Greening Finance Part One - Enforcd Blog

Greening Finance. Part One: Time to Act

By The Enforcd Team

Climate change presents a risk not just to the planet, but also to the financial sector. That’s the main message from a report into how finance can become more sustainable. The need to act now seems to be a given, the question now is how.

Some of the answers may be found in the report from the Network for Greening the Financial System (NGFS). The result of a collaboration between more than 30 banks and supervisors spread across five continents, this attempts to take the growing consensus around climate change and convert that into affirmative action.

This report has come up with four recommendations:

  1. Reporting: Climate risks should be integrated as part of daily financial reporting. Supervisors should set expectations to ensure companies are adequately monitoring and reporting on climate risk. They should encourage firms to take a long term approach to this issue and embed it into their core governance.
  2. Taking a lead: Central banks should lead by example, integrating sustainability into their portfolio management.
  3. Collaboration: Data will need to be shared where possible and public authorities should try to make as much information about climate risk available as they possibly can.
  4. Build internal capacity: Internal and external collaboration will be crucial to building capacity to assess climate risks.

These four steps represent a useful starting point, but there is still an enormous amount to do and plenty of barriers stand in the way. As the report acknowledges, one of the keys will be developing a common international approach to disclosing risk and for policy makers and markets to work together.

Here, things become difficult, because attitudes vary considerably. The Paris agreement is one step but various authorities appear to differ in how seriously they take climate change and their willingness to do something about it.

In the case of the US and Russia, there seems to be an active enthusiasm for the economic possibilities climate change brings. Mike Pompeo has said he sees the melting of the ice caps as an economic opportunity.

While statements like that rightly attract their fair share of scorn, they do highlight the biggest problem. The financial sector can acknowledge climate change all it likes, and regulators can try to improve reporting, but much of this is a question of stick rather than carrot. The view still holds sway that climate change and economic growth may be mutually exclusive and while that’s the case the sector will not move quickly enough.

For change to really be put into effect, the sector needs to see this for what it is, an opportunity. Areas such as renewable energies and smart development can have a be profoundly important in the greening of the economy, but they also offer billions of dollars worth of opportunities. It is a shift in emphasis. By looking at the challenge as an opportunity rather than a threat, the sector will start moving with incredible speed. In the second part of this blog, we’ll look at where some of those opportunities might be.