COP26, Climate Change and the Implications for Finance

COP26 may not have had much in terms of solid agreements, but it still represents a significant moment which financial institutions would do well to note.

For much of the last couple of weeks, the eyes of the world have been on Glasgow and COP26. This was billed as the world’s last great chance to keep ‘1.5 alive’. In terms of real tangible results, however, COP26 produced very little. But that doesn’t mean it will be as insignificant as many critics argue. For a fortnight, headlines were dominated by climate change. The world’s leaders may not have achieved much but the conference itself reinforced the message that the climate crisis is here now.

Challenges for the banking sector

The challenge for the banking sector remains, as Mark Carney said in his 2015 speech, ‘The Tragedy of the Horizon’ speech is that the traditional horizons of banks and political institutions have been too short to account for climate change. The approach of regulators both here and internationally, has been to bring ESG reporting into the mainstream.

To a degree, they’ve succeeded. In the UK, there has been the 2019 Green Finance Strategy, the Prime Minister’s ten point plan for a green industrial revolution and the green finance framework setting out standards for the UK’s first ever green bond issuance, to name a few. In October, BEIS introduced in parliament the Companies (Strategic Report) (Climate-related Financial Disclosure) regulations which introduce mandatory climate related disclosures.

All banking and finance firms will need to embed climate responsibility into their governance and strategies to support the transition to net zero by 2050. The PRA’s ‘dear CEO’ letter reiterated its push for banks to bring responsibility for climate change into the mainstream. Internationally, we’ve seen the Taskforce for Climate Related Disclosures, giving more definition to climate information and the launch of the UN’s ‘race to net zero’, and the Net Zero Banking Alliance.

Greenwashing and ESG

The difficulty until now has been generating a real shift in attitudes. Greenwashing remains a problem. While ESG remains an issue of sustainability, ethics or regulatory compliance, financial institutions will be tempted to view climate change as a box ticking exercise. There will always be a risk that businesses will put more thought into the appearance of compliance rather than genuine reform.

What’s changing, though, is that the effects of climate change are no longer invisible and abstract. They are moving squarely into the traditional ten year horizons of banks. Whether it’s wildfires in California, floods in New South Wales, record breaking snowfall in Madrid, Storm Christoph in the UK or the winter storms hitting Texas, 2021 has seen a dramatic rise in extreme weather events. The State of Climate Change Report states that these extreme weather events will be the new norm.   

And businesses are seeing the impacts hit their bottom line. The Swiss Re Institute estimates climate change could wipe 18% off global GDP by 2050. Climate change is also becoming a clear investment risk not only from regulatory point of view but also physical damage, resource depletion and disruption. Stocks with an ESG exposure represent an increasingly risky proposition. Likewise, the move towards net zero also opens up opportunities elsewhere.

Demand from investors

Demand is growing from investors to see businesses take clear and positive action on ESG reporting.  In January, HSBC faced pressure from investors worth $2.4 trillion over suspicions of greenwashing. A group of 15 investors signed a resolution which would force the bank to outline how it intends to reduce its funding of fossil fuel.

Investor action, therefore, is concerned less with concern about the environment, and more with concern about the risks of exposure to fossil fuel investments in a world in which governments are driving towards a transition from coal, oil or gas to clean energy alternatives.

This is the factor which will truly hold the finance sector’s feet to the fire. COP26 showed a growing consensus on the need to treat climate change as an emergency. Even if the conference fell short of being the game changer many hoped, it signals a shift in attitude. For two weeks, and more, climate change was front and centre of the national consciousness.

The ongoing actions of protestors such as Extinction Rebellion and Insulate Britain mean it’s unlikely to be fading away any time soon.

Most of all climate change has become the kind of immediate threat which businesses, politicians and consumers can no longer ignore. Be it through regulation, political action, customer or investor demand, financial institutions have to dramatically scale up their reporting on climate change in a way which goes beyond short term regulatory requirements to ways which generate lasting change.

Doing so will not only allow them to satisfy evolving regulatory requirements, but will position them in a more positive way for the future.