Cop26 private cash warning: net zero ‘not possible’ without green finance

Financial experts say climate summit must set clear targets to attract investors and mobilise private capital to tackle climate change

Activists symbolically set George Square on fire with an art installation of faux flames and smoke before the UN Climate Change Conference in Glasgow, Scotland. Reuters
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Finance will play a critical part in the transition to net zero with “nothing possible” unless trillions of pounds of private finance can be mobilised to help deliver lower carbon emissions, William Russell, Lord Mayor of the City of London, said on Friday

Mr Russell, who is in his final two weeks as Lord Mayor, said the transition to net zero will not be easy but public and private finance will need to come together to achieve the ambitious targets set by the UK government.

His comments come as the City of London Corporation prepares to co-host the Green Horizon Summit with the Green Finance Institute at the UN Cop26 environmental conference, which aims to examine how to mobilise private capital in the transition towards net-zero emissions.

“The future of finance is green and Cop26 is quite possibly our final chance to tackle climate change and the devastating effects that brings,” Mr Russell said.

“That’s why we’re bringing together the world’s leading financial institutions in Glasgow, London and around the world, all focused on building momentum behind the green finance revolution.”

The GHS will gather key players across green finance at Cop26, including chief executives, policymakers and governments.

Speakers, including former Bank of England governor Mark Carney, Larry Fink, cofounder and chief executive of BlackRock, and Bill Withers, group chief executive of Standard Chartered, will gather to examine how the commitments of today can be translated into action, in turn helping financial institutions “green” their business models.

On Thursday, Standard Chartered said it would remove or help transform its most polluting customers by the end of the decade under plans to make its loan book net zero by 2050.

The London-based bank, which has faced calls from some shareholders to match its green pledges with action, said it aims to reduce the coal-mining emissions it funds by 85 per cent by 2030 and will only provide services to clients who depend on thermal coal for less than 5 per cent of their revenue by that date.

Standard Chartered, which caters mostly to emerging markets and Asia, also aims to lend $300 billion to ensure firms can “tackle financial barriers to the transition,” Mr Winters said.

The announcement comes as banks face growing pressure from climate activists to stop lending to companies that show no intention of transforming their operations to be compatible with global agreements to slow rising temperatures.

Less talk, more action needed at Cop26

Stephane Monier, chief investment officer at Swiss private bank Lombard Odier, said Cop26 must do more than simply deliver more rhetoric on climate change.

Instead, investors need to see progress on the steps different industries will take to actually achieve net zero, with Cop26 delivering a clearer action plan for investors to follow to meet Paris Agreement goals, including interim emissions targets, policy guidance and industry strategies.

“Although about 80 per cent of the world economy is covered by net-zero targets, there is no clear action plan on how we get there,” he said.

While the Paris Agreement goal is to limit future global warming to 1.5°C, an August report from the Intergovernmental Panel on Climate Change (IPCC) said that temperature could be reached as soon as 2030.

“By our calculations, the implied temperature rise of the companies comprising the MSCI World Index is 2.9°C. This makes it hard for investors to allocate capital at scale with a net-zero mindset,” said Mr Monier.

“We lack clarity on the strategy and action plans — including policy guidance and detailed industry strategies. If we want to reach the targets [set by the Paris Agreement], we need to do a serious inflection in our carbon emission immediately.”

Mr Monier referred to the aviation industry as an example of the scale of the challenge ahead for different sectors to achieve net zero.

While a number of global airlines have committed to reaching net zero, “the move from a pledge to a plan of action is vague at best,” Mr Monier said.

“The International Air Transport Association’s road map relies on the use of nascent technologies, [e.g. electric and hydrogen aircraft], 65 per cent of emissions reductions from using sustainable fuels and the balance from carbon offsets.”

Switching everything over to SAF overnight would “just not be possible,” Mr Monier said, “because annual demand would exceed current supply by a factor of around 4,500”.

The challenges affecting the aviation industry are far from unique, he added, with industries worldwide facing the same difficulty of translating net-zero targets into net-zero action.

“For investors, progress here would be a crucial outcome from Cop26,” he said. “What we expect is credible interim targets on how we get from the current economy to a net-zero emission economy by 2050.”

Bridging the gap between rich and poorer nations on net-zero goals

Standard Chartered's loan of $300bn aims to ensure firms become greener and can tackle financial barriers to the transition.

Meanwhile, HSBC Holdings has said that it will phase out funding for coal-fired power and thermal coal mining in the wealthiest nations by 2030 and globally by 2040.

However, Mr Winters said at the Future Investment Initiative summit in Riyadh this week that there is a “huge gap” to close between rich and poorer nations when it comes to paying for greener economies.

Developed economies can see 60 per cent to 70 per cent of the funds needed, compared to less than 10 per cent in Sub-Saharan Africa, he said.

He has also said “it’s just not practical” to expect banks to stop financing the fossil fuel industry, in part because to do so would undermine transition efforts, particularly in emerging markets

While much of Cop26 will focus on individual countries’ plans of action, Mr Monier said progress between different nations is uneven as it depends on the level of development, fossil fuel dependence and exposure to the physical risks of climate change

“Key priorities at Cop26 will be setting credible interim targets for emissions reductions and front-loading these, locking in green recovery packages and infrastructure plans [including public/private partnerships], better guidance on the policy direction chosen in the pursuit of net zero and the regulatory backing to reinforce these ambitions,” he said.

Common sustainable investment frameworks a must to mobilise private capital

Mr Monier also called for common sustainable investment frameworks to help put trillions in private capital towards the net-zero transition.

While signatories to the UN Principles of Responsible Investment represent a hefty $120 trillion in capital, there is no single agreed-upon definition of how to invest sustainably, nor of what a sustainable financial product is.

“Cop26 could make big steps forward in this area,” Mr Monier said.

“Regulators are trying to standardise the field via the EU Taxonomy and SFDR [Sustainable Finance Disclosure Regulation] in Europe, but these have limits. Current investment approaches vary from exclusions, to ESG [environmental, social and government] criteria and wider sustainability measures.

Mr Monier said Lombard Odier’s investment strategy is based on recommendations from the Taskforce on the Climate-Related Financial Disclosures[1] (TCFD’s) Portfolio Alignment Team.

“At Cop26, we would welcome efforts to adopt these recommendations globally and to encourage investment firms to work with climate experts to develop and stress-test their models,” he said.

Greater standardisation would also help address issues of industry “greenwashing”, where a false impression is given of how environmentally sound a company's products are.

“With huge inflows into ESG funds, and investors increasingly questioning underlying methodologies, an erosion of trust represents a big risk — not just for the sector, but also for the climate transition. Transparency and common standards, such as those that the TCFD is seeking to provide, are the obvious solution,” said Mr Monier.

On Thursday, the Bank of England said it will accelerate its efforts to ensure the financial industry is dealing with the risks from climate change next year.

The bank's regulatory unit will switch its approach from focusing on whether firms are meeting its expectations on climate risk to “actively supervising against them”, the central bank said.

The lender acknowledged that challenges like a lack of data persist but said financial firms still need to come to grips with risks relating to climate or face regulatory consequences.

The central bank will ask companies that are not making sufficient progress to make “clear plans” and will consider using its powers and “wider supervisory toolkit”, if necessary.

Fair carbon pricing must be on the table at Cop

Mr Monier also called for Cop26 to advocate a fair carbon price — a cost applied to carbon pollution to encourage polluters to reduce the amount of greenhouse gases they emit into the atmosphere — as a crucial mechanism to advance decarbonisation.

While the International Monetary Fund estimates that 80 per cent of global emissions are unpriced, national and regional carbon-trading mechanisms provide only patchy coverage.

And while national carbon taxes on imports can help with “carbon leakage”, they can also push carbon-intensive activities offshore, with the higher price of carbon in one market forcing investment and production to shift to another where carbon prices are lower.

In June, the IMF proposed an alternative: an international carbon price floor for a select number of large emitters, with variable rates for advanced-, high- and low-income countries.

Mr Monier said higher carbon prices should help incentivise technological innovation, such as the hydrogen economy, and the push towards low-carbon activities, with revenue from carbon trading redistributed to help households with energy price increases and finance climate risk mitigation.

The Global Horizon Summit will help to drive momentum around these challenges by addressing key questions, such as how the transition can be financed while still enabling economic growth, how a global playbook can be set up for regulations and disclosures, how a global carbon price can be applied to nature and how to mobilise investment into emerging and developing economies.

Mr Russell said he has told big institutions around the world that it is time “go green or go home”.

Catherine McGuinness, City of London Corporation policy chairwoman, said Cop26 “is a vital step on the road towards net zero in the battle against the climate challenge”, but there are no easy answers to the big questions.

“They are urgent issues that we need to tackle head on if we are to finance the transition to net zero and meet the challenge Greta Thunberg has thrown down to us all to ensure that Cop26 is about action, not just ‘blah blah blah’.”

Updated: October 29, 2021, 9:44 AM