climate investment in the Netherlands is also impeded because there is a coordination problem between investors and financiers. This is where the government must step in to provide support and coordination. Government involvement is also required to support innovative climate investment. In many sectors, the transition hinges on successful technological innovations, but in their early stages these are often less competitive than fossil alternatives. It is important that governments do more to promote innovative investment and its financing, through subsidies, co-financing, and guarantees. An important precondition for this is consistent and reliable government policy, so that there is sufficient certainty for private investors to provide the necessary financing over the longer term. A further precondition is that government support for climate investment must not jeopardize public finances. Improved pricing of emissions and the reduction of fossil subsidies helps create budget space to support climate investment through subsidies, guarantees and co-financing.
- Regulating capital markets, climate reporting, and financial institutions. Another cause of the shortfall in climate investment is that the established carbon-intensive companies are not given adequate incentives to become more sustainable when they raise finance. Binding global climate accounting standards are needed to increase the reliability and comparability of data and related indicators for measuring climate related risk of investment portfolios. When financiers can assess the climate-related risks of their investment, they can more accurately gauge the risk premium they require. Similarly, central banks must be transparent about the climate-related risks in their own balance sheets. Both financial institutions and supervisors need to integrate climate-related risks in their risk frameworks.
In a separate statement, DNB outlined the steps taken in the past year to identify climate-related risks and opportunities of its own investment portfolios and to make investments more sustainable. DNB has started to build up a green bond portfolio for its own-account investments to support the development of this market. This year, DNB aims to invest at least EUR 400 million. In addition,, DNB conducted a climate stress test on its balance sheet, which revealed that the balance sheet is sensitive to transition risks. In the most severe stress scenario, both the corporate bond and equity portfolios are hit relatively hard. DNB is exploring whether it can align its equity portfolio with the agreements set out in the Paris Climate Agreement. For example, DNB aims to formulate measurable carbon-reduction targets. It will also start investigating and identifying the physical climate risks of its investment portfolios. The term of the Responsible Investment Charter has been extended by one year. In the Spring of 2022, DNB will publish an update, including further details on how it will implement the Paris Climate Agreement.
Keywords: Europe, Netherlands, Banking, Climate Change Risk, Sustainable Finance, ESG, Transition Risk, Climate Investment, Stress Testing, Green Bonds, DNB
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