It seems appropriate on the final day of COP26 in Glasgow to review what impact the two week Conference of the Parties (COP) might have on the world of finance. To which there are probably two answers.
The first is that fund managers are already looking at sustainability as part of their investment strategy well before COP26. Indeed RobMac has written a number of articles about ESG and sustainable investing over the last couple of months:
The second answer is that there will be more regulation on the way as a result of COP26. Globally two-fifths of the world’s financial assets – $130 trillion – under the management of banks, insurers and pension funds have signed up to 2050 net-zero goals including limiting global warming to an increase of only 1.5C.
This means that investments will focus on technologies that lower and eradicate carbon emissions, and away from investments in coal, oil and gas. Essentially the easy cheap bank financing that typically would have been made available to an oil field, or a coal mine, is diverted to renewable energy or to a mortgage product that subsidises highly efficient homes.
As mentioned some of this is already happening in niches, with loans raised for environmental investments attracting a flood of money, and so cheaper funding – something referred to as a “greenium”.
The Glasgow Financial Alliance for Net Zero (GFANZ)
GFANZ is one new initiative that has come out of COP26. GFANZ is chaired by the former governor of the Bank of England, Mark Carney, and brings together 160 global financial institutions. Its aim is to accelerate the role of businesses and capital markets in helping the global economy reach their net zero targets.
The GFANZ initiative and other financial markets developments are critical as the capital markets will play an increasingly important role in driving climate-related change in the real economy, including the commodities industries.
For this to happen there will need to be far greater transparency and explicit climate-change targets, that will require banks and other financial institutions to increasingly scrutinise their portfolios and business/financing decisions. For example, funding projects will increasingly be conditional on agreeing and meeting ever more ambitious climate change targets.
Conclusion
That said it still leaves the question about COP26’s climate finance agenda: can such ecological, economic and social change really be achieved more through financial carrot than by regulatory stick?
Of course, the politicians are hoping for the former as they don’t necessarily want to tell their voting public to fundamentally change their travel, consumption or lifestyle habits. By changing the financial system, their hope is that every economic sector, from energy to transport, food to clothing, how we live, work and what we consume will decarbonise of their own accord.
The consensus would appear to be that it needs both carrot and stick.
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