Unless the world reduces greenhouse-gas emissions rapidly, humanity is likely to enter an era of unprecedented climate risks. Devastating extreme weather events are already increasing in frequency, but much of the worst climate-related damage, such as a sustained rise in sea levels, will be recognized only once it is too late to act.
Clearly, the climate system’s time horizon does not align well with the world’s much shorter political and economic cycles. Listed companies report on a quarterly basis and recent regulatory changes, such as those mandating increased use of mark-to-market accounting, limit long-term thinking.
Governments usually have legislative cycles of no more than four years and they must also respond to immediate developments. Yet stabilizing the climate requires sustained and consistent action over an extended period.
AXA and UBS, together with the Potsdam Institute for Climate Impact Research, the CDP (formerly the Carbon Disclosure Project) and the EU’s Climate-KIC (Knowledge and Information Community), recently organized a conference in Berlin.
There, they discussed with leading experts in green investments and fossil-fuel divestment how financial intermediaries can help to address climate risks. The financial industry’s active involvement is urgently needed.
In the Paris climate agreement reached in December last year, nations worldwide agreed to limit global warming to well below 2?C, thereby defining the track on which the world must progress rapidly. Over the next 15 years, an estimated US$93 trillion will be needed for investments in low-carbon infrastructure.
Government funding alone cannot meet this demand, so the financial sector must help fill the gap. By redirecting capital flows toward proactive efforts to mitigate and adapt to climate change, financial institutions can protect client assets from global climate risks and from the economic risks that will attend a warming planet. They are also demonstrating their social responsibility for the well-being of future generations.
However, financing change requires changing finance. This process is already underway.
Development institutions such as the World Bank are reconsidering their investment policies and, in the private sector, there is growing enthusiasm for “green” bonds, loans, indices and infrastructure investments.
Still, as the European Commission notes, less than 1 percent of institutional assets worldwide are invested in environmentally friendly infrastructure assets. Given historically low interest rates and the general lack of attractive investment options, this is an ideal moment to tap into investors’ growing appetite for green financial products.
Many large financial institutions have joined a global initiative promoting fossil-fuel divestment. Research findings indicate that global carbon dioxide emissions must be restricted to less than 1 trillion tonnes between 2010 and the end of the century to comply with the Paris agreement and limit global warming to below 2?C. This means that most available coal, oil and gas reserves must stay in the ground.
As a result, investments in fossil-fuel energy sources will continue to lose value over time, eventually becoming stranded. Thus, the financial sector’s revaluation of such holdings not only helps to stabilize the climate, but also better protects its clients’ investments and, by preventing the creation of a “carbon bubble,” helps to stabilize economies.
However, selling off these holdings will not suffice — the freed-up assets must also be redirected to more sustainable businesses.
For financial institutions and investors to do their part, they urgently need a better understanding of the relevant climate-related investment risks, which the Financial Stability Board (FSB) has divided into three categories — physical, transitional and liability.
Informed investment decisions will require sound, scientifically grounded data and uniform standards to assess these risks, and to quantify opportunities against them.
Effective disclosure will hence be a key part of any new framework. An FSB task force — comprising representatives from banks, insurers, institutional investors, rating agencies, consultants and auditors — is shaping voluntary standards, so that companies provide consistent and comparable climate-related financial disclosures to their stakeholders, whether investors or lenders.
This will also allow companies to gain valuable insights into their own potential for change, reflecting a time-honored principle — what gets measured, gets managed.
This is no easy task. For example, carbon footprints on their own will not steer investments in the right direction. Instead of identifying the champions of environmentally friendly solutions, these figures merely reveal which companies emit the most greenhouse gases.
Meaningful disclosure standards must take account of sector-specific information and the impact on business strategies of the transition toward a low-carbon economy.
All the governments that signed the Paris agreement can now be expected to adopt a range of measures to enable them to implement their decarbonization strategies. In this context, carbon pricing will be an essential part of the policy toolbox.
Some governments have already taken steps to promote the development of green products, via tax or market incentives. Overall, such changes to legal frameworks must support, not impede, the private financial sector’s efforts to tackle climate change.
Financing the infrastructure projects that are too expensive for some national governments to finance on their own, but that are essential to the transformation of our energy system — such as wind farms and long-distance power lines — will require a new class of global infrastructure bonds.
In the past, governments have encouraged investment in government bonds. Now, in order to increase private investment in building up clean infrastructure, investor-protection measures and dispute-resolution mechanisms must be considered.
The financial sector is ready to spearhead the shift to sustainability. When Germany takes over the G20 presidency next year, it will have the opportunity to convince its partners to create an adequate framework to encourage change in the financial sector that ensures a smooth adjustment to a low-carbon economy.
For both public and private actors, the time to act is now.
Hans Joachim Schellnhuber is director of the Potsdam Institute for Climate Impact Research. Christian Thimann is group head of regulation, sustainability and insurance at AXA Group, and vice chairman of the FSB Task Force on Climate-related Financial Disclosure. Axel Weber is chairman of the board of directors of UBS Group AG.
Copyright: Project Syndicate
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under