The financial sector, the greatest ally for climate action ?

Press release [22.05.15]

Business & Climate Week is taking place this week in Paris, and the Institute for Sustainable Development and International Relations (IDDRI) and CDC Climat Recherche have published two research papers demonstrating why the financial sector has an interest in mainstreaming climate issues and how this could significantly strengthen the effectiveness of public climate policies, as well as providing specific proposals for achieving this.

During the New York Climate Summit in September 2014, investors representing 24 trillion dollars of assets under management declared themselves in favour of a new global climate agreement and asked governments for policies to steer their investments towards the low-carbon economy.

By June 2014, the World Bank had gathered more than 70 governments and 1 000 companies and investors to call for a global carbon price.

A month ago, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board to focus on mainstreaming climate risk in financial sector practices.

Climate issues are perhaps not yet central to financial sector concerns, but it is clear that this sector is currently one of the most vocal on the matter. This should be evident once more during the UNESCO Climate Finance Day to be hold today, 200 days before the Paris 2015 Climate Conference.

In two research papers published this week, IDDRI and CDC Climat Research show that the financial sector has an interest in further consolidating this process, which has considerable transformative potential, and provide some specific proposals to better address the risks posed by climate change to financial stability.

Why would the financial sector benefit from mainstreaming climate issues ?

  • The physical impacts of climate change, such as the increase in extreme weather events, result in significant human and economic disasters, with systemic effects likely to influence financial stability at the global level.
  • Current and future policies to combat climate change will inevitably result in value destruction: that of infrastructure with the highest greenhouse gas emissions. The amounts involved reach trillions of dollars, the sectors of finance and climate have an interest in better anticipate the dynamics at play.
  • Opportunities for the financial sector will also be colossal. The transition to a low-carbon economy will require huge investment, estimated at between 89 and 93 trillion dollars by 2030 in the recent New Climate Economy report.

Consequently, how can the institutions that shall ensure financial markets (G20, IMF, OECD, etc.) significantly contribute to increasing the scope and effectiveness of climate action while respecting their existing mandates ?

For effective investments that contribute to “decarbonising” the economy, the following is necessary :

  • Fostering the competitiveness of low-carbon investments in relation to carbon-intensive investments, through demand-side policies (carbon taxes, emissions trading systems, industrial policy, etc.);
  • Create favorable conditions for investors and banks for shifting their capital to a low-carbon trajectory;
  • Creating financial products and regulations that bridge the gap between this supply and demand.

For each of these three areas, the financial sector has valuable frameworks and tools, which must now also be applied to climate issues. Financial governance institutions are, for example, well-equipped to offset the competitive distortions potentially produced by differences in fiscal policy at country level, through cooperation mechanisms at the international level. As regards the creation of an attractive supply of capital (for example, by integrating carbon risk into central bank collateral) or the creation of financial products (such as green bonds), this is their core business.

In addition to the target of 100 billion dollars by 2020 and the capitalization of the Green Climate Fund needed to support low-carbon development and adaptation to climate change in the poorest, most vulnerable countries, the challenge is to achieve a complete transition of the world economy as a whole and of flows managed by the financial sector. In their research papers published this week, IDDRI and CDC Climat show that mainstreaming climate issues in the financial sector is not only desirable, but also feasible and synergetic.

Publications :

These two Working Papers will serve as the basis for a Policy Brief to be published shortly by the Centre for International Governance Innovation (CIGI).