400 Reasons to be Hopeful

By James Vaccaro, May 2021

Another day, another report. The field of climate finance is producing a deluge of literature. White papers, articles, statistics, reports. Like watching the evening news, we can often become desensitised from the content. It can feel abstracted and remote.

But this month has felt different.   

The IEA has been criticised in the past for being too conservative on its assumptions about energy transition. Its reports helped sustain fossil fuels by painting too dim a view about the prospects of renewable energy (it was so wrong in continually underestimating the volume and overestimating the price of solar that it undermined its own credibility – see how the colourful lines of the IEA’s projections compared with the black line of reality below):

So, for the IEA to have published their new scenario, catchily called, NZE2050, and spelled out no fewer than 400 measures for what it will really take to reach 1.5oC, it is little short of seismic.

There’s three times the reduction of oil by 2030 in its new scenario compared with its previous Sustainable Development Scenario (SDS). It calls for gas boilers not to be replaced beyond 2025 (that’s a much more meaningful way to describe behavioural change). And it states that there’s no case for further expansion or exploration of fossil fuels anywhere from now on. That’s not just coal, tar sands and arctic drilling – that’s oil, gas, the lot.

Continuing the Climb Forward

Many banks have set targets for net zero – generally by 2050. They are now at various stages of setting the strategies for each sector. The new IEA scenario NZE2050 has come out at just the right time from one perspective – any later and those strategies might have become set to a shallow trajectory and would have been harder to change later on. It means that in the months ahead, banks have more clarity about what path they need to be on. But it won’t necessarily make it any easier.

The starting point that we find ourselves in is a long way from ideal. A recent WWF/Greenpeace report  revealed the UK finance sector currently finances emissions that would rank 9th in the world if it was a country (that’s more than Canada produces). Whilst many financial institutions are committing to net zero by 2050, it’s the pace of change that is critical. It's a bit like paying off a mortgage - you can't say, 'I'll pay it off in 29 years' and expect the bank to wait and see if you make any payments until then. The financial sector has built up a huge carbon ‘debt’ which it’s adding to every year. It needs to be paying that down quickly on a clear schedule. There have been calls on the UK at the next G7 conference to mandate the finance sector to produce clear net zero transition plans. A ‘good’ transition plan would need to spell out the scenarios being used, the strategies for each sector, the interventions planned together with the assumptions about what would happen and the outcomes that would be achieved. It would need to be reviewed and updated regularly with audited reports on the outcomes. This echoes the proposal to ‘police the journey’ in our Financial Stability in a Planetary Emergency report.

It’s not clear that the G7 will make time for that discussion. But there will be other key meetings where these topics cannot be avoided. The European Banking Authority, for example, has published its first pilot climate risk assessment. The results show that across the European banking sector the ‘green asset ratio’ (e.g. the proportion of loans that comply with the EU’s new sustainable taxonomy) was estimated to be 7.9%. Even with the admission that the taxonomy is incomplete and not perfect, this number is very disappointing. The study also showed that over half of banks assets were allocated to sectors exposed to transition risk – in other words ‘partly contributing to the problem’. This time round, the EBA have run this as a pilot exercise, so no direct intervention is expected. But given that how concerning these figures are, shouldn’t more be done – and if so, what?

Capital Rules

That takes us to the forthcoming ‘Green Swan’ conference of the Bank of International Settlements. Here, the central bankers and regulators will come together to discuss proposals for how the financial sector should be addressing climate risk. Climate Safe Lending will be joining those discussions in particular to support calls for changing the capital rules (the proposal to ‘get tougher on buffers’ which came out as the most impactful, feasible proposal in our report last month). In the original report by Finance Watch, investments in new expansion of fossil fuels (the kind the IEA has said need to stop now to be on a path to climate safety) should have capital priced as pure equity. That feels overwhelmingly logical right now! Perhaps those within banks (especially those who are acting on climate) can add their voices to the regulatory debate given that regulation might realistically be the only way to get movement across the whole sector.

The argument on capital rules has been reinforced further by another report out this month by the Center for American Progress, Addressing Climate-Related Financial Risk Through Bank Capital Requirements. The author, Gregg Gelzinis makes the point that regulation should be followed into shadow banking (the under-regulated lending world). Indeed there’s a risk here that banks under pressure to push their emissions off balance sheets might find the wrong sort of creative solutions – evading disclosure by parcelling up activity into other financial institutions. That’s a loophole that needs to be closed before its exploited which is why Climate Safe Lending is working with others to address disclosure rules in different regions.

But for now, let’s take hope. If the IEA can come off the fence and spell out with clarity what is needed, people in banks can too. We’re in touch with many bankers who are using their agency in diverse and creative ways to bring about real change. By bringing together stakeholders outside and inside banks to speed up the pace of change, there is a real chance that organisations collaborating in Climate Safe Lending can be on time for the climate – collectively we are banking on it to work. 

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