Financial Services Can Save The Planet. Here’s How.

To everyone working in the financial services industry, this is our time to step up. We all have a critical role in supporting the transition to a low-carbon world.

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One simple question which made me act

When my 11-year old son recently heard about Greta Thunberg, the Swedish teenager now famous for taking a stand on the climate emergency and inspiring hundreds of thousands of other schoolchildren to do the same, he wanted to find out more. I showed him her incredible TedX talk and he just sat there, open-mouthed at the power and clarity of the message this young girl was delivering. Whatever your view on kids protesting and school strikes, if ever there was a role model for standing up for what you believe in, Greta takes some beating.

Then he asked me a question, so simple yet one which has had a profound effect on me:

“What can we do to save the planet Daddy?”

For all the small changes my family and many others have made to our lifestyle in order to “do our bit” for the environment, this was a tipping point for me. It made me wonder if I really could be doing more, a lot more, like on an industry and even a global level, to help avert the crisis which threatens the lives of our children, grandchildren and future generations.

Working in financial services (FS), which I have done for nearly 25 years, it’s natural for me to see if we could inspire this industry as the spur for real, concerted action.

Spoiler alert: I’m not going to use this forum to “greenwash” you with a long list scary facts and figures about global heating. We’re in the shit and need to act now, and if you believe otherwise that’s your prerogative. But for the sake of giving this some context:

  1. the most recent Intergovernmental Panel on Climate Change (IPCC) report recommending limiting global temperature rises to 1.5°C;
  2. 2) research by NASA shows that the current warming trend has a probability greater than 95% of stemming from human activity since the 20th century;
  3. 3) human activities have already warmed the planet about 1°C (1.8°F) since the pre-industrial era, defined by the IPCC as the latter half of the 19th century. At the current rate of warming, Earth would reach that 1.5°C threshold between 2030 and 2052.

This is a call to arms to banks and all who work in FS with a sensible plan for what we can do to help tackle the number one problem facing the world.

On the face of it of course, it’s a seemingly impossible challenge, but to paraphrase JFK,

“We choose to save the planet from climate catastrophe in the next decade, not because it will be easy but because it is hard, because that goal will serve to organise and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.”

For everyone in the financial services industry, this is our Moonshot.

Moving from debate to action

The Social Market Foundation think-tank recently partnered with the Chartered Banker Institute to publish a collection of essays by leading experts and practitioners in the field of green finance about the role that financial services can play in delivering environmental goals. Entitled “How sustainable finance can tackle the climate emergency”, the collection explores the way financial services firms can help provide the money needed to fund the transformation of the economy that scientists say is necessary to reduce carbon emissions to net zero.

The list of contributors is seriously impressive, and includes a former UN Climate Chief (also a member of The Elders, the group of independent leaders founded by Nelson Mandela who work for peace, justice and human rights), the FCA’s Director of Strategy, the Chief Exec of the UK Sustainable Investment and Finance Association, the Director General of the Association of British Insurers and the Chief Economist at Triodos Bank.

In my view the collection is more than a stimulation for debate. I see it as the basis of a blueprint for action. But at a whopping 58 pages it’s definitely TL;DR for many so hopefully I cover the main points here as succinctly as I can.

First let’s address the question of “why FS?” What about the energy companies, surely the responsibility lies firmly with them to get us out of this mess?

Why should Financial Services take the initiative?

In September 2018, the Bank of England published results from a survey of 90% of UK regulated banks representing over £11 trillion in global assets. The survey was designed to see how these banks view climate change. It found that while 70% of banks recognise that climate change poses financial risks, only 10% view climate change more holistically and take a long-term strategic view of the risks. Disappointingly, only 30% of banks still consider climate change as only a corporate social responsibility (CSR) issue, with little or no relevance to business strategy or operations.

This is hugely disappointing. Climate change is a major threat to the stability of the global economy. But it’s important to recognise there have certainly been some positive moves. Through the world-first Green Investment Bank (now owned by Macquarie), for example, the UK wrote the book on financing green. And with firms like Abundance Investment, local green projects are riding the wave of green finance — more than £90 million has been invested using the Abundance platform. This innovative drive is clearly demonstrated by the 38 green companies which have raised $10 billion combined on the London Stock Exchange.

Meanwhile, insurers across the globe, particularly in their world-leading major risk sector in London, know full well how very real the impact of climate change is. As the leading international provider of cover for large-scale and specialist risks, the UK’s insurance sector sees the financial impact of extreme weather events across the globe. The London market bore the brunt of hurricanes Florence and Michael, which are believed to have resulted in insured losses of more than $10 billion.

By supporting activities, organisations and sectors that can mitigate climate change and help individuals and communities adapt to the effects of climate change, FS organisations can help solve the world’s greatest collective challenge.

Importantly, the increasing public concern around climate change may not be sufficient to overcome the biggest barrier to taking positive steps; while actions speak louder than words, they require a lot more effort. Despite the warm words, people are not especially likely to alter their behaviour with just 9% of consumers feeling it is their responsibility to lead in tackling climate change.

To change how society generates and uses energy costs money. Lots of it. The International Energy Agency (IEA) estimates that $3.5 trillion needs to be invested in the energy sector each year up to 2050, which is double the current level of investment.

This is not only a commercial opportunity for the financial services sector, however. Importantly, it is also an opportunity for the sector to demonstrate its social purpose, by playing a key role — the key role — in the transition to a low-carbon economy and a more sustainable world.

Until recently, many financial institutions and businesses more widely, considered taking care of the footprint of their own operations was enough to meet their environmental obligations. Behaving responsibly as an institution, through the choices made about how to reduce energy use, source energy sustainably, and limit business travel, for example, is important. But it plays a relatively insignificant role in the overall footprint of most financial institutions.

Accounting for the carbon emissions of loans and investments creates many and varied benefits for the institutions that do it. Banks, and the sector more broadly, can monitor their greenhouse gas emissions, create opportunities for comparison between institutions and be more accountable and transparent to their stakeholders. Ultimately, they can use this information to set climate targets and steer investments towards a low-carbon economy.

A 10-point blueprint for action

  1. Concerted multilateral measures have any chance of seriously addressing the problem on a meaningful scale. It is essential for the key players in the investment community with whom the energy industry is so intertwined, to commit to radical, urgent but eminently feasible actions to help meet the goals of decarbonisation set out in the Paris Agreement and the UN’s 2030 Development Agenda.

Also, the CBI is clear that working to achieve net zero greenhouse gas emissions should not be seen as being a drag on business; in a letter to the UK Government, Carolyn Fairbairn, CBI Director-General wrote:

“Business stands squarely behind the ambition for the UK to have a net-zero emissions economy by 2050,” said Carolyn Fairbairn, CBI Director-General. “Immediate and decisive action is needed to avoid the catastrophic impacts of climate change and create opportunities in low-carbon technologies.”

FS and the UK government must also work with more international partners. One such partnership is the UK-China Green Finance Centre, which will enhance cooperation between UK GFI and China’s Green Finance Committee.

2. Set up a publicly-accessible registry, whether state- or investor-owned, to enable all stakeholders to organise a new plan for an orderly wind-down of pending or proposed projects — a just transition, in other words. It would give clarity to investors, who hold an extraordinary latent power to further the sustainability agenda, and thus secure a long-term future for their own assets and investment strategies.

3. The FS sector must work in a concerted manner towards the aim of establishing a net zero emission economy. Doing so requires coordination. The Green Finance Taskforce published a report in March 2018 which provides a clear path forward; after working with 140 organisations across the finance and energy sector, the Taskforce made recommendations to the UK government which included:

  • Boost investment in innovative clean technologies
  • Drive demand and supply for green lending products
  • Set up ‘Clean Growth Regeneration Zones’
  • Improve corporate disclosure and enhance pension fund investment requirements

4. The sharing of best practice, learning from one another’s achievements and coordination on regulatory matters is of mutual benefit. An initiative announced by a group of front-running Dutch financial institutions, during the Paris meeting, is an important benchmark. These institutions, led by Dutch bank ASN, called on the negotiators at the Paris Climate Summit in 2015 to take on board the role that investors and financial institutions can play to deliver the radical shift we need to a low-carbon economy. More practically, the group committed to create a more transparent approach to assessing the greenhouse gas emissions of their loans and investments, for stakeholders inside and outside the Dutch financial industry. The group created the Platform for Carbon Accounting Financials (PCAF). It was the world’s first effort of its kind, by the financial industry, for the financial industry.

5. Green finance itself must transition — to move from being part (currently a small, albeit growing part) of finance to becoming the mainstream practice of banking and finance. Despite some notable recent announcements from some institutions on green and sustainable finance, many banks and investors still provide substantial funding to environmentally destructive activities, including the burning of fossil fuels, that contribute to potentially catastrophic climate change.

The opportunity green finance provides for our finance sector and finance professionals should not be underestimated; it is the opportunity not just to trade profitably but to contribute to the process of rebuilding trust in the financial sector overall and play a key role in solving our greatest global challenge.

6. Regulatory change can also spur reform. In April 2019, the Bank of England published a new supervisory statement for UK regulated banks and insurers. This means that UK regulated entities must have comprehensive plans to manage the financial risks of climate change and designate responsible managers under the Senior Managers Regime. Regulated firms will need to submit plans and identify responsible individuals by 15th October 2019. However, whilst this is definitely a big step in the right direction, FS should seize the initiative to act sooner rather than later and not wait for regulation to for their hand. It is also in their own commercial interests to do so.

7. Insurance gaps need to be identified, and filled before any future disasters, not in their aftermath. In 2017, for example, while the spate of hurricanes resulted in record pay-outs, more than half of the overall estimated losses were not insured. Given that those worst affected by climate change, such as the flood plains of Bangladesh, will be the world’s poorest societies, there is an urgent social justice imperative.

8. A major long-term effort is required to switch from well-established investment practices to ESG (Environmental, Social and Governance) areas which, currently, do not benefit from observable market prices or external credit ratings. While the early signs on ESG investments are encouraging, it will require To go further, support from the regulatory regime is needed because, currently, the sector does not have a free hand to switch where they invest their capital.

The biggest change asset owners, investment managers, and indeed capital market makers such as the investment banks can make is to engage with companies most exposed to the low-carbon transition. These engagements should look to address climate risks or opportunities and challenge companies to move further, and at a faster pace, through assertive stewardship.

9. Banks should mainstream sustainability factors into their risk management models and business strategies. The best are already doing this. This allows them to reallocate capital away from unsustainable economic activities (i.e. industries heavily reliant on fossil fuels) to more sustainable ones (i.e. renewable energy production).

10. Banks can help create business opportunities, particularly for smaller corporates and at consumer level, by tapping latent demand through advertising and pushing new products. This will address the problem that there are actually insufficient green/low-carbon projects being undertaken that require financing. Part of the motivation for that has to come from the realisation that some existing industries currently financed by banks — like the coal industry — are simply going to be phased out in the economy’s transition to a more sustainable footing.

The Next Step

How long will it take to go from 10% of banks viewing climate as strategic to 100% seeing it that way? This has to be our immediate goal and we need to put steps in place now for the whole FS sector to step up to help decarbonise our economies to limit global warming to 1.5 degrees. And while viewing an issue as strategic is important, what does that actually mean in practice? Can we achieve a transition in how banks think about these issues and simultaneously achieve significant changes in practice too?

In the words of Mary Robinson, Chair of the Elders:

Let us listen to our children and grandchildren, and act to prevent the grave act of intergenerational injustice they fear will deprive them of a future. If we fail today, it will be an unconscionable betrayal for which our successors will pay an intolerably high price.

What are we waiting for? Let’s do this.

Venture builder, MVP no-code maker and product person.

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