The Financial Industry’s Role in Reaching Net Zero

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The Financial Industry's Role in Reaching Net Zero | Future Business

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McKinsey argues that for financiers, catalysing effective capital reallocation and new financing structures, including through scaling up climate finance, developing new financial instruments and markets, including voluntary carbon markets, plus deploying collaborations across the public and private sectors, and managing risk to stranded assets will be essential.

In practical terms, some decarbonisation projects are likely to have longer payback periods. This possibility may compel financial institutions to adjust their criteria for which projects they finance and how.

Further, financiers’ commitments must lead to actions that lower emissions, including expanding the range of climate finance products and services; for example, funding for low emissions power projects, new financial instruments to support negative emissions or nature-based solutions, and well governed voluntary carbon markets.

Ecosystems service theory could play a role too. Here, one places a cash value on a forest and its resources, carbon sequestration and so forth, essentially creating a financial incentive to keep it standing.

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There Is Hope…

The power sector holds some of the largest opportunities for value creation, given the expansion and capital spending expected. Opportunities would arise not only for low emissions power producers but also for providers of low emissions generation equipment, electricity storage hardware, and related services.

Finance providers and companies offering project development support for the influx of new low emissions projects required over the next decade could well see further opportunities.

Financial institutions could also devise products that support retrofits or new development of low emissions buildings that would also help them meet their own goals for reducing financed emissions. Policy makers have a variety of options for accelerating the Net Zero transition in the buildings sector. These include providing incentives to banks to finance building decarbonisation or offer subsidies for retrofits and purchases of electric or low emissions equipment.

In Summary

McKinsey says that financiers must rapidly scale up climate finance, develop new financial instruments and products, and cultivate voluntary carbon markets and repurpose redundant assets to make Net Zero a reality.

And as GRI notes, in the near term, financial institutions will need to consider assessing and disclosing their risks as well as measuring and committing to reduce their financed emissions.

The sheer complexity of the task seems daunting. But GFANZ is adamant that firms across the entire financial spectrum; banks, insurers, pension funds, asset managers, export credit agencies, stock exchanges, credit rating agencies, index providers and audit firms have committed to Net Zero emissions by 2050 at the latest.

They will review their targets towards this every five years. Right now, they still need twice the money, rising from $100 trillion to McKinsey’s $275 trillion estimate. Can they get there in time?

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