“Greening” the Finance

by | 7 Jun 2019 | Sustainable Finance

In his famous “breaking the tragedy of the horizon” speech delivered at the Lloyds City Dinner on September 29 2015, Mark Carney said : Climate change is the tragedy of the horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors, imposing a cost on future generations that the current generation has no direct incentive to fix.”

A necessary transition

Board members and C-level executives of big companies can turn a blind eye and move on, focusing, as accountants would do, on their next quarterly results. But sooner rather than later, the reality will boomerang on them.

According to Intergovernmental Panel on Climate Change (IPCC), concentrations of green house gas (GHG) in the atmosphere are unprecedented in at least 800 000 years, and this is extremly likely to have been the dominant cause of the observed warming since the mid-20th century.

Temperatures are now at least 1°C above pre-industrial levels and continued emissions in line with historical rates would lead to a cumulated warming of 1.5°C between 2030 and 2050. This would cause long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive, and irreversible impacts for people and ecosystems.

Extreme weather events impact health and damage infrastructure and private property, reducing wealth and decreasing productivity. These events can disrupt economic activity and trade, creating resource shortages and diverting capital from more productive uses to reconstruction and replacement.

Uncertainty about future losses could also lead to higher precautionary savings and lower investment.

The necessary transition to a low GHG economy is going to require rapid and far-reaching transitions in energy, land, urban, infrastructure and industrial systems. The costs and pathway for the transition will change over time depending on future choices made (infrastructure investment, decision by policy makers, shift of consumers towards greener choices …). Nevertheless, the estimated costs of this transition will be small compared to the costs of no climate action.

By adopting the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015, governments from around the world chose a more sustainable path for our planet and our economy.

“Call for action”

Financing the transition to a green and low carbon economy consistent with the « well below 2°C » goal set out in the Paris agreement and promoting environmental sustainable growth are then among the major challenges of our time.

At the Paris “One Planet Summit” in December 2017, eight central banks and supervisors established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Since then, the NGFS has grown to 36 Members and 6 Observers (update as of May 20, 2020 : 66 members and 12 observers) representing 5 continents. The Network’s purpose is to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system (i) to manage risks and (ii) to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.

The NGFS published on 17 April 2019 its first comprehensive report « A call for action » which proposes six not binding best practices aiming at facilitating the role of the financial sector in achieving the objectives of the 2015 Paris Agreement.

Four recommendations are aimed at inspiring central banks and supervisors (whether they are NGFS members or not) :

  • integrating climate-related risks into financial stability monitoring and micro-supervision ;
  • integrating sustainability factors into own-portfolio management ;
  • sharing data of relevance to Climate Risk Assesment (CRA) between public authorities ;
  • building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing.

Two last recommendations point to actions that can be taken by policymakers to facilitate the work of central banks and supervisors, some of them being applicable to the private sector.  :

  • achieving robust and internationally consistant climate and environment-related disclosure, in the wake of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) ;
  • supporting the development of a taxonomy of economic activities.

These two last recommendations, which to some extent are a condition to act on the others, are already well on track through the Financing Sustainable Growth Action Plan of the European Commission.

The pressure switches now to the private sector.

Iconography : Mark Carney, Governor of the Bank of England, speaking at the Lloyds City Dinner on September 29 2015 © Lloyds website