Climate risk – Why should financial institutions really bother?

It all boils down to the role of the finance sector in achieving a low carbon, climate resilient world.

What is most impressive is that finance sector leadership is evidently building momentum through low carbon and energy efficiency finance and investment.

Recently there has been much talk of increasing interest by financial institutions in taking action on climate change. Particularly in addressing the climate risk aspect.

UNEP have recently risen to the occasion by commissioning a study together with the Asia Investor Group on Climate Change, the Institutional Investors’ Group on Climate Change, the Investor Network on Climate Risk, and PRI, the Principles for Responsible Investment, that directly addresses the why and the how financial institutions are taking action on climate change.

The report also outlines in great detail how climate leadership is emerging in the finance sector and on how public and private actors need to work together to forge a new leadership orientation in this direction.

It all boils down to the role of the finance sector in achieving a low carbon, climate resilient world.

What is most impressive is that finance sector leadership is evidently building momentum in this direction, through low carbon and energy efficiency finance and investment, emissions reducing finance and investing, adaptation finance and investing, measurement and transparency, engagement with companies and also engagement with policy makers.

The major challenge ahead is undoubtedly that of taking such leadership to the next level.

Low carbon and energy efficiency finance and investing can be done through various means and vehicles:

Pension fund allocation to low carbon and energy efficiency. By supporting renewable energy projects. Through partnerships in developing countries. Through the growing green bond market. By reducing real estate emissions and energy use.

In practice new techniques are being implemented by financial institutions to reduce the carbon emissions of loan books and investment portfolios, while banks and insurance companies are developing financing solutions to support adaptation projects. On its part the industry is collaborating to improve carbon and climate change risk/performance measurement and reporting by companies and by the finance institutions themselves which is undoubtedly a vital and crucial building block for managing and reducing carbon emissions.

In many countries the finance industry is collaborating with policy makers to engage with them to also influence policies and regulatory outcomes that encourage greater participation from the finance industry in the transition to a low carbon economy.

Many seem and are convinced that there is actually an opportunity to build on these actions and embed climate change into mainstream finance in various manners.

This can be done by encouraging the implementation of government policies that provide the financial industry with more transparency, longevity and certainty.

While finance institutions are already taking action on climate change and allocating capital, for these actions to become more widespread, finance institutions need to build an assessment of climate change risk and opportunities into core processes, engage with companies and policy makers, and also develop strategies to reduce emissions across financing and investment activities.

Ultimately the success or failure of this engagement process will all hinge on the need to collaborate to unlock further capital flows.

Climate change is a systemic risk that is impacting the finance industry as it is impacting all sectors of the global economy.

There is also increasing concern about the shortcomings of the financial market system itself particularly in the wake of the recent credit crisis. This is actually triggering financial markets to be better geared to respond better to managing systemic risks such as climate change.

To actually focus on climate issues in a highly uncertain policy environment, shows how forward looking the financial institutions really are in spite of any perceived shortcomings.

The sector has come a long way but undoubtedly much work needs to be done both by the industry and by governments worldwide.

The next crucial step is for the task ahead to be clearly and unequivocally that of building on these actions and moving them into mainstream finance.

Partnerships between governments and the finance sector are also vital for those areas where the blockages to capital flows are greatest. It is only this way, through such combined actions, that one can help redirect the large pool of private sector financial flows towards activities that support a low carbon and resilient world.

This way the finance industry is helping to build new industry practices.

It enhances collaboration and partnership between the finance industry and policy makers.

And it helps ensure that any emerging financial flow barriers will be reduced to ones that are purely transitional.

Source: Malta Today