In early July, a group of senior economists, financiers and government decision-makers was brought together in Paris by the United Nations Environment Programme and investment banking firm AXA to discuss how climate change and other environmental challenges affect the world’s finance sector – and what to do about it. This comes in the run-up to the UN Climate Conference later this year, with UNEP is calling for better alignment between the financial system and the needs of the world, if we’re to survive as a race. Cat Turner, a member of the Institute of Financial Services’ UK sustainability committee and co-ordinator of Isle of Man Friends of the Earth and EcoVannin, explains.
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The United Nations Environment Programme’s work in this regard isn’t new, but it’s making increasingly urgent noises about the need to speed up the transition to an inclusive, sustainable economy.
This’ll be no mean feat. UNEP says it means diverting trillions of dollars each year into the kind of ‘green’ investments that will keep our planet habitable – and many more away from damaging, polluting and resource-depleting ones.
Furthermore, it says governments can’t do this alone and that huge chunks of private capital need to be made available.
China, for example, is in one of the world’s strongest fiscal positions.
But it estimates that it can provide less than 20 per cent of its incremental green financing needs of US $350bn a year from public revenues.
And at the same time, today’s financial systems (including insurers, banks and pension funds sitting on our savings), are increasingly financing environmentally damaging activity, which is known to be threatening our way of life.
Because of this, UNEP has been looking into how the entire global financial system can be rejigged to ensure it works for, not against, humanity’s survival.
Achim Steiner, UNEP’s executive director, said: ‘As we look towards the convening of the Climate Change Conference in Paris this December, we are reminded that our ability to invest in new, resource efficient technologies and infrastructure will require enormous investments that go beyond public finance.
‘That is why UNEP initiated an inquiry into the design of sustainable financial systems to examine how best to align financial systems to sustainable development needs.’
So far UNEP has been focusing on relatively ‘high level’ players – in other words, countries’ central banks, financial regulators and finance ministries – together with some major market participants, the aforementioned bankers, insurers and institutional investors. The conclusion is that financial systems don’t just need to respond to these big changes, they need to be deployed to bring them about, to become the drivers. In previous columns I’ve written about the weight of money potentially available for this.
Investment banking firm AXA was a key supporter of this month’s meeting, and as an example of how these ‘drivers’ might manifest themselves, the company’s CEO Henri de Castries, said: ‘We are convinced that the “systemic risk” of carbon has to be embedded into regulatory frameworks, through efficient “carbon pricing” mechanisms and, more broadly, a favorable treatment of longer-term investments that are necessary to limit climate risks.
‘This would indeed increase the number of industry players contributing to the transition of a low carbon economy, and hence the necessary scale would be reached for a successful transition.’
That implies big interventions, and some that will be controversial – to fans of the sanctity of ‘market forces’ for sure.
So, for example, UNEP is proposing that financial risk, and risk pricing, of investments and loans should have to take into account environmental risk, including climate change.
In the UK, the Bank of England has seized the baton, setting up a review to see what systemic risks climate change poses to the UK’s financial sector.
Lots else was discussed, but overall five main themes seem to have surfaced:
1) There’s an ongoing and very real sense of fragile financial stability, and this comes from the continuous creation of unchecked pockets of risks – despite apparent ‘progress’ in world regulation and supervision.
2) In addition, there is a perceived lack of control, again despite numerous new standards aimed at increasing reporting and transparency discipline across the financial services industry. Wasted money, increased business burden – limited effectiveness.
3) Inefficient liquidity is also an issue, as apparently ultra-abundant liquidity - on all financial markets - and extremely low interest rates don’t seem to be boosting public and private long-term investment at all.
4) Emerging economies are effectively backed into a corner, as they have little access to good funding sources.
5) Time inconsistency is also a problem, as the challenges we face as a human race pose greater collective needs for long-term and very diverse investments -yet financial regulations still currently favour liquid, short-term and homogeneous investments.
These are global problems but they’ll have a very real impact on even small international financial centres such as ours.
We need to be prepared for a steep learning curve, but also to seize the opportunities that will assuredly come out of these developments.
In its own small way, EcoVannin (www.ecovannin.im) is working towards this with its business (finance) workstream. It met for its first session on Friday.
We’ll keep you informed!