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As the dust settles from the recent UN climate summit in Glasgow, there is still much debate about what was actually achieved at COP26 and how different nations will reach the higher environmental goals they pledged Is.
However, there is little debate over whether the world’s finance sector took center stage in the two-week event, which has not happened in any previous climate talks in decades.
This is due in large part to Mark Carney, the former governor of both the Bank of Canada and the Bank of England. His latest assignment, as UN Special Envoy on Climate Action and Finance, was to unite the finance industry to make green investment a priority.
At COP26, he announced the formation of a group of 450 global banks, pension funds, insurance companies and other finance firms – with total resources of US$130 trillion – all to fund the transition to a low-carbon world and prevent global warming. promised to limit
As Carney told businesshala News at the conference, “One of the key messages from this COP is: There’s money.”
Having that funding available is important, but it is only the first step in getting the financial sector to act more quickly and more adequately against the threat of climate change.
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Carney’s COP26 declaration was met with a level of skepticism by environmental critics, as many institutions, including Canada’s banks, still finance fossil fuel projects and have made no commitment to stop doing so.
It will be difficult for any amount of new green investment to offset the continued growth of oil, natural gas and coal production, said Ben Caldecott, director of the Oxford Sustainable Finance Group at the University of Oxford.
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In recent years the sector has been under pressure to do more; COP26 just conducted further investigation on the industry.
“That pressure is healthy,” said John Stackhouse, a senior vice president at the Royal Bank of Canada, one of the world’s top bankers to the fossil fuel industry.
“We’re hearing it from corporate customers as well as individuals — and we hear from employees. It’s all good and there are a variety of ideas,” he said.
One of the challenges facing the financial sector while putting more money toward reducing the world’s emissions is the risk-averse nature that is inherent in the DNA of many banks: early-stage technologies are inherently risky.
However, offshore wind projects are often cited as examples of success; Banks in Europe were hesitant to invest in this technology 15 years ago, but are now feeling more comfortable as the sector matures.
Several technologies that could prove critical to decarbonization – the use of hydrogen as a fuel, continued electrification of the economy, and the enhancement of carbon capture and storage – are still in development.
‘The front end of the risk curve’
But whether the companies involved in these projects will be financially successful, it is not yet decided.
“Right now, we are at the front end of the risk curve in a lot of technologies that will be needed for transition,” Stackhouse said. “It would require a different financing approach then you would get for established and advanced technologies.”
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One solution is to merge the funding sources with banks, venture capitalists and governments – and their differing risk appetites – all partnering together.
Four years ago, French investment bank Natixis developed a fund which invests in organizations involved in sustainable land use, such as sustainable forestry and agriculture. The United Nations and the government of Luxembourg are both investors and have said they will take the first loss if the fund’s value drops. This arrangement provides some additional financial security to the bank and other private investors.
“Although those products have very high environmental and social performance, they are not always reflected in financial performance,” said Karen DeGouve, head of sustainable business development at Natixis.
Evaluating what is ‘green’
There are other constraints, he said, including supporting a limited number of low-carbon projects and deciding how “green” a company or project really is.
For example, the global oil sector is made up of many large, easy-to-invest corporations. But there are very few wind and solar companies that have significant scale. Experts suggest that there may be a need for consolidation in green industries to increase the quantum of investment in this sector.
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And currently, there is no standard or major rating system for how to evaluate which companies are making the biggest difference in tackling climate change.
Like many financial players, Natixis decided to develop its own rating system, called Green Weighting Factor; It assigns each of its customers a gray to green color scheme on a seven-level scale to assess the company’s environmental progress.
Carbon emissions are an important factor in the ranking, DeGouve said, but so are other environmental considerations, such as water use.
And choosing which company to support isn’t always straightforward when there are different climate preferences and different paths to net-zero.
For example, one company may reduce its emissions by switching from coal-fired power plants to natural gas, but a different firm may develop wind-power projects and another may invest in small-scale nuclear power. .
Not only this, there is a possibility of change in priorities. Right now, natural gas is generally viewed as a transition fuel, DeGoue said, but it could be viewed 10 years from now, as the world increasingly tries to reduce emissions.
“There is a lack of a general definition or general methodology to define ‘infection’,” she said.
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Jamie Bonham, Vancouver-based director of NEI Investments, said too often data about environmental performance isn’t consistent or even comparable.
For example, they find it difficult to evaluate Canadian oil companies, because they often use different metrics to calculate their climate impacts.
Were in Glasgow for COP26, Bonham said, “I’m at a bit of a loss at the moment as to which of these aligns the most with the net-zero path.”
The finance sector need not wait for correct data to take action, he said, but it is still a hindrance.
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There are also social and economic considerations that banks may weigh. The world needs reliable electricity and many workers and communities may be affected as nations turn away from some polluting industries such as thermal coal.
The world will still need oil and natural gas, especially for non-combustible uses such as plastics, for decades to come.
It is a realization that, amid repeated warnings of an impending climate disaster, further tarnishes the ambitions of the financial sector.
“We have to be really careful not to see it all as black and white – it’s full of gray,” RBC’s Stackhouse said. “The economy and geography and politics are not always predictable.”
While COP26 clarified where the world has to go, it is the ambiguity of the transition that the finance world has to grapple with as it moves from the sidelines to join the fight against climate change.