‘Stress tests’ for international finance from rising climate impacts, as UN report calls for banking cultural shift
By Alex Pashley
“Blowback” from climate change could wreck the financial system unless regulators rewire it to ditch fossil fuels.
So says Nick Robins, former head of HSBC’s climate change unit and author of a UNEP report published today, which urges sweeping reforms to shift multi-trillion flows of international finance to insulate countries from global warming.
Global greenhouse gas emissions have to fall to net zero between 2055 and 2070 to keep global warming below the 2C level governments have agreed to avoid.
If they are serious, that means a sharp correction in the value of unburnable fossil fuels, with ‘stranded assets’ set to rock the world economy.
Central bankers must pull levers now to soften the destabilising transition to low-carbon alternatives, recommended the ‘Coming Financial Climate’ report by the Inquiry into the Design of a Sustainable Financial System.
“The financial system hasn’t been doing its job as it should be,” Robins, told RTCC, “new tools are required to design it for a new era.”
Robins cites examples from central banks in Bangladesh, Brazil to the UK that are re-writing regulations in recognition of climate impacts.
They range from placing ‘green financing’ on balance sheets, binding banks to set up strategies for ‘environmental risk management’, and monitoring climate risks in the insurance sector.
Though such initiatives are firmly in their infancy.
“It’s something new over the last two or three years, but what’s interesting is the voices arguing for it are coming out of the financial system. If you want long-term sustainable investment, you need to look at the climate,” Robins said.
The flows of capital to avert climate calamity are enormous, moreover.
Sustainable development needs reach $17 trillion, though they are just a fraction of global financial assets valued in 2012 at $218 trillion, according to the United Nations Environment Programme (UNEP).
So far wealthy countries have pledged $100 billion a year from 2020 in a green fund to developing countries to prepare for increasing impacts like rising sea levels, droughts and heat waves.
Mobilising finance for low-carbon, resource efficient assets like solar or wind power was key.
Those investments for low-carbon generation need to be as much as $1.1 trillion a year between 2010 and 2029, the IPCC estimates.
But in the face of the juggernaut of fossil fuel companies who forecast temperatures to rise far above the 2C target, Robins said the obstacles were numerous, but no singular one “fundamental” to writing off financial reform.
One would be getting pension funds and companies to disclose portfolios bearing carbon-intensive assets in the pursuit of transparency.
Bodies like the Climate Disclosure Standards Board and Sustainability Accounting Standards Board are helping, developing new frameworks for sustainability and climate accounting and disclosure.
Convincing central banks they had a mandate for meddling in climate regulation was another.
Robins said the Bank of England was reviewing climate risks related to its insurance industry, but monetary authorities in other counties were less keen to intervene in issues usually dealt with by the environment and energy ministries.
“It’s quite reasonable for a regulator to be dealing with this, due to the spill over or environmental blowback on the financial system,” Robins said.
This year with upcoming UN conferences on sustainable development goals in September and a crunch summit to sign a global emission-reduction pact in December, was critical.
Nevertheless momentum is growing.
“In developing a strategy for what a green financial system would be like, different central banks and regulators are coming at it in different ways,” Robins continued, “but there’s a growing realisation it’s leading to a more enriched discussion at the international level.”