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Beyond COP28: transition finance is the key to unlocking climate action

Catherine Howarth OBE, Chief Executive ShareAction explores why the financial sector should be top of the list for COP28 discussions.

This article first appeared on Business Green.

World leaders gathering in Dubai this week for COP28 can be in no doubt of the severity of the climate crisis. July was the hottest month ever on record. Communities on every continent are experiencing more frequent and intense heatwaves, flooding and super-storms that damage homes and livelihoods. The UN and scientists warn that far worse is to come if we fail to halt the rise in temperatures.

It's also apparent that current levels of climate action fall dangerously short of what is needed. The landmark Paris Agreement made at the 2015 COP united the international community in a commitment to limit temperature rises to 1.5°C. Yet fast forward eight years and the chance of meeting 1.5 is at severe risk. The evidence is perfectly clear that rapidly transitioning our economies away from highly polluting activities is integral to achieving this goal.

So how can we accelerate the transition to a net zero future? What levers can decisionmakers meeting this week pull to shift our economies on to a safer track?

Unlocking private finance is fundamental to driving the climate action needed. As a charity working to accelerate authentic and ambitious responsible investment, ShareAction is acutely aware of the financial sector’s outsized impact in shaping the world we live in. Investment and lending decisions about where to allocate capital offer tremendous potential to drive positive change. Moreover, investors have powerful rights over companies that give them huge influence.

However, the financial sector is currently holding back when it comes to using its power to force a rapid pace of low carbon transition. Worse, financial institutions remain deeply complicit in driving many of the environmental problems we face thanks to their enabling of activities across the world that worsen climate change, destroy forests and pollute the air.

The International Energy Agency estimates that $4.5 trillion in investments is needed yearly by the early 2030s for the world to reach net zero by 2050. To make sure this investment flows where it’s needed, policymakers should use every fiscal, legislative and regulatory power at their disposal to guide and enforce progress towards transition. The finance community can reinforce a positive feedback loop by putting environmental considerations high within their decision-making criteria without waiting for legislation. This is the leadership needed from the finance sector to demonstrate what is possible and to create a conducive context for introducing more ambitious public policies.

There are four key areas that ShareAction believes should be a priority for policymakers, financial institutions and business leaders – not just at COP28, but in what remains of this critical decade for action to cap global temperature rises.

Top of the list must be committing the financial sector - banks, pension funds, insurers and asset managers – to say a firm no to any further expansion of fossil fuel production and a rapid phase out of fossil fuel use in sectors across the economy. Since the Paris Agreement entered into force in 2016, the world’s 60 largest banks have together provided $5.5 trillion in finance to fossil fuel companies. In addition, our recent research found that green finance targets and reporting by Europe’s biggest banks risk misleading customers and investors.

Secondly, there’s an urgent need to decarbonise industrial processes such as chemical and steel manufacturing, which contribute nearly a quarter of global emissions. Investors in these sectors have a crucial role to play in financing them to transition. As an example, ShareAction has published evidence-based standards for petrochemical companies aligned with limiting global warming to 1.5°C and is working with investors to push companies to adopt these standards.

Thirdly, we need to rethink the legal framework that governs investment decisions. Too often, a narrow interpretation of fiduciary duty means trustees who control money on behalf of pension savers focus on short-term financial returns, without considering the impacts of investments on the future security and well-being of pension savers. With £3 trillion invested in UK pensions alone, there’s enormous potential to ensure that money is supporting the transition to a net zero future that will enable stability and security for all of us. The pension policy review announced by the UK Prime Minister earlier this year is a critical opportunity to redefine fiduciary duty to better reflect people’s long-term best interests.

There is strong public support for ensuring that investments are aligned with action that protects people and planet. YouGov polling earlier this year found that the majority of people in the UK want to see social and environmental impacts considered alongside profits when their savings are invested on their behalf.

Finally, we need to see action to mainstream best practice regarding transition.
The UK’s Transition Taskforce has published a powerful framework for transition planning that should be adopted by all companies and financial institutions. Making these plans public will allow citizens and investors to hold companies accountable for action.

While COP28 shines an important spotlight on climate ambition and global action, its real-world impact will be measured by what happens outside the conference in the months and years ahead. Policymakers, financial institutions and businesses must all be playing their part to drive the transformative transition to net zero we collectively depend on.

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