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Financial services and the climate change emergency

09 January, 2020Ouida Taaffe

Climate change brings both risks and opportunities for the financial services sector. Ouida Taaffe looks at how banking and finance is moving towards carbon-neutral investment.

Sustainable-financeThe European Parliament declared a “climate change emergency” at the end of November 2019. It called for all European Commission proposals to be in line with keeping global warming below 1.5 degrees above pre-industrial levels. Pre-industrial is defined as the period 1850-1900.

The Parliament’s other demand was that the EU cut greenhouse gas emissions by 55% by 2030 and be climate neutral by 2050.

Under the 2016 Paris agreement, the EU was to cut greenhouse gas emissions by 40% by 2030. The EU announcement came just ahead of the start of the United Nation’s (UN’s) climate change conference on 2 December 2019.

Reaching the targets will require heavy investment in climate-friendly businesses. The EU estimates that it needs to invest around €180bn a year to meet the 2016 Paris agreement targets. And some firms will become obsolete or have to change their operating model.

For example, the biggest utility in California, Pacific Gas and Electric (PG&E), filed for bankruptcy in January 2019. PG&E became liable for an estimated US$30bn of damages when its power grid sparked wildfires. The Wall Street Journal called it the first “climate-change bankruptcy”.

The financial system and climate change

The investment that’s needed in climate change is an opportunity for financial services, but also a potential threat.

An International Monetary Fund (IMF) paper on Climate change and financial risk outlined the two main implications of climate change for the financial sector. One is that climate change brings physical risks, such as the wildfires that bankrupted PG&E.

The other is that transitioning to a low-carbon economy will be complex. 

The IMF points out that during transition there will have to be changes in policy, technology, consumer behaviour and market expectations.

One potential change is that existing assets may become much less valuable.

Mark Carney, the Governor of the Bank of England, has pointed out that fossil fuel companies may find that their reserves become “literally unburnable”. US coal mining companies already trade at a discount to clean energy firms.

The attitude of financial firms to climate change

Financial services firms have woken up to the threats of global warming. 

There has been a “change in urgency” in the financial system when it comes to dealing with climate change.

That’s the view of Anthony Cox, Deputy Director, Environment Directorate of the Organisation for Economic Co-operation and Development (OECD). He was speaking at the Climate Risk and Green Finance Regulatory Forum in London in November 2019.

However, he added that the systemic risks posed by a fall in biodiversity have yet to be appreciated by the financial services sector.

Eric Usher is the Head of the United Nations Environment Programme (UNEP) Finance Initiative. Also speaking at the Forum, he called for the owners of financial assets to use “credible, science-based targets” in responding to climate change.

He also said that asset management firms should see tackling climate issues as part of their fiduciary duty.

Global co-operation

For global warming to be controlled, financial services firms will need transparency on the climate risks of assets globally.

The OECD recently published a paper on international co-operation on carbon pricing

A member of the Forum audience asked about harmonisation of carbon pricing globally. “A global price for carbon is the holy grail,” said Cox. “Realistically, it is not going to happen.”

The OECD paper points out that a single global price for carbon would be the “most cost-effective” way to deal with global greenhouse gas emissions. It would make it easier for investors to compare across jurisdictions.

However, it adds that it might not be fair. Setting the same price across regions would place the biggest burdens on the developing world.

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