Climate Finance Week is worthy but can’t mask the fact Irish Finance needs to stop promoting high carbon emitters
By John Vivian Cooke
In “The Sun Also Rises”, Ernest Hemingway notes that there are two ways to go bankrupt: “gradually, then suddenly”. It is difficult not to draw the conclusion that, for all the earnest recognition of the scale of the climate crisis expressed by individual participants in Climate Finance Week 2021, Ireland`s financial institutions have missed this lesson. At least, that is the conclusion to be drawn from the depressingly modest targets and entirely inadequate timetables that the industry revealed during a week-long series of panels, presentations and seminars.
Climate Finance Week Ireland is now in its fourth year and attracts over 5,000 virtual attendees. It is organised by Sustainable Finance Ireland in association with the Department of Finance, and sponsored by AIB. Speakers included Gro Harlem Brundtland, James Cameron, Brian Hayes and Colin Hunt.
The conference´s set piece, “Irish Sustainable Finance Roadmap”, was notable for the absence of quantifiable milestone targets to achieve net zero industry by 2050. Instead, the focus was on identifying opportunities for new business and a detailed plan of preparatory actions, dedicated to capability building and consultations to be completed by next year`s conference. It is unsurprising that an industry event, convened to discuss the business implications of climate change, should focus on the opportunities for profit. So there was much talk about the implications of the loss of value of underlying assets held as investments or as collateral due to climate change, and, how best to position Ireland to maximise new business opportunities in financing the transition to a green economy. In this context, individual participants can be forgiven for showcasing their own products and services as the nature of any industry-run event is given to bouts of self-promotion.
Some consolation came from the genuine engagement by participants in treating the subject of climate change seriously and from sessions that gave details of the mechanisms by which the financial services industry will respond to the climate crisis.
Green Finance
There was widespread enthusiasm for the prospect of financing the transition to a green economy. Many participants are planning to develop a full ‘suite’ of green financial products to be marketed at advantageous prices. This is not to be sniffed at. The World Bank estimates that public funds will only cover about one third of the total cost of moving to a global net zero economy with the private sector funding the remaining costs. All parts of the economy will have significant borrowing requirements to pay for this transition and Irish financial institutions are eager to capture some of that business with green loans; green bonds; green equity funds; and climate insurance. But, in moving into the sustainable finance market, the industry is merely ensuring its own continued profitability by responding to market signals of future customer demand.
Disclosure and Reporting
The obligations on businesses to disclose the environmental and social impact of their business activities was a major theme that emerged. The International Financial Reporting Standards Foundation is expected to publish a global standard at the imminent COP 26 which will bring order to the patchwork of existing reporting standards. Such a global standard for measuring companies` carbon management will allow comparison between different sets of published ESG reports and, moreover, encourage further ESG reporting by removing the need to generate different data sets for different reporting standards. Irrespective of the outcome of COP 26, the EUis pushing ahead with new reporting regulations that update the 2014 Non-Financial Reporting Directive.
At the moment, Environmental, Social, and Governance (ESG) disclosures are published voluntarily
in response to investor demands or as part of companies’ own ESG targets. However, it was noted that there is currently increased “supervisory engagement” with financial regulators as a prelude to the introduction of formal mandatory ESG disclosure regulations. The Bank of England is in the process of developing formal guidelines and, not only will companies have to disclose their GHG emissions but they will also have to disclose the financial risk to the value of the assets on their balance sheets from the impact of climate change. It was suggested that one possible consequence of similar reporting of financial risk would be the requirement that Irish banks might have to hold greater capital reserves over property they hold as collateral.
Capability Building
It was made clear throughout the week that Irish finance companies are not equipped to deliver a net zero financial industry in the immediate future. For the moment, they have neither the sufficient staff with relevant skills nor the business support and IT systems to become sustainable finance providers. As seen in the Roadmap, the industry is only in the very initial stages of laying the ground work for this change, and, most are still at the problem-scoping stage; still trying to figure out what sustainable finance would look like before they even begin to start to reconfigure their business models.
Sarah Dempsey, Head of Sustainability Communications and Partnerships at AIB, gave specific examples of how this problem manifests itself on a day-to-day basis. The current information systems that AIB uses predate the concept of carbon management and were designed to provide information for financial control and regulatory compliance. As a result, the bank does not have access to data for validating data carbon emissions. For example, a substantial portion of its historic mortgage book is secured by homes that have never had a BER rating. Moreover, its effort to decarbonise its operations has a lag time as smaller suppliers in a complex supply chain do not have the capacity to produce data on their own carbon emissions. In fact, AIB spent the last 12 months mapping their loan book against carbon emissions as preliminary step to designing a carbon management system.
That AIB is seen as the leader among Irish banks in sustainable finance shows just how much is yet to be done. Irish financial institutions are facing a Herculean task in attempting to de-carbonise their loan books even by 2050.
Regulators
Some jurisdictions have updated their regulators’ mandate to make explicit their supervisory function over ESG matters. However, climate change is seen as both a risk to systemic stability of economies and a financial risk to individual companies 0 so increased regulation of climate change can occur under existing mandates as well.
Implications
The changes by financial services companies to achieve net zero will play a large part in determining the rate and nature of the change in other parts of the economy. As more large companies adopt carbon management and disclosure policies, these practices will be pushed down their supply chain, forcing smaller companies to adopt similar practices in order to remain suppliers to their larger customers.
With some reluctance, financial companies are contemplating a distant future where they will not provide any services or products to customers who are net GHG polluters. Already, some insurance companies will not underwrite business to parts of the coal industry and they expect the scope of such sector exclusions will only continue to grow. Even if the government continues to shield the agricultural sector from the consequences of its pollution, it is imaginable that at some point in the future, individual farms will not be able to continue to buy insurance or secure loans without radical changes to their farming practices.
The financial services industry must eliminate the carbon attributable to their core businesses, not just their day-to-day operations. This means that they must do more than recycling more paper and buying renewable electricity. They will continue to remain part of the problem until they stop providing financial products to GHG polluters. Even banks that provide green loans and green bonds alongside finance to polluters will still be like those oil companies that invest in renewable energy while still pumping fossil fuels out of the ground. Until they abandon a polluting customer base, then ESG will remain, in the words of one panel participant, “Everyone Still Greenwashes”.
Desmond Tutu advised that the only way to eat an elephant is one bite at a time and it is understandable that this year`s Climate Finance Week should recommend actions that will encourage the development of new sustainable finance products and increase capabilities by investing in skills and technological innovation. All these things are welcome and entirely necessary if insufficient.
It is a pity that we waited until the restaurant had caught fire before serving the pachyderm course. The question left unanswered by all the discussions, online seminars and panel groups is: will the economy and the financial services sector – globally – do enough to reach net carbon zero in time to change the trajectory of climate Armageddon?
