How the finance industry is leading the way to a greener future

By Vanora Bennett

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EBRD and global cities group scale up green urban financing

Financiers, not policymakers, are crafting climate action, EBRD conference hears

Freak weather events that focus minds on the dangers of climate change are fast becoming the norm, from blazing forests in the Amazon and bushfires across Australia to Storm Dennis, which brought floods around the UK last weekend.

The latest WEF global risk report says that, for the first time, the top five risks the world is facing are all climate-related.

As decision-makers around the globe grapple with how to address this challenge with faster, more comprehensive and better coordinated action on climate change, another strange phenomenon is also coming into the open. In today’s climate crisis, it’s not policymakers who are leading the way towards a virtuous solution. It’s the financial system.

The days of corporate Gordon Gekkos cackling “greed is good” as they rape the earth are long gone, was one message from a February conference on climate corporate governance held at the EBRD’s London headquarters. Today banks, companies and international financial institutions are talking the language of cooperation and collaboration, an approach which, so far, has taken them farther, faster, towards managing climate change than parallel political and policy processes. “It’s actually the financial system that seems to be ahead, and in certain cases way ahead, of all the policy,” the EBRD’s climate change managing director Josué Tanaka told delegates from across the financial system, coming together to compare approaches. “How far can we keep on moving ahead of policy?”

During a day-long event which tracked climate corporate governance in financial institutions from principles to policy to risk assessment to products, it became clear that the finance industry would welcome more guidance, even as a worldwide climate finance business model begins to take shape. “Clearly we’re very hungry for clarity and standards – we want to know which systems and accreditations we hang our hat on going forward,” said the EBRD’s climate change director Terry McCallion, summing up the day.

“What the private sector needs is absolute certainty and clarity on what the regulation’s going to look like when it comes … what’s the business model for this climate emergency that we’re in?”

The challenge is huge. Today worried companies and banks looking at their balance sheets are seeing both new physical risks (their assets might be burned or flooded in the next freak weather event) and transition risks (their assets might not be green enough for the lower-carbon economy that will be needed for our economic system to survive, and become uselessly “stranded”).  

Success would look like this. The finance industry works out exactly how to define and measure today’s complex situation. Policymakers are encouraged to catch up and provide government legislation and central bank regulation, so solutions that will decarbonise the world can soon be financed, through the commercial banking system, at the vast scale needed to keep global temperature rises down below two degrees and if possible to 1.5 degrees.

Roland Mees, a director of sustainable finance at ING, underlines the apocalyptic cost of failure. “At a three-degree scenario, there will not be any market. We will not be here. We will be rescuing our families and ourselves from the consequences of climate change.”

But how even to measure the risks? In banking terms, this is a practical question. Traditionally, corporate risk was measured and priced by simply extrapolating from past trends. In a world where climate events are increasingly unpredictable, and new solutions may have no track record, there’s now growing recognition of the need to scrap that backward-looking way of thinking altogether and start looking at future risks through completely different, forward-looking, scenario-based analysis.

Creative thinking on such adventurous approaches, along with imaginative collaborations and partnerships and measuring systems (TCFD, NGFS, UNEP FI) and climate finance instruments, are springing up all around the financial system.

Yet this is far from conventional, problem-solving, “don’t-tie-me-down” capitalism, as speakers’ repeated requests for more central bank regulation and more action by national governments show. With all kinds of bespoke solutions and systems now jostling for attention, the finance industry is a coalition of the willing looking for a leader to harmonise approaches.

One closely argued argument for more central bank action came from Luis Pereira da Silva, deputy general manager of the Bank for International Settlements. He’s also the author of “Green Swan”, a book on what a climate-prompted catastrophe might look like. Because a climate disaster could cause a cascade of unpredictable further consequences, whether environmental or social or economic or geopolitical, the fear his book focuses on is that climate change could eventually trigger a complex, unquantifiable “green swan” cataclysm worse than a systemic financial catastrophe. To stave this off, Pereira da Silva argues that financial and climate stability should be considered as “two interconnected public goods”. And – since climate change brings financial instability, and it is the job of central banks to maintain financial stability – he is among those urging central banks to become “more proactive in calling for precisely coordinated change from actors in society. Central banks should have a central role, help the private sector, civil society, and the international community to think about all this because there are a number of actions that need to be implemented at the same time. Central banks’ role in setting up and making these actions effective will be important.”

Praise for government intervention came from another speaker, Sean Kidney from the Climate Bonds Initiative, who attributes the ever cheaper prices for solar energy that have helped revolutionise the global market in renewable energy to positive action by governments in Germany and China. “We’ve seen the collapse of solar. That happened because of policy action by states, and we haven’t twigged to it. It was Germany that established a feed-in tariff, followed up by China, with massive levels of procurement of solar across China. In most economies the prime driver of price reduction is volume procurement. So you see a couple of governments acting on something; now think what have been the consequences. We are getting really cheap solar, in the US, in the Gulf, in Australia – cheaper than gas. US firms are abandoning gas and going straight to solar, just because it’s cheaper. That is the benefit of government action.”

Kidney also wants finance industry colleagues to go and “educate your public sector” to bring governments into climate action, “because the public sector in nearly every country in the world is 20 years behind the finance sector, and they’ve got to catch up. Your government liaison people can be talking to MPs, government ministers, and apprise them of what it all means. In fact you need to, because the action they take will reduce your risk, create better opportunities for you, and by the way create a better future for your children.”

The future of the children is always waiting to come into this debate. So are existential questions about how humanity got itself into today’s climate predicament, and how best to get out.

Pereira da Silva’s answer is collective responsibility in a future with “new institutional and new governance arrangements”. “Somehow, somewhere, some time ago, we lost the ancient sense of collective responsibility that small human groups have vis-à-vis themselves and their environment. Now we have to regain this sense of responsibility in a very different world. We are globalised. We have technology. We want efficiency and speed, and we know that it’s going to be very challenging. To link us together, we need new institutional arrangements and new governance arrangements. By working together with these very difficult challenges, and trying collectively to answer cooperatively, I hope these efforts will trigger a much needed sense of collective responsibility for ourselves, for our generation, and the future of our kids."

 

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