A sustainable finance industry

On 16 September the world’s capital markets urged action on climate change in a powerful message to the UN Copenhagen climate change conference. 181 leading investors and financial institutions responsible for the fiduciary management of USD 13 trillion issued a Statement on the Urgent Need for a Global Agreement on Climate Change, to be agreed on in Copenhagen this year, writes Lisa Bowyer, principal consultant, Liberty Consulting Ltd.

Are they soft hearted tree huggers, is it a marketing ploy, or do they listen to their children?”

“Whilst the majority of companies in the Global 500 and FT 350 recognise that climate change is a risk and an opportunity, worryingly, less than half of the FT 350 have plans to deal with their greenhouse gas emissions, and a mere 23 per cent of the FT 250 assign responsibility for it at Board level.”

“A…more comprehensive approach would be to incorporate sustainability policies into business practices, for example, for banks to apply their expertise and capital to encourage responsible building practices and energy efficiency…”

Based on the scientific evidence available the Statement demands a global target for emission reductions of 50 to 85 per cent by 2050 (and for developed countries 80 to 95 per cent). The Statement, endorsed by developed and developing country investors, specifies the elements that the upcoming climate change deal must feature so as to unlock institutional investment and finance sector skills – at the needed scale – into the development of a low-carbon and climate-change resilient global economy.

Why are these financial institutions and investors interested in climate change?

Are they soft hearted tree huggers, is it a marketing ploy, or do they listen to their children? Well most likely none of the above. They like many other savvy and forward thinking organisations, have realised, some up to 20 years ago, that climate change is a huge risk to the financial sector. At the domestic level non-sustainable communities will see their local economies contract and with it demand for property finance, investment and banking services generally. Brief illustrations are that assets acting as security for lending may plummet in value as properties become uninhabitable or insurable. Adverse climate change will also negatively affect insurance and reinsurance companies as extreme weather, natural catastrophes including rising sea levels and flooding gives rise to greater claims, then rising premium levels to a point where insurance is unaffordable for many.

Risk and the environment
On a global level, whilst banks, investment and insurance companies have been crunching the data on risk and asset values for many years, not all have been factoring environmental criteria into the analysis despite the fact that for example there is now sufficient evidence on the investment materiality of climate change. Firms may see climate change as a part of corporate social responsibility (CSR), but not a core business issue.  Whilst the majority of companies in the Global 500 and FT 350 recognise that climate change is a risk and an opportunity, worryingly, less than half of the FT 350 have plans to deal with their greenhouse gas emissions, and a mere 23 per cent of the FT 250 assign responsibility for it at Board level.

Opportunities for the finance sector
Quite simply, the first step is to reduce one’s own operational carbon footprint through an energy efficient operation. A good Cayman resource for this is the guide “Reducing your Office Footprint” issued by the Department of Environment www.doe.ky/about/sustainable-development-unit/.

A second step would be for firms to include green initiatives in their charitable donations and sponsorships. In Cayman many financial institutions have already appreciated the need for a sustainable finance sector with a better than average infrastructure to attract more business, investors and employees.

This resulted in the adoption by many local entities of socially responsible practices for many years, and entities may simply have to redirect their CSR policies to encompass the environment and sustainability and ideally support the development of a sound climate policy for the jurisdiction.

A third step and more comprehensive approach would be to incorporate sustainability policies into business practices, for example, for banks to apply their expertise and capital to encourage responsible building practices and energy efficiency. It is these entities that facilitate the property development and thus they have a great deal of power to effect change and as was explained above, it is these entities that will suffer first from a distressed property market.  Insurers can also offer favourable terms to encourage domestic solar panels and there are a number of reinsurers making specific coverage available for renewable energy technology and so early entry into this market could provide competitive advantage. Other examples of finance for new business opportunities and private public partnerships for a reduced carbon economy, are green transport initiatives, perhaps finance for public transport, alternative fuel vehicles, low mileage and car sharing arrangements.

Sustainability does not stop at the shores of these islands. Adverse climate change is a global phenomenon and the international finance sector needs to consider this and not least its own investment and purchasing practices. The two most important areas to focus upon in averting disastrous climate change are to protect forests and to improve energy efficiency.  Carbon trading and emissions off setting is developing fast in other jurisdictions, and could create opportunities in Cayman.  Investment in clean technologies, especially in developing countries and project finance generally, not to mention growth of existing products such as weather derivatives and cat bonds, suggest significant opportunities especially for many players in Cayman and thus possible development of a niche of expertise. The appetite for clean tech investments is predicted to be $230 billion by 2016 and the development of a green energy infrastructure is reported to require finance of $20 trillion over the next 30 years. Finally, the international insurance industry may also look to risk consulting opportunities and develop schemes for carbon as an insurable asset.

“Continuing to pour trillions of dollars into fossil-fuel subsidies is like investing in sub-prime real estate. Our carbon-based infrastructure is like a toxic asset that threatens the entire portfolio of global goods – from public health to food security. We must direct investment away from dirty energy industries.” United Nations Secretary-General Ban Ki-moon, May 2009

The relevance of Copenhagen 2009
A great deal hinges on the outcome of the December UN Conference on Climate Change in Copenhagen. A timely post-2012 climate change agreement containing appropriate long- and medium-term emission reduction targets and policies are essential to support investor confidence, bring enhanced policy transparency and predictability necessary to reduce investment risk and uncertainty regarding future income and cost streams.

The United Nations Environment Programme Finance Initiative, which is a global partnership between the United Nations Environment Programme and over 170 financial institutions from the banking, investment and insurance sectors across the globe, will play an important role in Copenhagen contributing the views and ideas of the finance sector and this is inextricably wrapped up with the need for stimulus measures as part of efforts to re-launch the global economy.  For information on becoming a signatory to the UNEPFI go to www.unepfi.org.

In the next part the author will further examine the opportunities for the finance sector and explain the work of the UNEPFI and benefits of becoming a signatory in more detail.

 

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