Climate change represents both risk and reward for the Gulf’s financial industry

The greatest existential risk of our time can be an enormous opportunity for those who are willing to seize it

The Middle East is an early victim of the climate crisis.

It is abundantly clear that climate change is not only a scientific challenge, but also an economic one. Just as scientists have long warned of the catastrophic physical effects of rising global temperatures, economists are also sounding the alarm bells.

The risk is existential, but there is also opportunity. Recent analysis has demonstrated that the transition to net zero emissions could drive as much as 25 per cent higher cumulative GDP growth over the next two decades alone, turning this existential risk into an enormous commercial opportunity.

The question is how the financial sector will navigate and enable the transition.

The transition begins with disclosure. Without a view on how companies are managing climate change effects or portfolio net zero alignment, capital markets cannot accurately price the financial effects of a warming planet. Investor demand for consistent, comparable and reliable data is rapidly growing, but there are still challenges to accessing quality data.

The Task Force on Climate-related Financial Disclosures (TCFD) was born as a solution to this problem. Established in 2015 by the G20’s Financial Stability Board, the TCFD created recommendations for climate-related financial disclosures to promote more informed investing, lending and insurance underwriting decisions. In 2017, the Task Force published voluntary disclosure recommendations and guidance focused on four thematic areas: governance, strategy, risk management and metrics and targets.

Support for the TCFD framework has grown rapidly, reflecting a desire to improve the quality and quantity of reported data in the market. More than 3,000 organisations representing a market capitalisation of $28 trillion now support the TCFD recommendations. The G7 and G20 have endorsed the framework along with more than 110 regulators and government entities. At Cop26, the International Financial Reporting Standards Foundation formed the International Sustainability Standards Board, which will develop a global sustainability reporting standard based on the TCFD framework.

If we are to achieve the systemic change required, we also need co-ordinated action across the global financial system so that every financial decision takes climate into account. Governments and regulators need to work together to ensure standards are derived from common baseline metrics and inputs from market participants.

The Glasgow Financial Alliance for Net Zero (GFANZ) was launched to co-ordinate and raise the financial sector’s ambition on climate change. The alliance unites all sectors of the private financial system, covering banks, insurers, asset owners, asset managers and service providers into one coalition. Today, more than 450 financial institutions from 45 countries – across Europe, Latin America and Asia – and representing over $130tn in assets, are members of GFANZ. Members must adhere to the UN Race to Zero’s criteria for inclusion, which means they have committed to using science-based guidelines to reach net-zero emissions by 2050 and have set 2030 interim targets that represent a fair share of the 50 per cent decarbonisation required by the end of the decade. Further, they must publish a net-zero transition strategy and commit to transparent reporting and accounting on progress against those targets.

This global initiative will drive much-needed consistency, science-based rigour and public accountability in how financial institutions determine, disclose and achieve progress against net zero targets. Together, GFANZ financial institutions are working with their clients to channel investment to green solutions, reduce emissions and drive economic growth.

Cop26 was a significant turning point as the private sector demonstrated its willingness to play a key role in fighting climate change. High-quality disclosures and credible net zero targets are key mechanisms to mobilising private sector investment for sustainability.

All eyes – including those of regional regulators and investors will be on the Middle East as it hosts the next two Cops: Cop27 in Sharm El-Sheikh, Egypt and Cop28 in Abu Dhabi, UAE. Perhaps now could be the time to turn principles into lasting progress.

The Middle East is an appropriate staging ground for these decisive conferences as many economies in the region face transition risk in the move to a low-carbon economy as well as the effects of extreme heat and water scarcity.

It has also witnessed several compelling initiatives that support net zero. The UAE took a significant step forward by launching an ambitious plan to reach its net zero target by 2050, which includes plans to invest $163 billion in "clean and renewable energy" over the next 30 years. Other nations in the GCC have followed suit with similar plans.

Ahead of Cop27, and to meet the pace and urgency of the financial crisis, financial institutions and governments alike must deliver on their commitments. There is a tremendous opportunity to act in a way that benefits both business and our planet, and the financial sector in partnership with government is a catalyst to seizing the net zero opportunity.

Mary Schapiro is Vice Chair for Public Policy and Special Advisor to the Founder and Chairman at Bloomberg

Published: March 29, 2022, 4:00 AM