It is not by chance that the first of the COP26 themed days was Finance Day. Central to the perceived success of the UN Climate Change conference was reaching the Paris Agreement target of US$100 billion per year of funding to developing nations to address climate change. But more than that, the UK Presidency declared that to reach our climate goals, “every company, every financial firm, every bank, insurer and investor will need to change.” This will require both public finance for the development of infrastructure and private finance to fund technology and innovation, and to help turn the “billions of public money into trillions of total climate investment”.
IFoA Policy Manager Caroline Winchester was at Finance Day on Wednesday 3 November and here are her five takeaways:
This was the slogan for Day 3 of COP, which saw finance ministers participating for the first time. The Coalition of Finance Ministers for Climate Action, representing 65 countries, met to discuss the implications of climate change and how they could work together to help ensure the readiness and resiliency of the financial sector in the transition towards Net-Zero.
Together with the Network of Central Banks and Supervisors for Greening the Financial System, the Coalition reiterated their key role in mitigating climate-related risks for enhanced investment, especially the private sector, and the potential to work more closely together on tools such as scenario analyses and prudential stress tests.
The Coalition emphasized the close relationship between global climate and nature goals, adding that the loss of biodiversity and ecosystem services could undermine climate change mitigation and adaptation efforts while exacerbating climate risks. Biodiversity is clearly a rising focus for climate activity next year and one where the IFoA Sustainability is already engaging with.
Although falling short in 2020 and 2021, the target of $100bn a year of climate finance for developing countries will be met over five years, following the latest pledges by the US, Japan and Norway. Canadian Minister of natural resources, Jonathan Wilkinson, who is responsible for the delivery plan, said that, going forward, the plan would have to work towards the “modelization of trillions of dollars” – underlying the importance of the private sector finance.
Bank of England Governor Andrew Bailey said the Bank had seen a “step change” among senior executives and boards at firms, with some organisations “exhibiting genuine ambition” in making steps towards net zero.
His comment followed the announcement that over 450 financial institutions in 45 countries, with around 40% of the world’s assets on their books, had now signed up to the Glasgow Financial Alliance for Net Zero (GFANZ). Mark Carney, UN Special Envoy on Climate Action and Finance, celebrated GFANZ’s $130 trillion of capital, saying it meant that finance was “no longer a mirror that reflects a world that’s not doing nearly enough.”
The UK Government sees this as one of the major achievements of the conference. However, critics pointed out the pledge does not stop the investors from financing fossil fuels in the short term, and that the $130tn figure refers to all assets under management, not just low-carbon investments.
In his keynote speech, Chancellor Rishi Sunak said he wanted to accelerate actions to “rewire the entire global financial system for Net Zero”. As part of this, he highlighted better and more consistent climate data, green bonds, mandatory climate-related disclosures, proper climate risk surveillance and stronger global reporting standards, along with a £100m contribution to the Taskforce on Access to Climate Finance and support for a new Capital Markets Mechanism to fund renewable energy in developing countries.
He announced the UK would become the first ever “Net Zero aligned financial centre”, with new requirements for UK financial institutions and listed companies to publish clear, deliverable transition plans. To guard against greenwashing, a science-based ‘gold standard’ for transition plans would be drawn up by a new Transition Plan Taskforce, composed of industry and academic leaders, regulators and civil society groups.
The UK joined 37 other countries in welcoming the announcement of an International Sustainability Standards Board (ISSB) to develop a set of internationally consistent, high-quality, and reliable baseline standards for disclosure of sustainability-related information.
In the UK Presidency Pavilion, Andrew Bailey said 2022 would see a gear shift from enabling firms to identify and address climate-related financial risks to active supervision. He announced a new approach to investments by the Corporate Bond Purchase Scheme to incentivise firms to take meaningful actions in support of climate transition.
The UK Presidency pavilion hosted a valuable discussion on the interrelationship between health and climate change with representatives from the WHO, the World Food Programme and Dr Vanessa Kerry (briefly accompanied by her father, John Kerry). With climate change the biggest health threat of the century, they noted that health pathways were not included in the nationally determined contributions.
A Met Office event at the science pavilion looked at tipping points. The message was to ask, not what might happen and how bad that will that be, but what’s the worst that can happen and what is the likelihood. Tipping points are additive to the impact of climate change. Currently, they are not yet part of IPPC scenarios, but the Swiss have made an official proposal for an AR7 special report to provide a comprehensive scientific assessment. As a speaker said, we want to make sure the decisions we make now do not put us in a lock-in.
A Presidency summary of the COP26 World Leaders Summit has now been published.
It was clear that in the discussions there was clearly a sense of momentum across the financial sector that a gear change was not only desirable but essential. This fits well with those actuaries wishing to think about how they can better understand what it means – have a look at the sustainability hub and the new report produced this week by the IFoA.
