By Alexander Erzini Vernoit, Campaigns Officer, ShareAction
First published on Environmental Finance (£) here on 26 September
A few weeks ago, amid stories of hurricanes, flooding, and a rise in global hunger after years of decline, another climate-related news item made the headlines. In a new show of strength, a group of investors managing nearly $2 trillion in assets wrote letters to 62 of the world’s largest banks, calling for improved disclosure of climate-related information. Why are investors focusing on banks? And what does this mean for global efforts against climate change?
The CEOs of HSBC, Lloyds, Bank of America, JPMorgan, Morgan Stanley and Deutsche Bank have all received letters https://t.co/5JidKwzxSO
— Financial Times (@FT) September 14, 2017
From an investor perspective, how banks manage climate change issues is a concern because it can have an effect on financial performance. Now more than ever before, investors understand that global climate change and the commitments the international community has made to addressing it will have a disruptive influence on the world economy.
The impacts of a changing climate and the transition to a low-carbon economy bring with them a host of risks and opportunities across different regions and sectors—including banking.
It is concern about these systemic risks, in fact, that is drawing further scrutiny of banks from regulators and policy-makers, notably the Bank of England.
Now more than ever before, investors understand that global climate change and the commitments the international community has made to addressing it will have a disruptive influence on the world economy.
There are of course many ways to frame the problem of climate change, but on some level addressing climate change remains a matter of mobilising capital—at sufficient scale and speed—to invest in a low-carbon, resilient economy. According to the widely-cited Global Commission on the Economy and Climate, $90 trillion is needed in investment in sustainable infrastructure by 2030 in order to keep global temperature rise to the limit for avoiding catastrophic climate change.
As providers of capital, banks have a central role to play in this story. A recent report by McKinsey identifies the banking sector as the class of investor providing the most important source of debt financing for infrastructure.
The Paris Agreement itself sets the global goal of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. As of now, however, global financial flows are far from consistent with the Paris Agreement. For example, large sums of capital continue to be invested in fossil fuel projects that are inconsistent with a trajectory of rapid emissions reductions.
— UN Climate Change (@UNFCCC) September 15, 2017
It is these high-carbon capital flows, which threaten to lock us into a trajectory that puts a stable climate out of reach, that are drawing the ire of civil society, both grassroots and professional. Banks in particular have been the focus of protest and condemnation for their role in financing fossil fuel projects such as the Dakota Access Pipeline and Keystone XL pipeline, pressure that is only set to grow.
To be sure, the actions taken by banks also depend on a variety of factors outside of their control—such as political will, market forces, or government regulation—but that does not keep banks from assuming the positions of leaders or laggards in the fight against climate change.
Addressing climate change remains a matter of mobilising capital — at sufficient scale and speed — to invest in a low-carbon, resilient economy. As providers of capital, banks have a central role to play in this story.
Recent years have seen noteworthy pledges made by banks to seize opportunities of growing low-carbon investments, as well as commitments to curtail investments in fossil fuels, especially coal. Some major banks have even adopted long-term plans for the decarbonisation of their lending to levels in line with global climate goals.
Greater progress is needed, however, and this forms at least part of the motivation for September’s letter from the $2 trillion investor coalition. This is also why civil society will continue to be vocal in calling for change.
Climate Week in September put climate change in the news once again as businesses, governments, and civil society gathered in New York in a reaffirmation of global efforts.
The mood was one of some optimism in gathering momentum. When all is said and done, however, it bears recalling that whether the world achieves the goals of the Paris Agreement will ultimately depend upon the emissions trajectory taken by the global economy, and this, in no small part, depends upon the direction of capital flows—past, present, and future—and the actions of banks.
Thanks Alexander! To find out more about our Banking on a Low-Carbon Future campaign, click here.