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Climate change: risks and opportunities for the finance sector

09 March, 2020Ouida Taaffe

The financial risks of climate change are huge. Every bank, insurer, investor and others in banking and finance will have to adjust their business models to avoid these risks – and take advantage of the opportunities.

Green shoot growing out of moneyManaging the financial risks associated with climate change has to be a core competency of all banks and insurers.

That’s according to Mark Carney, the Governor of the Bank of England, who was speaking at the launch of COP26 at the Guildhall on 27 February.

Firms need to step up to the challenge of stopping climate change because around 60% of global GDP runs through private investment channels.

The risks from climate change are “great and clear with potentially catastrophic outcomes”.

Government intervention will be needed to manage the transition, said Ignazio Visco, Governor of the Banca d’Italia, who was also speaking at the COP26 launch.

So how big will the transition be?

“Achieving net zero will require a whole economy transition. Every company, every bank, every insurer, every investor will have to adjust their business models,” Carney said.

Carney did not pull his punches on the magnitude of the change needed, but also argued that succeeding will turn an existential risk “into the greatest business opportunity of our time”.

Finding the way forward

Climate-friendly investing will, as a number of speakers at the event pointed out, require much better disclosure from firms on what their “climate finance risk” actually is.

This data will also need to be much more comprehensive than measures such as past greenhouse gas emissions.

Investors will have to be able to compare like with like.

David Schwimmer, the CEO of the London Stock Exchange (LSE) Group, called for global standards on climate-related disclosures. He refused to be drawn on whether the LSE will make such disclosures a listing requirement, though he added that mandatory disclosure was the “direction of travel”.

The regulator steps in

Both the Bank of England and the European Central Bank (ECB) said they will be stress testing financial services firms on different climate pathways.

The ECB will test “90 significant financial institutions” by the end of 2020.

The Bank of England will launch its stress tests of banks and insurers at the end of the year and conclude the exercise in early 2021.

Sarah Breeden is the Executive Director for UK Deposit Takers Supervision at the Bank of England. She told the summit that its climate change stress test will look forward 30 years and include both physical risks and transition risks.

The ECB also wants to look beyond individual firms to try to model system-wide interactions, said Christine Lagarde, President of the ECB.

Getting the money to where it matters

Ensuring that firms measure climate risk in comprehensive and comparable ways – and put money to work to mitigate that risk – are just two of the challenges.

Josue Tanaka is the Managing Director for Operational Strategy and Planning, and Energy Efficiency and Climate Change, at the European Bank for Reconstruction and Development (EBRD). He said that there is another major hurdle in the developing world.

He pointed out that there is a need “to fix the [financial] plumbing” in emerging markets. That way, a potentially big supply of sustainable finance can be put to work where it is needed.

Richard Gnodde, the CEO of Goldman Sachs in Europe, highlighted the “abundance” of large low-carbon investment opportunities around the world. But, he argued, there will have to be opportunities to invest more in lower-cost green technology if the world is to avoid more than 2oC increases in global warming.

How much money

The UK government’s Green Finance Strategy says that greener, more resilient, growth will require the reallocation of “tens of billions of dollars” of investment.

Nick Stern is Chair of the Grantham Institute at the London School of Economics (LSE). He pointed out that the world will have to build as much infrastructure over the next 15 years as it already has installed, if it is to mitigate climate change.

Much of that infrastructure will have to be put in place in emerging markets.  

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