How Finance Can Help Prevent a Climate Catastrophe

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How Finance Can Help Prevent a Climate Catastrophe

The World Economic Forum (WEF) is asking whether banks and investors can shift to climate-friendly business in a way that will have a global impact on slashing greenhouse gases. But how could this affect the stock market? A panel discussion at Davos 2022 went into some depth regarding this complex but crucial part of the fight against climate catastrophe. It all has big implications for business.

The challenge

At Davos, Mark Carney, UN Special Envoy for Climate Action and Finance, told the panel that the world needs an energy transformation on the scale of the industrial revolution at the speed of the digital transformation. And therefore, we need a revolution in finance.

There’s plenty of it required. Estimates suggest that investment, indeed public and private money will need to hit $50 trillion minimum in incremental investment by 2050 to successfully meet Net Zero targets.

Anne Richards, Chief Executive Officer, Fidelity International, was candid about role of stocks and listed markets in hitting Net Zero. “The final point is we spend a lot of time talking about what’s going on in listed markets. There’s a vast swathe of the world’s economy that actually is privately-held enterprises.

“It’s the SME sector in many, many economies. So we’ve got to help those parts of the economy do their heavy lifting and make it easy for them to do that heavy lifting so that we can, again, try and get this acceleration and this virtuous cycle going.”

So, trillions are needed, stocks and markets must play their role, and time is short. How’s it going to happen?

Greening Finance

Makhtar Diop, Managing Director, International Finance Corporation (IFC), said that the world is talking about greening the value chain, but most of a big part of the value chain is composed of SMEs in developing countries; the risk that we are facing is that by greening it, we exclude those people from the global value chain.

“So the work that I see we are trying to do is to see how we can accompany SMEs specifically. It’s more complicated because the financial sector, which is trying to set standards in terms of greening itself, has to trace the lending to the sub loans and the loan to these small companies and that is more challenging.”

Of course, useful green financing must go beyond just getting assets and taking care of assets, but also looking at the broader issues, which are the social implications of it all. Obviously, trillions is also a lot of investment to blend and de-risk.

Some of the panel felt solutions that we have now, with philanthropy, DFIs and also different parties, will help us find a way to de-risk more investment in this area.”

Global economy

Celine Herweijer, Group Chief Sustainability Officer, HSBC, said that our goal has to be a Net Zero global economy, with big finance and asset implications.

“That means we have to be involved in the transition finance of the heavy industry in Asia, of the energy sector in Asia. And that means we can’t introduce very blunt policy tools or thresholds that might work in the West. We can’t say overnight, OK, you can only have 30 per cent or 20 per cent coal in your energy mix, because that would mean we couldn’t work.

“We couldn’t finance the large energy, state-owned energy companies in Indonesia or Philippines or Malaysia. And then we couldn’t help on the transition. And that’s the biggest carbon wedge impact we can have; helping on the transition in the areas where the emissions growth is the highest.”

Herweijer also points out that green finance, assets and their risk are key. No one wants stocks or a stake in a failing venture.

“There’s a lot of challenges, because actually the green stuff at the moment is quite hard to finance. On one side of it, you’ve got the  infrastructure, the project infrastructure long tenure, even if you have a sovereign backing and a high RWA (high risk weighted assets), our bank sheets as a commercial bank aren’t used to having lots of long tenured deals on them.

“So it’s difficult for us to get involved in the clean infrastructure finance. So if we want to, which we do want to, we have to make some adjustments. We have to have a culture, a mindset shift, a risk appetite shift for a portion of our balance sheet.”

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