The potential impact of climate change is at a tipping point and set to become the major disruptor to global financial markets, businesses and politics.
This was the key message for participants at a green finance event in Brussels on 16 October. Keynote speaker Dr Rhian-Mari Thomas told the packed briefing, “Increasing awareness of the impact of climate breakdown, [as well as] the shift in the social zeitgeist means the need to demonstrably act to avoid the worst effects of climate change, is becoming the greatest disruption faced by business and finance today.”
Thomas, CEO of the UK’s newly-launched Green Finance Institute, also moderated the event entitled ‘Accelerating green finance: collaborating to drive action’, organised by the City of London Corporation.
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She starkly illustrated the threat of climate breakdown: “We are filling the atmosphere with planet-warming greenhouse gases at a higher rate than at any time in the last 66 million years.
The last time C02 levels were this high… forests grew across the Arctic and global sea levels were 25 metres higher.”
The impact of rising CO2 concentrations is unlikely to be felt until mid-century, but, Thomas warned, “Let’s be clear on those impacts … global temperatures rising higher than 3.5 or even 4 degrees more than pre-industrial levels during this century is a statistical likelihood and will render vast swathes of the planet uninhabitable during our lifetimes.”
Greening the financial system, and in particular, actively financing the “transition” to a cleaner, zero-carbon economy, represents a “profound” shift, presenting “the investment opportunity of the century.”
The common perception of the green economy as a small, low-yield, niche market focussed exclusively on renewable energy is misplaced.
"The Green Finance Institute’s operating model is based on bringing together global experts from industry, finance, academia, civil society and government in coalitions that focus on identifying and then unlocking the barriers to capital flows" Dr Rhian-Mari Thomas, CEO of the UK’s Green Finance Institute
Rather, at around $4 trillion, it represents six percent of the market capitalisation of listed companies globally – similar to the global fossil fuel sector.
However, the former is growing; large-cap companies (greater than $10bn) represent some two-thirds of the green market, while the green economy spans industrials, utilities, technology, chemicals, construction, minerals, materials and agriculture.
Thomas argues that, “Companies and financiers recognising both the risks and opportunities presented will prosper, while those who don’t will lose money, investors and credibility”.
She had become increasingly interested in Joseph Schumpeter’s concept of ‘Creative destruction’. “Investors are driven by growth, not size.
When challengers emerge, even those seemingly too small to matter to the incumbents, once they begin exhibiting accelerating growth then investors start shifting interest towards them.”
Thomas highlighted research by London-based financial think tank Carbon Tracker, which revealed that, “when a challenger captures just 3-5 percent of the market from an incumbent, moving from the innovation stage to early adopter phase and capturing the growth within that market, the incumbent’s sales often peak and begin to decline, signalling its eventual demise.”
Past examples include the move from gas lighting to electricity; demand for gas peaked in 1907 when electricity held only three percent of the market. Kodak’s fall is another famous example.
This was a business that had lost its previously formidable ability to generate growth.
Although the company developed the first digital camera in 1975, it failed to capitalise on it. When new digital technology players challenged their business model, it was all too easily dismissed by executives steeped in the world of film, chemicals and paper.
Kodak’s share price peaked in 1997, when digital camera sales were just under three percent of the total. Kodak fi led for bankruptcy in 2012.
In the electricity sector, wind provided six percent of global electricity demand in 2018, solar photovoltaic four and bioenergy three.
The market share of electric vehicles in Europe was about two percent - 30 percent higher than the previous year.
Unlike earlier examples of creative destruction, the shift to net zero carbon also has the additional driving forces inherent in “the scientific necessity to reduce emissions and the resulting tide of legislative and societal pressure.”
The Carbon Tracker concludes predicting that peak demand for fossil fuels will be as early as the 2020s.
Two current initiatives for bolstering the take-up of green financing, the Network for Greening the Financial System (NGFS) and the EU Sustainable Finance Taxonomy were discussed.
The NGFS, which includes 50 central banks, monetary authorities and international observers, exchange experiences, share best practices and drive green financing.
“In recognising that climate change represents the single greatest systemic risk to the stability of financial services [the NGFS group] are working together to mitigate risk using all the supervisory and regulatory levers at their disposal to drive change - governance, capital adequacy and weighting, stress testing, disclosures, data provision and so on,” said Thomas.
"Finance was late to the climate change party, but it’s now moving faster than any other sector we know" Nick Mabey, CEO and founder of E3G, a non-profit organisation dedicated to sustainable development
The Commission’s 2018 Action Plan on Sustainable Finance set out a comprehensive strategy to link finance and capital markets with sustainability.
Establishing a detailed EU taxonomy to cover all sustainable activities linked to financial systems is vital.
Thomas hoped that the EU Taxonomy will prove “the catalyst for a seismic shift” in sustainable investment.
“By providing a directory of economic activities that actively contribute to the transition to an emission-free society, the Commission’s EU taxonomy aims to expand the range of investments identified as drivers of the transition, answering investors and issuers concerns of what constitutes climate-aligned capital.”
She believes the taxonomy’s approach will help to create competition, forcing companies to invest in lowering emissions through investment in relevant products and encouraging investors to reward companies leading the way.”
As Chief Executive, Thomas provided an overview of how the recently-launched Green Finance Institute (GFI) will accelerate the mainstreaming of green finance. Its mission is to mobilise capital towards an emission-free and climate-resilient economy, providing th
e UK’s main green finance interface between public and private sector.
“Our operating model is based on bringing together global experts from industry, finance, academia, civil society and government in coalitions that focus on identifying and then unlocking the barriers to capital flows.”
In a lively panel discussion, attendees heard from several high-level experts. Sandrine Dixson-Declève, co-president of the Club of Rome, argued that finance and capital markets should be vehicles to enable the green economy, with the EU’s taxonomy helping deliver the Commission’s Sustainable Finance package.
"In the City of London, we believe that finance has an important role to play in tackling climate change and other environmental challenges" Catherine McGuinness, Chair of the policy and resources committee at the City of London Corporation
However, she warned that political issues, based on national energy resources or dependencies within and between EU Member States, shouldn’t be ignored.
“There’s a political conversation going on, linked to what resources a Member State depends on. We’ve got real issues in terms of what they’re actually willing to move forward on.”
Marine de Bazelaire, head of sustainability at HSBC Continental Europe, said that the EU’s taxonomy must be considered a destination: “This is important, because it is easy to get a little lost over what’s green and what’s not, or what’s transition [finance] and what’s not. We need to work out the direction Europe’s economy actually seeks.”
She cautioned against a one-size-fits-all approach to taxonomy; factors involved in shifting the economy from one Member State to another differ greatly.
Aldo Romani, head of Sustainability Funding at the European Investment bank (EIB) said the bank’s president, Werner Hoyer, had recently announced his intention to strengthen the EIB’s role as the EU’s de-facto ‘Climate Bank’ at the UN Climate Action summit, allocating at least 50 percent of its balance sheet to green finance by 2025.
Romani argued that capital markets are important, but another key challenge is clarifying where capital should be deployed.
“[You want] as broad as possible spectrum of investors. For these people to be involved, you need three things: Clarity, comparability and reliability. And this can only be achieved by simplicity.”
Nick Mabey, CEO and founder of E3G, a non-profit organisation dedicated to sustainable development, argued that, “finance was late to the climate change party, but it’s now moving faster than any other sector we know.”
Mabey believes that next year’s COP26 conference in Glasgow could be the opportunity for the UK to place finance at the centre of the sustainability agenda.
He called on the financial services sector to get behind the Commission President-elect European Green Deal.
“For me, the biggest issue is how to ramp up reinvestment, which is quite hard to do. There are many distributed smaller investments that add up to huge amounts of money, but are actually hard to build as projects. That’s where the New Green Deal in Europe will be a huge opportunity.”
Catherine McGuinness, Chair of the policy and resources committee at the City of London Corporation, suggested that irrespective of the Brexit outcome, climate change requires international action and cooperation between the UK and EU.
“In the City of London, we believe that finance has an important role to play in tackling climate change and other environmental challenges. We’re going to remove barriers to investment and ultimately redirect more private capital towards climate change mitigation and resilience”.
That’s why, said McGuinness, the City of London Corporation helped launch the Green Finance Institute, “to work to accelerate the greening of the global financial system by bringing together the private and public sectors and scaling up financial solutions in areas such as the energy efficiency of buildings, resilient infrastructure and sustainable commodity production across the supply chains. I’m pleased Dr Rhian- Mari Thomas is leading this effort as the GFI’s first chief executive.”