Editorial – One Planet Summit: global finance and the fight against climate change
By : Morgane Nicol, Ian Cochran, Benoit Leguet
On Tuesday December 12 the ‘One Planet Summit’ will take place in Paris organized by Emmanuel Macron, Jim Yong Kim and Antonio Guterres to celebrate the 2 years anniversary of the Paris Agreement. The official summit – as well as side-events organized from December 10 to 14 – will focus on a key issue: financial actors’ commitment to contribute to the fight against climate change.
But why give such importance to Climate Finance issues today?
Two main objectives
On the one hand, financial actors – public as well as private – will have to bring a part of the funding needed for the transition toward a low-carbon and climate resilient economy. Around one hundred trillion dollars are estimated to be needed globally between 2015 and 2030 to achieve limiting the average global temperature increase below +2°C. More than creating additional financial flows, what is at stake is above all to reallocate portfolios from carbon-intensive toward low-carbon assets.
Source : New Climate Economy
On the other hand, financial actors’ performance will be threatened by climate risks. These risks are related to financial impacts, for corporates and households, of both consequences of climate change and evolutions – technological, regulatory and market – required by the low-carbon transition.
Recommendations of the Task Force on Climate-related Financial Disclosures
2015: the turning point
Prior to 2015, the financial sector was falling behind on the objective of mainstreaming climate issues into decision making. Then two events considered as turning points occured.
The first was the speech given by Mark Carney, Governor of the Bank of England and President of the Financial Stability Board (FSB), an international body set up by G20. Mark Carney stated that climate change could impact global financial stability and called financial actors to manage these climate-related risks. This represents a paradigm shift: climate issues are a financial factor, and not only an environmental concern.
To listen to Mark Carney’s speech: https://youtu.be/V5c-eqNxeSQ
Some weeks later, the Paris Agreement in the Article 2.1.C. presented the alignment of financial flows on a low-carbon pathway as one of the three pillars of the fight against climate change.
Since 2015, financial actors have made a clear progress toward the inclusion of climate change risks and opportunities. However, there is still much ground to cover.
Managing climate-related risks
Opinions are converging on climate-related risks. The work undertook by the Taskforce on Climate-related Financial Disclosure launched by the G20, as well as reports from Bank of England, Banque de France and French Treasury, and the Dutch Central Bank all conclude that financial actors should improve their assessments of their portfolios’ exposure to climate risks.
Financial actors, data providers and research centers are affected by these risks. As such, a triple collaboration will be necessary to speed up efforts: between financial actors and research centers; between financial actors, regulators and supervisors; and between supervising bodies at an international level. A deepening of the role of financial supervisors in the monitoring of efforts against climate change should therefore be expected in the coming years. The European Commission could quickly set the pace, through final recommendations from the High Level Expert Group on Sustainable Finance expected for Q1 2018.
Financing the transition toward a low-carbon economy
Several ‘green’ financial instrument have been developed. The most well-known is the green bonds market. This market achieved this year again a record issuance volume. Nevertheless, it remains a niche market representing less than 0.5 % of the global bond market.
On another note, many investors have committed to divest from fossil fuels, notably coal, and sometimes to invest in ‘clean’ technologies. Some have committed to disclose the carbon footprint of their investment portfolios. Investors have also been developing engagement strategies on climate issues with the companies they invest in.
The main challenge today is thus to accelerate the implementation of these commitments to accelerate the shift of financial flows towards low-carbon assets. Time is running short, and the volume of low-carbon investments is not sufficient to date. In France for example, even if an annual average of 32 billion euros of climate investments occurred in both 2015 and 2016, this totals only about half of the estimated annual investment necessary to achieve the ambitions of the national low-carbon strategy (SNBC).
To check if the objective of aligning financial flows with a low-carbon and climate resilient pathway set in the Paris Agreement is under way, a monitoring of the actual shift of national and global financial flows will be necessary. Two pre-requisite could be handled by national governments: publish investment scenarios representing their climate commitments, and put in place a monitoring framework for ‘Climate’ financial flows.
Awareness raising and training on climate issues for finance professionals
Required actions cover all financial institutions, not solely public financial institutions or financial actors specialized in ‘green’ finance. Thousands of finance professionals will have to consider in their analyses factors that they are often unfamiliar with. Raising awareness and training these professionals must therefore occur quickly
A need for a coherent set of climate policies
The financial sector has a clear role to play in the fight against climate change. However, the current focus on the role of finance should not drive to the background other necessary and efficient tools, such as regulatory and fiscal instruments, carbon pricing, subsidies for less mature technologies and support to research and development. If corporate actors do not revise their strategies to make them compatible with a 2°C pathway, and if required real-economy investments are not “bankable”, financial actors will not find enough viable low-carbon and climate resilient investments to finance. A set of coherent climate policies, readable and stable, is thus needed, as well as incentives for financial actors to take into account these climate policies in their strategies.
A busy schedule for the One Planet Summit, and for 2018.