Finance Risks Falling Behind In a Greening World


The effects of climate change are all around us. Last year was the hottest on record; the last decade, the hottest ever recorded. Almost a decade and a half after the global financial crisis, experts warn that the effects — from rising sea levels, flooding, droughts and wildfires — could make financial crises more than twice as likely to occur.

The encouraging news is the world is greening. Renewable energy is now cheaper than new coal and gas in the majority of the world, and around 70% of the world’s economy is now covered by net zero emissions targets compared to less than 30% when the U.K. took over the presidency of COP26, the crucial United Nations Climate Change Conference that the U.K. will host this November.

With the right push from both public and private sectors, there is still a possible future where the world is protected from the worst of climate change and where we create jobs and prosperity without harming the planet. It is in the interests of private finance to invest in that future.

A recent study by Imperial College London and the International Energy Agency found investments in renewables have repeatedly seen better returns than those in fossil fuels. And “brown” investments could fast become a cost burden. If the existing coal project pipeline goes ahead, the independent financial think tank Carbon Tracker estimates that it could create $630 billion worth of stranded assets — those which no longer have value.

Many financial institutions are already making progress. In April, 160 financial firms came together under the Glasgow Financial Alliance for Net Zero (GFANZ) to set ambitious targets as part of a new strategic alliance to drive the transition. This includes global asset managers responsible for $37 trillion worth of assets, representing around 40% of the industry, as well as 43 banks from 23 countries.

Such efforts are welcome, but they are not enough. The entire financial sector needs to map out a pathway to sustainability if we’re to secure that greener, more profitable future. That’s why, alongside former Bank of England Governor Mark Carney and the UN High Level Climate Action Champions, I issued a call for private financial institutions to grasp the opportunity for action over the next six months.

First, we urge more financial firms to get behind GFANZ. Leading firms in the Alliance should also come forward with impactful pledges, such as policies to phase out financing of fossil fuels and deforestation, science-based and accountable 2025 and 2030 targets, and robust transition plans setting out what will be done to achieve net zero, particularly in the short to medium term. This should be done before COP26. And it is critical these commitments are rigorous and actually make a difference.

Second, new finance must flow to developing countries and emerging markets, where it is needed most. There is nearly $23 trillion in opportunities for climate-smart investments in emerging markets between now and 2030. By injecting capital into zero carbon and climate-resilient projects in those areas, such as solar, wind farms or early warning systems, we can help to ensure governments and the private sector develop along a climate-resilient net zero pathway, preventing history from repeating itself.

Third, financial institutions should urgently step away from coal, a relic of a bygone age. Renewables are the only energy source for which demand increased in 2020 despite the pandemic. But leadership is required to make a final push to leave coal in the past where it belongs.

In May, the G7 Climate and Environment Ministers meeting, which I co-chaired, made a commitment to end international coal finance in 2021 and to accelerate the transition towards an overwhelmingly decarbonized power system in the 2030s. We also agreed to protect the world’s land and oceans and to incorporate environmental concerns into financial and economic decision making.

I’m calling for financial institutions to sign up to the “Powering Past Coal Alliance Finance Principles” and follow science-based timelines for coal phase out. Without such action, those institutions risk living in the past.

Fourth, financial firms should measure, manage and report their environmental impacts. G7 finance ministers made an important commitment last week to move towards mandating the disclosure of climate risk by financial institutions. Such reporting is not only crucial for our planet, but also helps companies manage risks and take advantage of commercial opportunities presented by the transition to net zero. So I urge firms now, to ensure clear, comprehensive reporting of climate-related information in line with the recommendations of the Task Force on Climate-Related Financial Disclosures.

Finally, financial decisions should consider the natural world around us. Firms should commit to zero deforestation impacts across portfolios by 2025 and become “nature positive” by 2030 -- ensuring investments contribute to the restoration of the natural world. This includes reversing biodiversity loss associated with investment and lending portfolios, and announcing material new investments in nature-based solutions.

While governments can legislate to mandate or encourage climate-friendly strategies, it is increasingly clear that harnessing the momentum and making green choices makes business sense.  

Around key events over the next six months — including climate action weeks in Africa, the Asia-Pacific region, London and New York, and the Venice Climate Conference — we are urging firms to make public the kinds of meaningful commitments I have set out. The COP26 Presidency will work to amplify these announcements to drive up the ambition needed on the road to Glasgow.

The opportunities offered by this greener future are real, and tangible. They will not remain within our grasp for much longer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alok Sharma, a U.K. government cabinet minister and Conservative member of Parliament, is president-designate of the 2021 United Nations Climate Change Conference.

©2021 Bloomberg L.P.

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