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Finance's role in climate change

 

Finance is a key lever for change in sustainability and plays a major role in shaping the world we live in. To succeed in tackling some of the most pressing environmental and climate issues, huge amounts of capital need to be shifted to more sustainable, low-carbon sectors. The International Energy Agency’s estimates that $75 trillion [external link] in cumulative investment directed mostly towards renewable and other low carbon energy technologies, as well as energy efficiency measures, is required to keep global temperature rise to below 2C, and avoid the worst effects of global warming. Clearly, the scale of capital required for this shift is beyond the scope of public finance alone, meaning that private finance will be essential to the low carbon transition.

On the other hand, the losses from inaction far surpass what both the public and private sector would be willing to risk, with an Economist Intelligence Unit report, commissioned by Aviva, putting the Value at Risk from 6C warming at $56.8 trillion [external link]. That's over 80% of the current market capitalization of all the world’s stock markets. It is widely accepted that the cost of action to avoid catastrophic climate change increases incrementally as it is delayed.

The current economic model operates under the assumption that the world has unlimited resources. This is unsustainable and results in negative behaviours and outcomes, such as short term economic thinking, environmental degradation and climate change, as well as social inequality and systemic poverty.

 

The risks and opportunities for finance institutions

Failure to integrate environmental factors into decision making puts the capital of financial institutions, as well as those they manage money on behalf of, at unnecessary risk. For instance, there is substantial financial risk from investments in stranded asset that are high carbon and cannot be burned in a world working to stay below a 2C rise of global warming. Another example is the unpaid loans resulting from poor yields in the agricultural sector that are heavily reliant on natural resources such as water.

The risks do not end there for the finance sector. An increase in stakeholder advocacy on environmental issues represents a material risk to the reputation of investors and banks involved in controversial industries. The finance sector, which all but lost its social license to operate after the Global Financial Crisis, is painfully aware that damage to reputation can result in significant impact to bottom line returns.

As an enabler of economic activity, the finance sectors’ performance is strongly correlated with the performance of the economy as a whole. This means, while it is certainly exposed to the myriad of risks associated with environmental factors through its value chain, it is also well positioned to capture value from the opportunities that the sustainable economy presents.

For example, according to Mercer’s study, ‘investing in a time of climate change,’ embedding climate considerations into asset allocation, through investments in renewables and other low carbon technologies, offers the finance sector a way to achieve improved returns while also contributing to the low carbon transition.

Similarly, the Sustainable Development Goals offer a new framework for investment alignment with a strong potential to grow.  We are recognising nascent interest in this space from investors.

 

How WWF-UK can help promote sustainable finance

 

The financial system can make a difference to our current economic model. It can significantly influence sustainable development by not only better integrating environmental risk, but delivering mechanisms that protect nature and drive sustainable business practices.

This is where we are working to help. Through innovative collaborations, research and advocacy our aim is to help integrate environmental considerations into mainstream finance and lending, and to help shift capital away from high-carbon, unsustainable activities.

We work with banks, investors, asset managers, investment consultants and insurers, to help drive more sustainable investments and lending practices that serve people and the planet. By doing this, we also help them understand the material impact that environmental risks and opportunities such as carbon, water and biodiversity present for their business.

We work globally and in concert with other WWF colleagues in our priority regions to achieve our global goals. With governments, civil society, and regulators, we also work on policy change through advocacy.

Putting the urgent moral and ethical imperative to one side, our work is underpinned by a strong financial argument, which is why sustainable finance and related thinking continues to gain mainstream traction.

We work directly to incentivise the flow of private capital towards conservation and sustainable ecosystems, for instance in forest areas via forest finance mechanisms.

WWF combines expertise in science, conservation, the environment and finance, as well as its experience of bringing together actors from multiple sectors. This combination enables us to help financial institutions reduce their impact on the natural world and develop financial mechanisms which protect and encourage sustainable ecosystems.

Our reach and networks allow us to influence policy to effect sustainable change in governance for the finance sector at a global level.

We're also working to educate our supporter base on how their financial decisions can be used to effect a change toward the sustainable economy.