Funding & financing transition to a resilient economy

This article was published on interest.co.nz on March 24, 2023

The is no disagreement around our urgent need for funding and financing the transition to a more resilient economy. Nor of the need to remain competitive as the global economy heads for decarbonisation. Our vulnerability has been revealed and we must respond with urgency.

The latest UN climate report shows the world is currently on track to reach 1.5 degrees warming (based on pre-industrial levels) in the 2030s.

“Rapid and far-reaching transitions across all sectors and systems are necessary to achieve deep and sustained emissions reductions and secure a liveable and sustainable future for all,” the Intergovernmental Panel on Climate Change (IPCC) report says.

Finding creative ways to unleash our finance system is the critical next step.

“If climate goals are to be achieved, both adaptation and mitigation financing would need to increase many-fold,” the IPCC report states. “There is sufficient global capital to close the global investment gaps but there are barriers to redirect capital to climate action.”

We can look at our investment demand as a nation using three broad horizons:

• the immediate response to Cyclone Gabrielle and mitigation in the highest risk areas to restore lives and livelihoods of the many devastated communities in Northland, Auckland and the East Coast. Who could forget our East Coast whole communities torn to pieces?

• the investments required over a medium-term horizon to build resilience into our energy, transportation and infrastructure systems, and to maintain our global reputation as meaningfully contributing to the goals of the Paris Accord.

• the longer term 30-year infrastructure deficit of $180bn as identified by the Infrastructure Commission in 2020.

The numbers are eye-watering. The scale of the financing challenge will certainly test our institutions, public and private sector. But, before we get too buried under the numbers, we need to expand our mindsets and the breadth of our aspirations and consider the levers we might pull.

Our public financing sources can never meet our urgent net-zero transition needs, and they don’t need to.

Governments alone simply cannot afford the scale of financing required and we must find whole-of-economy solutions. This means creating arrangements that utilize public, philanthropic and concessionary capital, to mobilize private investment on a scale that we’ve never experienced before.

We have seen good small-scale pilots here and there that have been promising, but not at the scale needed. We need to find new and creative ways to source capital.

Are we bringing our best minds to the table as we consider our options for meeting our urgent funding and financing needs?

To date, few options have been brought forward. Conventional approaches such as changes in our tax system have been mooted, as have increases in our long-term borrowing ratios.

But there are many more options available to us to unleash global capital markets to address our urgent needs. Not all will be relevant to our situation in Aotearoa New Zealand but, given the scale of our deficit, we need to expand the conversation and challenge ourselves to think much more laterally and creatively than we have tended to in the past.

As an export nation, and a net-importer of capital, our country needs to retain its trade relationships and economic value proposition in a net-zero future.

The shape of our future

Our first challenge is to articulate a cohesive vision, strategy and investment plan for the future of our nation as a high-wage, low-emissions economy so that we can attract the global capital and talent to do this transformational work.

This includes:

1. Developing a domestic and international narrative around our future, and our transition to that future, to build political and financial support across businesses and communities.

2. Outlining sectoral transition pathways and analysis of climate related risks to business and investment strategies.

3. Uniting central and local government and regulated infrastructure in transparent long range planning processes, which are linked with identified budget allocations and other sources of financing in line with our long-range strategies.

Many public sector infrastructure entities overseas excel at communicating the future shape of their cities and countries; Singapore and Melbourne being celebrated examples.

Aligning on the pathways to a positive future helps funders and financiers plan their investment strategies as well as providing future visibility for politicians and citizens.

What is the future shape of a climate-resilient Aotearoa New Zealand?

An investment-ready financial infrastructure

Finance and industry leaders and policy makers will then need to build on this core vision to identify and encourage creative financial options that fit within core Government programmes and ensure regulatory certainty.

Ensuring long-term stability and facilitating the essential finance for climate resilience is a fundamental task for our leaders and regulators. The range of global options must be explored with urgency and the public sector is crucial to ensuring our institutions are prepared to attract, welcome and facilitate these funds flows.

There are several important steps to ensure the pricing and quantity of funds flows and the attractiveness of Aotearoa New Zealand as an investment destination, such as :

• Long term planning and policy certainty. Policy advice to improve the overall investment environment. More staff (and perhaps staff with new skills) to help governments identify projects, prioritize them, design concessions that place risks with those best able to bear them, help run tenders for project sponsors/investors and then evaluate proposals.

• Streamlined policy processes to attract and facilitate investment.

• Creating macroeconomic stability and reducing medium term country risk. At the structural level, to swim with the tide.

New Zealand must also build a robust resilient sustainable finance market. Necessary building blocks for this include developing common definitions and standards, which are interoperable with emerging global conventions, such as the ISSB international sustainability reporting standards, green and sustainability linked loan and bond principles, climate disclosure standards (TCFD), which are mandatory in NZ from this year, as well as assurance and other investment disclosure tools.

We must be ready to respond. Capital is available for our urgent infrastructure needs, provided that we meet best practice global standards and expectations.

Widen our sources of capital

Billions of dollars of private capital globally is willing to invest in essential infrastructure, especially in “investment grade” countries like our own.

Many countries have developed sophisticated skills to catalyse flows of funds from the private sector. This is essential given that the investable resources controlled by institutional investors are many billions greater than those funds available to the public sector in every country.

Public/private partnerships (PPP’s), special purpose vehicles (SPV’s) and the funding of local authority projects through the Infrastructure Funding and Financing Act 2020 have been few in number in our country in recent years, and limited partnership opportunities are presented in the Government’s work pipeline.

Regardless of our track record to date with blended finance projects, the urgency of our challenge is too high and the numbers are too great to reject this option.

However, there is abundant evidence, most notably in Australia, demonstrating how successful properly structured PPP’s and SPV’s can be, in mobilising much needed global capital.

Regardless of our track record to date with blended finance projects, the urgency of our challenge is too high and the numbers are too great to reject this option.

As an export nation, and a net-importer of capital, our country needs to retain its trade relationships and economic value proposition in a net-zero future. Our public financing sources can never meet our urgent net-zero transition needs, and they don’t need to.

Our peer countries globally have recognised this and are responding. Through collaboration and constructive dialogue, we must harness the collective power and expertise of our public and financial sector to address these challenges of funding and financing our future.