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We must stop investing in our own demise

How to restructure the global financial system to combat climate change.

By Barry Gardiner

The financial sector is fuelling climate change. If the investments made by the banks, venture capitalists and asset managers of the City of London were their own country, it would sit above Canada and Germany as the world’s ninth-largest polluter. The financial markets continue to pour trillions of dollars into fossil fuel industries, new oil and gas projects, and carbon-intensive activities. In doing so they are driving themselves, and the planet, towards a cliff edge. The task of redirecting these investments towards the goal of achieving net zero carbon emissions by 2050 is as mammoth as it is crucial if the goal of limiting warming to 1.5°C above pre-industrial global temperatures is to be achieved.

Failing to achieve net zero by 2050 would not just be a human and environmental catastrophe. It would be an economic one. Business as usual, leading to warming of 2°C or 3°C, would break the foundation of the financial system and risk major economic collapse. The adverse impacts of extreme weather events will undermine the ability of insurance companies to evaluate risk, with hurricanes, bush fires and droughts causing entire business models to fail. The consequence is that insurers would set the price for cover at increasingly unaffordable rates. With assets uninsurable, banks will be unable to offer security for loans such as mortgages, and without insurance or banking functioning as before, the entire financial system that today generates so much capital could fail.

Yet the risk to the sector presented by climate breakdown currently plays a minor role in investment decisions. Fossil fuel investments remain high-reward, and very few financial institutions are committed to ending investment in oil and gas: private banks invested $742bn in the fossil fuel industry in 2021 alone, and the UK bank Barclays is the seventh-largest investor in the world. Reversing this trajectory requires global action.

Some moves are already under way, with parts of the financial system indicating their willingness to transition to net zero by joining alliances such as the Glasgow Financial Alliance for Net Zero (Gfanz). Gfanz is a collective of more than 500 firms across the financial sector, such as banking, asset management and insurance, which has publicly committed to net zero by 2050, dedicating $130trn to weaning the economy off fossil fuel investments.

Bridging the gap between words and action, however, requires standardised and uniform goals. Without these, companies will be accused of elevating their own particular climate credentials publicly in an attempt to be seen to be green, while doing little to implement measurable and accountable change. Financial industries can claim to be making environmentally informed decisions, while failing to make public the exact indices and standards to which they measure success. Sadly, the varying standards against which different investments are bench-marked – whether environmental, social and governance (ESG) policies, carbon emissions, carbon productivity or other climate-focused metrics – are extremely inconsistent. Inevitably companies tend to pick and choose the ones that show them in the most favourable light. To address this, consistent metrics are needed for investors to determine the environmental performance of their investments – a “green taxonomy” that is globally aligned and can be an informed resource to rank green investments.

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[See also: Why New York and London are betting on climate budgets]

Restructuring requires a robust regulatory framework. Gfanz members are clear: “We are policy-takers, not policymakers.” They will run their businesses in accordance with the rules, but the rules must be the same for everyone. Until they are they will continue to justify carbon-intensive investments. Policy that engages the financial sector towards climate action must recognise that voluntary schemes are unlikely to deliver the change required. As things stand, Gfanz operates through voluntary initiatives, but only 60 of the 240 largest members have policies against coal investments, and only 11 robustly oppose offering financial services to new coal mines or related infrastructure.

To remain members of the United Nations’ net zero initiatives, investors have been told they must phase out unabated fossil fuel assets to support a just transition that does not leave communities to suffer. But the commitment to this phased approach must involve action and not be a “smokescreen” to disguise the financial sector’s foot-dragging. Regulation must create accountability. This could involve mandating diverse investments to ensure a move away from fossil fuel reliance with minimum economic pain, or oil and gas companies paying a bond for expected decommissioning costs, effectively ensuring that any new projects have their end firmly in sight.

By far the most direct way to factor environmental degradation into investment decisions is to put a price on CO2 emissions. This is supported by the majority of Gfanz members because it internalises the price of carbon and ensures the most polluting sectors pay their fair share. Put simply: the polluter pays.

But to align investment decisions with net zero requires a global focus that brings the entire financial sector under the same rules so as to avoid carbon leakage, which will be inevitable if industries in countries with high carbon prices can be undercut by those that have low ones. A unitary metric is required and competitive undercutting must be prevented. The International Monetary Fund estimates that the global price of carbon must increase from the current average of $6 per tonne to $75 by 2030, or the positive impact of carbon pricing risks being undone by leakage.

The global financial sector needs systemic change if it is to survive and mitigate the impacts of climate change. Faced with tackling the ravages of the Second World War, 44 nations gathered for the Bretton Woods conference in America to set up a system of rules, institutions and procedures to regulate the international monetary system after the war. It set unitary metrics for currencies – convertibility against the dollar – and demanded cooperation to prevent competitive devaluations. Next year, on the 80th anniversary of the original conference in New Hampshire, the world has a perfect opportunity to reconfigure our global financial institutions once again. We must do so to meet a climate change challenge that is both economic and existential.

[See also: The lawyers taking polluters to court: “No company is above the law”]

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