finance climate change

FINANCE: The British banking industry is gearing up to protect itself from the shocks of climate change and take advantage of the opportunities. 

The British banking industry has launched a Green Fintech Challenge for the market to find novel types of financial products and services that will assist in the UK’s transition to a low carbon economy.

These new ideas could include ways of channelling more funds towards green products and services, making it easier to issue or distribute green products, managing climate related risks, measuring future environmental impacts and creating new green financial products.

For example, new company IGreenBank has developed an AI engine to help risk managers detect environmental risks through environmental stress testing.

It will perform environmental stress testing on a selection of companies that institutional firms are considering lending to or investing in, to measure the component of these companies’ credit/investment at risk from environmental factors.

The algorithms will generate a report to predict the risks and their environmental bases, associated with a specific company/group.

The challenge is jointly launched by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), the regulatory arm of the Bank of England.

“We want to ensure that firms not only respond to the challenges climate change poses, but also make the most of the opportunities it presents,” Christopher Woolard, executive director of strategy and competition told the FCA’s Innovating for a Greener Great Britain event on 19 October.

He painted a picture of the future: “Investors being able to invest with confidence in green finance. A clear understanding, or taxonomy, of what green means. No greenwashing or mis-labelling. A way of measuring the effectiveness of the ‘green’ aspect of the product, as well as the financial return. Investors pricing in climate change risk. And, more broadly, an awareness amongst practitioners of how their business decisions may obstruct the path towards low carbon investment.”

Scenario analysis

Just a few days earlier both bodies presented two consultation papers.

The PRA’s paper sets out what it expects firms to do to manage the financial risks from climate change. Firms are expected to use scenario analysis to show how they are managing the far-reaching and foreseeable risks from climate change by moderating their actions today.

The scenarios should address a range of outcomes on the transition to a lower-carbon economy and a range of climate change scenarios leading to increased physical risks.

The Bank of England also expects firms to fully embed consideration of the financial risks from climate change into their governance framework, with the board and its subcommittees being given clear responsibilities for managing the financial risks.

At the same time, the FCA’s discussion paper on climate change and green finance explains how climate change could have an impact upon its own statutory objectives to protect consumers, market integrity and promote competition.

Andrew Bailey, chief executive at the FCA said: “The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fairway which meets users’ needs.”

Both organisations view these initiatives as being within their own missions’ objectives of soundness, safety, and the protection of public value.

70 green bonds

With over 70 green bonds now listed on the London Stock Exchange in seven currencies, worth over US $22 billion there is much to regulate. Thirty-eight green companies have raised $10 billion in London, including 14 renewable investment funds.

Moreover, the retail banking sector has seen the introduction of green mortgages and home owners who want to buy an energy efficient new-build property can be offered lower rates on some mortgages. Green loans are also available for a range of projects such as reducing greenhouse gas emissions.

The twin bodies see the transition to a low carbon economy as presenting many opportunities for the UK to grow as a centre for green finance, but this does bring regulatory challenges to the financial services markets, some of which have already been noted by The Financial Stability Board’s Taskforce on Climate Related Financial Disclosures, in connection with measuring and disclosing information on risks related to climate change.

It discovered that few companies disclose the financial impact of climate change on themselves or the resilience of their strategies under different climate-related scenarios. Also, the risks to the value of longer term investments if current valuations do not adequately factor in climate-related risks.

New forum to help minimise greenwashing and manage the financial risks from climate change

In the absence of universally agreed minimum standards and guiding principles for measuring the performance and impact of green finance products, there is great potential for “greenwashing”, so the two organisations are cooperating on setting up a Climate Financial Risk Forum to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in Green Finance.

Its membership will be finalised by the end of November and will include representatives from industry as well as technical experts and other stakeholders, who will meet for the first time or early next year.

Pension schemes are key

The FCA is looking in particular at the way pension schemes, which are already leading the way in divesting from fossil fuels into more sustainable forms of investment, are run.

It wants them to better evaluate their environmental, social and governance responsibilities, how they take account of members ethical another concerns, and improve stewardship, which includes paying attention to the risks from climate change.

It also wants to see more competition and market growth for green finance, for capital markets to give adequate information to investors of the financial impacts of climate change, and for there to be a new requirement for financial services firms to report publicly on how they manage climate risks.

And, perhaps more proactively, it is creating a “global sandbox” for international network of financial regulators who will test more efficient ways for innovative firms to interact with regulators and cooperate with each other.

Allianz and Swiss Re recognised for tackling climate change

Besides regulation, brand recognition is an important motivation for financial organisations nowadays to better embrace environmental, social and governance responsibilities.

This is illustrated by the fact that the two brands receiving the highest praise from NGOs in the last quarter are Allianz and Swiss Re, gaining their positions due to their efforts to tackle climate change.

This is the second quarter in a row that they have topped the ranking from global research and strategy consultancy Sigwatch, based on its monitoring of more than 9000 NGOs in July through September.

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