Report: Global carbon budget will be exhausted in 15 years without fossil fuel finance overhaul

Without drastic action from banks, policymakers and regulators, the world risks becoming stuck in a "climate finance doom loop", whereby financial systems support the organisations contributing most to environmental changes which undermine their very security.

Fossil fuel majors are believed to have received more than £2trn in finance since the Paris Agreement was ratified

Fossil fuel majors are believed to have received more than £2trn in finance since the Paris Agreement was ratified

That is according to a new report from NGO Finance Watch, which describes its mission as ensuring that finance serves society.

The report highlights the fact that any new fossil fuel production projects are, by their nature, incompatible with the Paris Agreement’s 1.5C trajectory, but that oil and gas firms globally have received a total of $2.7trn (£2.1trn) in public and private finance since the Agreement was ratified in 2015. Statistically, the vast majority of this funding will not have gone towards low-carbon activities.

These investments, coupled with slow changes to policy, have put the world on track to exceed the global carbon budget through to 2100 within 15 years, Finance Watch concludes, echoing the UN’s recent assertation that the global temperature increase is likely to exceed 3C by mid-century.

Such an increase in temperature and a depletion of the carbon budget would result in “unpredictable” and escalating risks to financial stability at a national and international level, Finance Watch warns. Risks noted include stranded assets, physical damage from more frequent natural disasters and extreme weather events and increased numbers of environmental and ethical lawsuits.

“Finance both enables devastating climate change and will itself be devastated by climate change,” the report summarises.

The report does praise the recent uptick in climate disclosure from financial bodies, including disclosure in line with the Task Force on Climate-Related Disclosures’ (TCFD) scenario analysis component, whereby risks are assessed across a range of warming scenarios. The TCFD’s latest update revealed that more than 1,000 organisations, with a combined market cap of $12trn and AUM worth more than $13trn, had supported its recommendations. However, it warns that impacts can be non-linear and therefore not accounted for by such analyses and that many businesses and policymakers are spending too much time on modelling and not enough on action. Moreover, it adds, analyses of single businesses often fail to take into account the global picture.

Calls to action

Finance Watch makes specific recommendations for the EU in its report, given that the bloc is currently developing its post-Covid-19 recovery plans and that the NGO is based in Europe. These plans should include a review of the Banking Package, first promised in 2018. Finance Watch’s recommendations draw on previous calls to action from the Bank for International Settlements, Banque de France, the UCL Institute for Innovation and Public Purpose and Carbon Tracker.

The report states that bank exposures to existing fossil fuel reserves should have their risk weight recalibrated to 150%, with the recalibration rising to 1250% for new fossil fuel reserves, in line with the fact that these reserves will typically require unconventional – and therefore riskier and higher-carbon -  methods of extraction. These include fracking, tar sands and arctic drilling. 

Such changes would work with, not against, the EU’s existing regulatory frameworks, Finance Watch argues. The bloc’s Capital Requirements Regulation (CRR) mechanism is designed to prevent financial instability in both the long and short-term, the report states, meaning that these adjustments would fulfil that purpose.

Policymakers and regulators should then ensure that banks – particularly private ones – are using these modified risk weights for internal calculations and decision-making, before promoting similar requirements to other nations.

The EU has notably already pledged to ensure that green finance is a “key focus” of its Covid-19 recovery plans. In April, the Commission launched a public consultation on its “Renewed Sustainable Finance Strategy”, part of a €1trn package to make the European economy greener by 2030. The package forms part of Ursula Von Der Leyen’s Green Deal ambition to create a carbon-neutral, bloc-wide economy by mid-century, whose financial components build on previous initiatives such as the Commission’s 2018 Action Plan on Financing Sustainable Growth and the reports of the Technical Expert Group on Sustainable Finance (TEG).

Finance Watch believes that the EU can create a 1.5C-compatible finance system using “far less radical or costly” measures than it is employing as a result of Covid-19 and notes that it is “already empowered and equipped to act”. The EU had already pledged to end fossil fuel subsidies by 2025 and encourage banks to act accordingly. However, a pre-pandemic investigation found that no EU member states had begun making plans for this transition.  

Sarah George

edie’s Sustainable Investment Digital Conference

edie’s Sustainable Investment Digital Conference takes place on 7-8 September 2020 and unites corporates, asset managers and asset owners for frank discussion around disclosure priorities, roadblocks and innovations. Featuring green finance experts from the likes of ING, BlackRock and BNP Paribas, the event explores how corporates and financiers can move beyond ESG in a post-COVID world.

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bank | green finance | Subsidies | tcfd


CSR & ethics | Climate change | Green policy | New business models

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