Forward-thinking financial institutions should seek ways to proactively support ambitious climate policy and regulatory reform
As COP28 draws to a close the Lab’s Head of Climate Safe Banking, Jon Dennis, reflects on how the finance sector can support governments to take bolder action on climate.
A week ago at COP28, the annual global climate summit, the spotlight was on finance and its role in tackling the climate crisis. There were a few notable announcements, including commitments on climate finance mechanisms, the launch of a new taskforce to help align global policy with net zero and a big demonstration of support for climate-related disclosure standards. However, as the dust has settled, there is a palpable sense that the commitments fall short of what is needed to fully mobilise finance for a just, net zero transition. The question arises: what role should mainstream finance play in ending the stalemate and changing the terms of the debate?
Navigating the complex interplay between government and mainstream finance poses a challenge for greater action on climate, resembling a catch-22. Decisive government action often depends on signals from the private sector, yet many private sector actors hesitate to act without more assertiveness by governments. This indecision plays into the hands of those seeking to slow progress or profit from it. This includes actors within the finance sector itself, who have continued to invest in fossil fuel expansion, and from the oil and gas industry, who have dedicated millions in lobbying activities since the Paris Agreement.
Given the potentially catastrophic system-wide threat that climate change and related issues – including the destruction of nature – pose to individuals, economies and societies globally, something needs to change.
A pathway forward
Forward-thinking financial institutions should seek ways to be a greater part of the solution, by proactively supporting ambitious policy and regulatory reform that incentivises a rapid scaling of sustainable investment and accelerates the end of fossil fuel finance.
A term that encapsulates this approach is macro stewardship, where financial institutions actively work with governments and key stakeholders to correct market failures such as climate change. These engagements operate on the premise that governments have the authority to bring about cross-sectoral change, while market participants possess the expertise and influence necessary to identify and push through those corrections.
What this means in practice for financial institutions is multifaceted and an area that merits far greater attention and scrutiny. Nevertheless, it is possible to envision a future where collective action by individuals, organisations and whole sectors brings about positive change for the benefit of society, as well as shareholders and clients.
The scales of change
Individuals that champion climate causes – already present across the finance sector – have the potential to embody and proactively engage in aspects of macro or system change. This includes avenues that support stronger climate policy and regulation, spanning various functions and seniority levels, both in roles specifically related to sustainability and other areas such as public affairs and communications. Enabling individuals to embark on this journey will rely on cultural shifts that promote diversity of thought and open engagement, coupled with much bolder commitments by senior leadership that mirror the urgency of the situation.
Organisations should carefully evaluate existing avenues of advocacy and challenge whether these align – at a minimum – with their own climate objectives. Research indicates that the majority of the world’s largest financial institutions, either directly or via industry associations, continue to oppose emerging sustainable finance policy. Given the substantial direct and indirect leverage that financial actors have on policy and political processes, this is an obvious area that needs to change.
At a sector level, efforts should be directed toward cultivating stronger and clearer signals to the government from those who are genuinely committed to a rapid and just transition to net zero. This has happened before; the UK government’s decision at COP26 to mandate firms to publish transition plans was undoubtedly influenced by direct and collective calls by leading market actors. Transition plans have now become the benchmark for private sector climate action and are fast being integrated into global standards and regulatory expectations.
All of the above changes, as well as others yet to be realised, will benefit from deeper and more meaningful collaboration. The UK’s competition regulator has recently released guidance that gives companies the green light to team up and tackle issues of broader public interest, such as the climate crisis. This guidance also aims to eliminate ‘first-mover disadvantage’, which stands in the way of emerging leadership, particularly in competitive sectors like banking.
Managing the push back
Some will argue that action in this area is a muddling of priorities, asserting that profit maximisation supersedes any other motive. This viewpoint is counterproductive and backward facing for multiple reasons. Financial institutions have a responsibility to act in the best interests of their clients and broader society. Pursuing profit at the expense of these considerations has led to the build up of systemic risks that cannot be hedged and represent substantial threat to any properly functioning market. The world is already overstepping at least five climate tipping points, each of which could trigger unprecedented societal disruption and damage. It is also estimated that around half the world’s fossil fuel assets, valued between US$11 trillion and US$14 trillion, will become worthless by 2036 under a net zero transition.
As the gradient of the transition steepens, the capacity for mainstream finance voices to take a bolder and more assertive stance on issues of sustainability will only increase. The most proactive actors will no longer be seen as outliers, instead paving the way to a more unified and collective force that helps to deliver tangible changes both domestically and on international stages.
To release this vision, we need forward-thinking financial institutions to come together and forge high-ambition alliances that not only redefine political debates but also overcome forces that hinder progress.
As COP28 concludes this week, the spotlight shifts to what comes next and a critical reflection on what is required to meet the science. Here, the call is not just for financial institutions to act but for governments to respond, using their authority to bring about ambitious climate policy and regulatory changes that realise a brighter and more prosperous future for all of us.
Finance Innovation Lab is embarking on a refreshed strategy to support individuals and entities in mainstream finance to engage on aspects of climate policy and regulation. Please get in touch if you’re interested to find out more. Write to us here: email@example.com.