Picture: 123RF/Dejan Bozic
Picture: 123RF/Dejan Bozic

Sydney — Are we trying to protect the climate with finance, or protect finance from a changing climate? It’s a question that gets discussed surprisingly rarely considering how important climate change is becoming to finance and vice versa. 

Many financial managers see climate change as an opportunity, as expanding into services and products that claim to take it into account is a way for active investment managers to rise above the stiff competition posed by cheaper passive index funds. These products tend to bear the “environmental, social, and governance” (ESG) label, indicating they’re good investments.

Larry Fink of BlackRock, explaining in January why the world’s biggest asset manager would incorporate ESG principles into more of its products, indicated that simple customer demand was the main rationale. Steve Waygood, chief responsible investment officer at Aviva Investors, has been calling for a finance version of the Intergovernmental Panel on Climate Change, the multilateral climate science assessment body, to help international negotiators understand capital markets and the real economy.

Meanwhile, government officials working on mitigating climate change are putting the financial sector at the forefront of efforts to corral the international community into helping. The UK, which is scheduled to host the UN’s annual climate change meeting in November, has chosen finance as a key element of its diplomacy before the summit. Mark Carney, the outgoing Bank of England governor and former chair of the G-20-linked Financial Stability Board, is assuming not one but two climate-related roles: UN special envoy on climate action and finance, and the UK prime minister’s finance adviser for the 2020 climate meeting, COP26. 

This effort to put finance at the centre of the climate conversation partly reflects a hope that the capital markets will be faster and more rational than political bodies, where efforts to arrest climate change have tended to struggle and languish. Consider how many experts and commentators have said China’s authoritarian model appears to be more effective at managing emissions than most democracies; if we’re looking for alternatives, the capital markets might be better than authoritarianism.

Carney’s speech launching the UK’s COP26 “private finance agenda” on February 27 encapsulated that logic. “The objective for the private finance work for COP26 is simple,” he said. “Ensure that every financial decision takes climate change into account.” 

On top of being a risk to individual financial assets, climate change is a risk to the entire financial system. It seems reasonable to believe the all-powerful market could help ward off this threat. Bringing climate change into financial decisions, however, is not necessarily the same as finance taking action to address climate change. That might sound obvious, but it’s not unusual to be at a panel discussion or roundtable about climate finance and hear some participants speak in the narrow sense of risks and returns while others talk about limiting climate change broadly.

This dissonance in attitudes within the industry can be seen acutely in its response to the EU’s sustainable finance taxonomy, a list of economic activities categorised by their effects on the climate, which was handed down on Monday. Technical experts stewarded the drafting of the list; if the name “taxonomy” doesn’t give it away, it’s entirely fair to say that this is a dry and detailed piece of work. The list will underpin future financial rules in Europe, including a green bond standard and a consumer-focused eco-label for investment products, and it’s thought likely to become a de facto standard in other parts of the world.

Watering it down

Industry and finance groups duly took note of its potential importance and worked hard to try to water it down, according to a report by InfluenceMap, a non-governmental organisation in the UK. The members of those lobbying groups include some of the most prominent voices supporting the incorporation of climate change concerns into finance, such as Allianz SE and BNP Paribas. The discrepancies in at least one bank extend into its highest ranks: InfluenceMap’s report pointed out that HSBC’s CEO had made supportive comments about the taxonomy at a Bloomberg NEF summit — even though one of the bank’s executives is a leader of the Institute for International Finance, which strongly advocated a less stringent approach.

BlackRock, now seen by many as a climate champion after its embrace of ESG criteria, published its own view of such official taxonomies in January. The document cautions against being “overly prescriptive” or imposing “binary definitions” and makes frequent reference to ESG financial concerns as materially important. In other words, BlackRock is taking the Mark Carney approach: climate and social considerations should be central to investor decision-making, but the objective is purely financial, not climate-related.

The EU taxonomy’s stated purpose is to label economic activities not by their financial risk but by their environmental sustainability. That’s why the expert panel recommended, for example, that only passenger vehicles that are all-electric and electricity that’s generated with almost zero emissions be designated “sustainable”. This is where philosophical arguments become reputational risks. There’s still ambivalence among investment managers concerning the role oil and natural gas will play in the coming decades, and shares from companies selling both can still be found in sustainable finance products. Consumers, however, tend to find this distasteful.

As concern about climate change grows, and as marketing of “sustainable finance” products ramps up, it may be customers — both retail and institutional — and policymakers who have the final say. At some point, the great and the good in climate diplomacy and the financial sector will need to be much more frank about whether their goal is to protect the climate or investment returns.

Bloomberg