by: Christofer Sköld, Acting Program Director on Environmental Policy at think tank Forum for Reforms, Entrepreneurship and Sustainability (FORES)
In my latest post I pointed out short-sightedness as one of the main obstacles to get the financial sector to address the challenges that climate change poses. The main issue is not merely to solve this problem but also to make the financial sector itself see the monetary value in dealing with climate mitigation and adaption. This does not necessarily imply huge regulatory packages, such as the Basel III/Solvent II or the Dodd-Frank act. Instead transparency may be the key ingredient in making the financial sector sustainable and making the financial sector itself gain from sustainable behaviour.
The International Energy Agency has stated that in order to reduce global carbon emissions, $13.5 trillion need to be invested in low-carbon energy. That amount of money can realistically only be found on the financial markets. This is far more than, for instance, the $1 billion dollars in “climate finance” that the international climate negotiations have yet to come up with under the UNFCCC umbrella.
As I wrote in my latest post, the global stock markets and financial instruments are to a great extent exposed to fossil fuels. This is counterproductive to reaching the 2-degree target set by the UN. One way to go about this challenge is to enact legislation to compel larger companies to provide information on the sustainability of their investments and actions. In the United Kingdom larger companies have to report their carbon footprint. Although Sweden's four major banks are all bound by the UN’s “principles for responsible investments” (UN PRI), there are no national laws requiring businesses and investors to present information on a set of sustainability indicators. The UN PRI highlight how a particular company addresses environmental, social and governmental issues which is helpful to consumers. This kind of reporting has become increasingly popular, even mainstream, around the globe but has not been effective in breaking the kind of short-sightedness that create systemic risks such as a potential carbon bubble.
The major cause is that there still is no price on unsustainable behaviour. This is where transparency gets into the picture.
The UN principles for responsible investments only request actors to set up goals and then report on how they deliver on these targets. The goals do not take into account the national climate goals. For instance, Sweden, has relatively strict national climate goals, set to decrease carbon emissions by 40 percent by 2020 compared to 1990 levels. Say that a bank has to report their annual carbon emissions, their targets for the future, and how this compares to the Swedish national targets. Then analysts, and in the end, consumers could get the information needed to start comparing different companies' climate impact. Emitting less and/or investing less in for instance carbon-intensive industry would then become advantageous to companies. In short, it would provide an incentive for companies to decrease their “climate threat exposure”. In this way, transparency will be the key ingredient for turning the financial markets' investment streams away from fossil fuels and towards a low-carbon society.
The City of Cambridge, Harvard University and Massachusetts Institute of Technology have signed a historic “Community Compact for a Sustainable Future” aimed at leveraging the intellectual and entrepreneurial capacity of the business, non-profit, education and municipal sectors in Cambridge, MA to contribute to a healthy, livable and sustainable future.
