Green finance is “still largely untapped” as an asset class, according to John Glen, economic secretary to the Treasury and City minister, speaking at the Mainstreaming Green Finance Summit in London on 17 July. The government, he says, wants green finance to be “sustainable, mainstream and culturally embedded”. The challenge, of course, will be getting there
One of the hurdles is finding out what finance is “green” and what is not. Russell Picot, special adviser to the FSB’s Task Force on Climate-Related Financial Disclosures (TCFD) and the chair of HSBC’s pension fund, argued that, if the financial risks posed by climate change are to inform the way in which firms operate – if senior people to be engaged – disclosure requirements will have to be changed. When climate risk sits within normal disclosure, he argued, conversations in the board room will be materially different.
Make it mandatory
Speakers from insurance firms present at the event – among them Patrick Arber, senior analyst, global public policy at Aviva, which has £0.5tn in assets under management – stressed how important it was for insurers to be able understand the impact that climate risk could have on their investments. Arber said that while insurers know that extreme weather events will become more frequent, more severe and potentially more clustered, they need a detailed risk analysis that they can “mainstream” into their business. Arber called for the Prudential Regulation Authority to encourage consistency of data, so that like can be compared with like, and “a pathway to make aspects of disclosure mandatory”.
Make it long-term
When it comes to banks, Tanveer Hussain, head of peer supervision & risks division at PRA, at the Bank of England, said that though it was harder for them to trace through the risks that climate change represents for their business, it could be done. He pointed out that, on average, banks have a planning horizon of just four years and he suggested that scenario analysis might help firms examine a longer time frame. He expects the transition to move to greater disclosure on climate change risks to be “driven by private firms” but with help from bodies like the TCFD.
That help may be needed. Tim Nixon, managing editor, sustainability, at Thomson Reuters, says that around 75 per cent of large firms in Northern Europe disclose “basic emissions data” and that other regions see less disclosure. Further, even when firms do make ESG disclosures there “appear to be material omissions”. Nixon believes that it is in the interests of the firms themselves to move from basic ESG data to discussing the actual impact of climate change on their performance. If they did that, he suggested, they would see an improvement in financial performance and more engagement from investors.
However, if the world’s largest 200 to 250 firms do not start disclosing useful data on climate change risk, Nixon added, we could all be looking at a world with 4 degrees of global warming. That, another speaker, said, would be catastrophic.
Make it do-able
What is standing in the way of better disclosure at the minute, Rhian-Mari Thomas, chair of the green banking council at Barclays, argued is that boards often view more disclosure as a reputational risk. Then, they find it hard to synthesise the data in a useful way because climate change hits the whole business while operations within firms are often siloed. Further, putting together a future scenario is much more difficult than building a model based on historical data. “None of them have been through a low-carbon transition before,” points out Thomas.