By Caroline Fouvet
The work of the financial services sector in addressing climate change was high on the agenda at COP 25 in Madrid this year. Indeed, this December, the 2019 UNFCCC climate negotiations saw multiple side events involving green finance, and one common thread that emerged was the importance of synergies between public sector-led efforts and financial institutions’ (FIs) initiatives to build a sustainable low-carbon and climate resilient financial system.
The impact of the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations is one of the main underlying factors to these common endeavours aimed to tackle climate-related issues. As it stands, several countries are implementing both compulsory and voluntary measures for the financial sector to take into account transition and physical risks, including the UK and France. Launched at COP, the 2019 Investor Briefing of the Global Adaptation & Resilience Investment (GARI) Working Group, to which Acclimatise contributed, urges investors to pay attention to this growing regulatory trend. While there are a number of ways that the public and private sector will have to work together on climate action, the need for standardisation, increasing green bonds, and macroeconomic analysis of climate impacts were in sharp focus at COP25.
A call for standardisation
One of the main reasons FIs are working hand-in-hand with governments on green finance is the need for standards to consistently address climate-related risks and opportunities. The European Union sustainable finance taxonomy was, for instance, referred to in multiple instances during panel discussions and praised as an efficient tool providing clarity as to what constitutes sustainable finance.
Financial regulators present at COP 25 mentioned their work on standardisation and methodologies. The Colombian financial regulator Superintendencia Financiera de Colombia (SFC) issued a mandatory survey to take stock of the country’s financial institutions’ governance, risk management and opportunities consideration practices, in order to identify best practices and provide common definitions. The Bank of England explained that it was currently working with scientists and FIs to develop four standardised scenarios that will be published in the spring 2020 and trialled by members of the Network for Greening the Financial System (NGFS). The NGFS chair Mr. Frank Elderson also announced that the Network was undertaking detailed technical work on scenarios, stress-testing, environmental assessment methodologies and guidance on integrating environmental risks in supervision.
Increasing green bond growth in developed and developing countries
In the wake of standardisation initiatives, several side events at COP 25 focused on the emergence of green bonds methodologies and the collaboration of governments with FIs to enable their take up. Both developing and developed countries are proactive on the issue, as shown by Nigeria and Ireland. The former issued the first African green bond in 2017 that was successfully subscribed to, thanks to efforts from the Nigerian federal government in giving confidence to investors regarding the green projects the proceeds would be invested into. The country set up the Green Bond Private Public Sector Advisory Group, which brings together capital markets, private corporates, the Government and external development partners to support the green bond programme and enable cross-sectoral dialogue. In Ireland, the government engaged with banks and investors in developing the Irish green bond framework, which underpins the issuance green bonds and use of the proceeds to finance projects that promote Ireland’s transition to a low-carbon, climate-resilient and environmentally sustainable economy.
Macroeconomic analysis of climate impacts
Another area for collaboration was the analysis of climate change impacts on the economy, undertaken by Central Banks. A representative of the Central Bank of Costa Rica explained how 2016 hurricane Otto hit the country for the first time and impacted the inflation rate and GDP growth, leading to repercussions on the financial sector. This pushed the Central Bank to undertake analyses from a risk perspective of what climate-related events such as El Nino meant in terms of inflation, and to communicate on this topic to financial stakeholders. The Central Bank of Chile is also involved in analyses of the climate impacts on the macroeconomy.
Financial sector alignment with the Paris Agreement’s mitigation and adaptation objectives continued at COP 25
Each COP provides a platform for dialogues across continents, sectors and institutions. COP 25 reflected this collaborative spirit between FIs and government-led work to green the financial system. Climate action is now an established concept within the financial sector, as evidenced by the conversations at COP 25, which constitutes an essential step in addressing the climate emergency.
Note: COP = Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC)