Green Finance has experienced substantial growth in the last five years, the total green investment under management reached US$ 30.7 trillion reported by Bloomberg in 2019. However, many green finance products are not leading to real additional environment benefit, called ‘additionality’. They are likely to be issued and filled anyway no matter whether they are labelled ‘Green’ or not. The impact of coronavirus crisis on nations’ fiscal expenditure for climate change is uncertain, but certainly we need to avoid spending for ‘Greenwash’, to maximise the efficiency of utilising climate funding. Researchers in China and UK attempt to fix the problem through promoting pillars within their proposed climate investment and finance standard framework.
To understand investment additionality, we need to assess whether projects are commercially feasible in absence of being certified by a green or climate friendly scheme (e.g. Green Bond). A green investment may have additionality, only if the investment’s return was not financially feasible initially but after being certified as ‘green investment’ the project became feasible (increased project return or lower investors’ expected required rate of return). For example, if a hypothetical solar PV project in the UK could only generate 5% internal rate return originally, which was lower than 6% required rate of return by investors in the market. If the project could attract policy support or climate friendly investors and become feasible after being certified in a green finance scheme, in addition to prove emission reduction benefit from a baseline level, then the product could claim to have ‘additionality’, i.e. leading to real emission abatement. And vice versa, if another hypothetical project, an onshore wind project in the UK, already achieved 12% return which was already commercially feasible, the wind project’s bond being certified as a green finance product would not lead to additional emissions reduction benefit and therefore it didn’t have any additionality, labelling green bond doesn’t lead to additional emission reduction.
In October 2019, China launches an initiative called Climate Investment and Finance Association (CIFA) to advance investment and finance environment for climate change. China International Engineering Consulting Corporation (CIECC) was commissioned a study on establishing climate investment and finance standard framework in China. Dr Zhang Yuan from CIECC suggests China’s Climate Investment and Finance Standard System should evaluate international best practices and develop a future proof system. Dr Zhang wishes all climate friendly labelled products and investments to disclose their real climate additionality in the future. Their study proposed to separate existing green finance products with climate benefits into ‘climate friendly or green statistics products’ and ‘climate friendly or green impact investment’, as the former category is only a statistic while the later category could lead to real emission abatement. The study also suggests climate friendly financial products to disclose its additionality to avoid misleading climate friendly investors.
Dr Liang Xi, Senior Lecturer at the University of Edinburgh, a co-author of the CIECC study, in his recent article, suggests avoiding any public fund and climate friendly concessional investment flowing into ‘green finance’ or ‘climate finance’ unless their real additionality is proved. Dr Liang cited a story at the beginning of the article: his neighbour bought a ‘green bond’ issued by a major bank in the UK and told Liang the bond leads to 8 million tonne CO2 abatement. From Liang’s opinion, the bond might be issued anyway no matter whether it had been labelled ‘green bond’ or not, and therefore his neighbour by purchasing the bond might not lead to any real and additional investment claimed by the investment prospectus. Liang’s team were working closely with CIECC in the last few months in reviewing various green fund and green finance standards, incl. those certified by big names ICAM, CBI, CICERO, S&P, Moody, but he was disappointed with the fact that none of these schemes required certified products to disclose additionality. Investors would not know how much real climate or green benefits their investment may contribute to. Dr Liang indicated that the latest report issued by the EU Green Bond Standard Group in 2019 actually highlighted the limitation of green finance for the lack of ‘additionality’ in section 2.1 but the report sadly does not provide any concrete solutions to address this critical issue.
The additionality missing problem is observed beyond climate and green finance. Dr Matthew Brander, Senior Lecturer at the University of Edinburgh, identified a large number of ‘carbon offsets’ and ‘carbon neutral’ certificates are actually greenwashing, i.e. consumers by purchasing these certificates will not lead to the emission abatement benefits advertised. Prof Guan Dabo from Tsinghua University and the founder of China Emission Accounts & Database (CEAD) database, suggested China and most OECD countries have ability and adequate capacity to assess direct emission (scope 1) and energy related indirect emissions (scope 2) effectively. He proposes the world must make progress in developing databases for assessing scope 3 indirect emissions from non-energy consumption given the limited time left for achieving the Paris Agreement goal. Prof Guan also cited, the Clean Development Mechanism (CDM) under United National Framework Convention on Climate Change (UNFCCC) has mandated additionality assessment for nearly two decades; however, more effort needs to be made to improve the quality of such assessment and to ensure real additionality is assessed.
Hopefully, the discussion on additionality could lead to a more effective and stringent framework for guiding our society to spend very limited climate friendly funding and for enabling projects that generates real additional climate mitigation and adaptation benefits. We need be honest to ourselves as well as our future generations.