OPINION: Vaccinating the global financial system against climate crisis

by Prajwal Baral | Hornfels Group
Wednesday, 8 April 2020 14:58 GMT

FILE PHOTO: Solar panels sit on the roof of SunPower Corporation in Richmond, California March 18, 2010. REUTERS/Kim White/File Photo/File Photo

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* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

We risk sleepwalking into a climate catastrophe unless we transition to sustainable investments and climate-resilient economic growth

Mr. Prajwal Baral is a sustainable finance and clean technology expert and the Managing Partner of Hornfels Group, a technology investment consultancy.

The COVID-19 crisis has demonstrated that our financial system is utterly ill prepared to tackle any form of global turbulence and is estimated to cost the global economy between US$ 1 trillion and US$ 4.1 trillion. Nevertheless, this loss is not going to be permanent as the governments have already started rolling out stimulus packages such as expansionary measures, that could help the economy stand up to its feet again.

Let’s just fast forward to 2050 when people in their thirties today will be expecting to retire and live on their pensions or returns from their current investments. That will also be the time when the impacts of climate change will start battering everything we have built since the first industrial revolution – the very things in the real economy where our investments are embedded. According to expert projections, the global economy will be 3% smaller in 2050 because of climate change vulnerabilities, triggering vicious loop of deteriorating market confidence and shrinking economic growth in the years that follow.

The loss in and beyond 2050 is likely going to be irreversible for a foreseeable future unlike what we have seen in the aftermath of World War and 2008/9 financial crisis. This is because unlike post-war or pandemic recovery, there is a considerable time lag between what climate actions we take today and when we get the results. This is how the science works – even if we completely reverse the greenhouse gas emissions trajectory today, the Earth will continue to warm from the emissions accumulated since the industrial revolution. Even in the best-case scenario, many cities around the world will be under water, and extreme weather events like mega storms, flooding and wildfires will become the new normal. That is like multiplying the COVID-19 devastation by an order of magnitude.

Now the question is – is our financial system sleepwalking into this looming climate catastrophe? The answer would be ‘yes’, looking at the very insignificant global capital reallocation to climate resilient projects. Despite overwhelming media coverage of sustainable investing in the last couple of years, the green and climate portion of such investments is still very low. The global green bond market accounts for less than 1% of cumulative global bond issuances even after more than 10 years of its first issuance. Only less than 0.5% of the US$ 80 trillion plus of institutional capital is currently invested with purely environmental and climate change considerations. And, there are many sustainable investment funds that are reported to have been using the practice of investment greenwashing to appear green. The great green promises from the likes of Larry Fink are still not measuring up to some trillions of dollars that need to be immediately pumped into the global economy for a timely transition to climate resilient economic growth.

All is not dark though. We already have knowhow of a mixed set of climate vaccines for the financial sector. Like any vaccine, these have gone through trials over the last couple of years, primarily in advanced economies. What has emerged from these trials is a recommendation for some broad-spectrum vaccines that are generally applicable to both developed and developing nations. There is no particular order for deploying these vaccines, and the countries should adopt what best works in the context of their financial market.

These include, among many others, adoption of standards for labelling projects as climate friendly; development of climate-aligned financial products and corresponding incentives; development and adoption of climate risk disclosure standards; development and adoption of standardized climate stress testing tools; incorporation of climate issues as material to risk and return analysis in investment decision making; measurement of carbon-related credit exposure of the financial institutions’ investment portfolio; and systematic and explicit integration of climate issues into investment research, governance model, performance review process and engagement practice of financial institutions and investment managers.

As long as the financial systems around the world get a decent dose of some of these vaccines, the resulting systemic immunity could help the global financial system overcome the upcoming wave of climate catastrophe or at the very least, acquire some form of cross immunity to buy more time for a speedy recovery.