The Paris Agreement will soon come into force. Will this be enough to stop climate change? And how should the finance industry contribute?
Ursula Finsterwald, Group Sustainability Manager at LGT
The Paris Agreement (pictured below) was adopted on 12 December 2015 at the UN Climate Conference in Paris. One of its key objectives is to limit global climate change to well below 2 degrees compared to pre-industrial levels.
At present, 84 countries, accounting for over 60 percent of global greenhouse gas emissions, have ratified the Paris Agreement. It will thus enter into force on 4 November 2016.
Also positive is that even before the agreement comes into effect, the international community has taken a first important step to achieving the 2-degree objective: 150 nations reached an agreement on 15 October 2016 under the so-called Kigali Deal to further sharpen the Montreal Protocol treaty and limit the use of harmful hydrofluorocarbons (HFCs).
These are used primarily in refrigerators and cooling systems; and the demand for HFCs typically grows at the same pace as economic development. If the countries succeed in reducing HFCs by around 85 percent by 2036, global warming can be cut by approximately 0.5 degrees.
However: Attainment of Objectives Questionable
The first milestone in the fight against climate change would therefore appear to have been reached. Now work begins work on implementation of the Paris Agreement, that is, the governments of the signatory countries must draw up their national action plans. Whether these planned measures will be ambitious enough to reach the climate goal is questionable.
One weak point in the agreement is that the individual states can decide what their respective contribution will be to achieving the goal. Observers are therefore concerned that the foreseen measures will not be nearly sufficient to reach the goal.
China Is More Difficult to Assess
Next to the EU, which set itself the ambitious objective of reducing greenhouse gas emissions by 40 percent by 2030 compared to the level in 1990, stand other countries with less ambitious objectives. These include the US, which intends to reduce its CO2 emissions by only around 26 percent by 2025 compared to 2005.
China is more difficult to assess. At present, it is the biggest investor in alternative forms of energy, but it is also responsible for around one-quarter of global greenhouse gas emissions. China aims for its CO2 emissions to peak by 2030 at the latest and then decrease.
Until that time, it expects industry to operate much more effectively, so that for the same level of production, 65 percent less CO2 will be produced. Further to this, the share of renewable energy is expected to rise by around 20 percent by that time.
What About the Finance Sector?
Under China’s presidency, the G20 has this year been focusing on the issue of a sustainable financial system, and founded the Green Finance Study Group. This group recently published the Green Banking Policy report.
In the report, its authors examine the measures adopted to date by the G20 countries to promote a more environmentally friendly economy. Among other things, the authors found that the financial institutions in most G20 countries do not have to include environmental risks in the calculation of their capital requirements.
Important Findings
It seems that state actors are of the opinion that under Basel III, the financial market supervisory authorities have the flexibility they require in order to call on banks to identify relevant sustainability risks. Further to this, under Basel III, the banks are also required to take environmental risks into account in their lending business. To date, however, this has also not been the case.
The findings of the Green Finance Study Group are important. Even more important, however, would be concrete measures from states and financial institutions. This is not yet sufficiently the case. The longer financial market participants wait to take measures, the greater the losses they could suffer in terms of their investments.
Banks Should Capitalize on Sustainable Companies
Namely: if financial institutions are invested in companies that have not yet recognized the sign of the times or brush these aside as a passing trend. Sooner or later, such companies will be confronted with high adjustment costs due to tighter environmental requirements, with secondary costs arising from environmental and reputational damage.
Instead, banks should capitalize on sustainable companies and sectors that contribute to low carbon and climate neutral developments.
Importan Contribution
In their role as important intermediaries between investors, and companies as well as countries seeking capital, banks are already in a position to make an important contribution to achieving the climate goals. And certain countries – for example the EU, but also China – see the financial sector as playing an important role in helping to reach these objectives.
LGT already introduced a systematic process many years ago that provides for enhanced due diligence for corporate but also government bonds. Among other factors, this process takes into account the signing of international agreements such as the Paris Agreement.
Further to this, it assesses the measures adopted by countries for climate protection in terms of their credibility and contribution to the achievement of the objectives that have been set.
