How can the financial sector move faster to slow climate change?
COP-26 will be remembered as the moment when finance moved to the forefront of the fight against climate change. Political surprises - ranging from the 'phasing down' of coal to closer cooperation between the US and China - may have grabbed attention. But for the business community, it was finance that generated the headlines.
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Among many notable announcements, the Glasgow Financial Alliance for Net Zero (GFANZ) commitment to align $130tn of lending, investment and underwriting with Paris Agreement goals grabbed the most attention. True, this collective target is theoretical for now, but it was a powerful sign that global finance is more aligned and committed than ever to the common goal of decarbonisation.
The goal for financial institutions now is to translate this sense of purpose into reality. For example, the industry will need to act fast to meet the UK’s new requirement for listed and financial companies to publish credible climate transition plans by 2023.
The scale of the challenge is illustrated by adaptation and resilience, which received belated attention in Glasgow. Public and private investors in developed countries need to provide much more capital to emerging markets countries already suffering loss and damage from climate change. Shifting the dial on adaptation financing will require firms to get up to speed with unfamiliar clients, projects and assets and to quickly develop new types of financing, insurance and underwriting.
In short, the mission of finance now is to build trust. Trust in the unprecedented commitments that firms have made at COP-26, and trust in the decarbonisation processes that will allow those targets to be achieved. Collaboration is crucial to making tangible progress, and that theme runs through EY’s new research on credible decarbonisation plans, sector-specific transition pathways and global capital mobilisation.
The Paris Agreement caused a sea change in how business thinks about climate change, backed up by a worldwide cascade of new agreements and regulations. Glasgow will do the same for financial services, pushing scrutiny of the industry to a new level. The time for abstract aspirations is over. Financial institutions must make climate change their business and act now to play a leading role in limiting global warming to survivable levels.
Gillian Lofts is the EY Global Financial Services Sustainable Finance Leader.
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