Greening Finance Part Two - Enforcd Blog

Greening Finance Part Two: Opportunity Knocks

By The Enforcd Team

The financial sector is quick to acknowledge the threat of climate change, but not enough is being done about it. That’s a shame because, aside from anything else, this could be an enormous opportunity.

Climate change is very real and the impact on the economy is likely to be profound. Like or not the financial sector will have to confront it sooner or later. In the words of Luke Skywalker they are left with a stark choice, they can ‘either profit from this, or be destroyed’. 

However, even now, with people on the streets and scientists issuing dire warnings the message doesn’t seem to be sinking in. Only 10% of financial firms have a strategic approach to climate change and 30% see it as being a matter of corporate social responsibility. That, as Mark Carney explained means that the vast majority of the sector is unprepared for climate change risks.

“Many banks have some way to go to identify and measure the financial risks from climate change comprehensively,” he explained.

Vast swathes of the sector have no idea about the risks they are facing. As the example of 2008 shows, when the financial sector loses sight of the risks coming its way, bad things happen.

At the same time, they are missing out on a trillion dollar opportunity. Research from the Global Commission on Climate and the Economy outlines a $26 trillion opportunity. The benefits of climate action, says the report, are bigger than ever and so too are the risks of inaction.

The report highlights numerous examples of successful projects. For example, a Ugandan non profit and private company have partnered to use drones to help farmers move to more sustainable practices. This has increased yields and seen an average annual profit increase of more than $2,500 for the pilot farmers. In china cement is being made with the lowest carbon footprint in the world increased earnings by 70% and reduced costs by 20%.

The transition from fossil fuels to renewables will create an enormous opportunity for the financial sector. A report from ING found that US firms with integrated sustainability programs were had better borrowing and revenue outcomes than those which did not. Analysis from S&P 500 companies also shows that sustainable companies tend to be the most profitable.

Regulatory change

Regulators are stepping up to the plate although not as quickly as many would like. The FCA has released a climate change discussion paper and, together with the PRA, have set up a Climate Risk Forum to collaborate and share information.
However, they are under pressure to do more. Positive Money, for example, urged the FCA to do more than just give initiatives such as the Taskforce on Climate Related Disclosures which offers an internationally recognised framework for firms to report on their environmental impact, their backing. Instead they want them to start mandating many of its measures.

Regulators are being hounded all the way and are moving towards a more proactive stance. Many measures which are now issued as guidance, or advice could soon become mandatory

There is, then, a lot of carrot and stick going on here. Firms should take climate change more seriously than they do because of its opportunities and risks. Global warming will change the economy and the financial system which supports it. Investing in sustainable measures which fight climate change, though, represents an enormous growth opportunity.

It’s an environment much like digital transformation in which early adopters and fast movers could have a significant advantage in the marketplace. Those who see climate change as a key strategic issue rather than a box ticking exercise will be best placed to benefit from a market which will be increasingly dominated by the environment.