Banking on a Low Carbon Future
It was encouraging to read last week that HSBC has promised $100bn of finance for low-carbon technology and sustainable development by 2025 as part of a set of measures to strengthen its commitment to tackling climate change and other “green” goals. HSBC said the $100bn would be focused on projects that contributed to reducing carbon emissions or meeting the UN’s Sustainable Development Goals (SDGs), which cover a range of social and environmental priorities. One thing is becoming very clear – ”green” investing is creating a buzz in the financial sector. Emerging markets including China and India are being seen as a good bet for investors hoping to fight climate change and boost returns, according to a report issued earlier this year by Morgan Stanley’s Institute for Sustainable Investing and The Economist Intelligence Unit. For a long time, climate action was seen as a cost rather than an opportunity. However, it would appear that the tide is turning.
We write at a time when the world’s nations are meeting in Bonn, Germany, for the 23rd annual “conference of the parties” (COP) under the UN Framework Convention on Climate Change (UNFCCC), which aims to prevent dangerous global warming. It’s important therefore to mention the economic imperative for action from the national perspective – according to some estimates like that featured in a report produced this September by the United States Government Accountability Office (GAO), inaction to combat climate change could amount to as much as $35 billion per year to the federal purse by 2050. However, over the years it has become increasingly understood that Governments alone cannot achieve necessary reductions in emissions, and that businesses needed to be brought into the discussion so that they can be part of the solution.
On the flip-side, following President Trump’s intention to withdraw from the Paris agreement, an intriguing question was asked: In the absence of US central political action, can business save the world from devastating climate change? In short, business cannot save the world from climate change on its own, just as politicians can’t drive change on their own. Success will be possible only through bold collaborations with diverse participants – public and private, incumbent and innovator, local and international. Think about the scale of new policies, projects and finance that are required to move the world’s major cities towards becoming clean, sustainable urban systems by 2030? That’s the scale of the challenge the SDGs and the Paris Agreement have set out.
Following the devastation caused by hurricane Irma across the Caribbean and Florida earlier this year, letters from ShareAction and Boston Common Asset Management, were sent to the chief executives of banks including HSBC, Lloyds, Bank of America, JPMorgan Chase, Morgan Stanley and Deutsche Bank to demand more information about their exposures to climate-related risks and their plans to ensure compliance with the landmark agreement to tackle global warming reached by governments in Paris in December 2015. The letters asked that bank leaders provide details of their plans to support the transition to a low-carbon economy, which could require up to $93tn of investment by 2030. This being the case, the business opportunity/advantage proffered by sustainable development in order to meet the 2030 UN Sustainable Development Goals is significant, creating $12 trillion of new market opportunities by 2030, according to the Better Business, Better World report.
Whatever the reason behind HSBC’s strengthening of its commitments, we need to remember that as stewards of the financial system, banks play the pivotal role in the movement of money across the global economy. An investment ultimately marks a statement about the future, and the money that a bank moves today will define the world of tomorrow. This means that in terms of climate change and our transition to a green economy, banks hold many of the keys to failure or success. The investment decisions they make now will go a long way in determining whether we will face total climate chaos, or a timely transition to a safe, green and inclusive future.
But the call for action is not just environmental, it’s also financial. If banks fail to act, they risk invoking financial ruin. Carbon intensive companies in which banks invest and to whom they lend are surely now a very real financial risk, and equally markets are at risk when the extremes of climate change send them into disarray. So banks can delay or drive forward the transition to a world below 2°C. We hope that HSBC’s move is an indicator, however small, of the latter.
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