Sustainable Finance News from the Grantham Research Institute, LSE – December 2019

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December 2019

In this final update for 2019 we outline how the finance sector can ramp up its focus on climate action. We have details of new reports on central bank action on climate change and integrating the health of our oceans into climate finance systems. Finally, we have a new assessment on how well the world’s top automotive, aviation and shipping companies are aligned with the Paris Agreement.

Climate ambition depends on finance and finance follows ambition

By Patrick Curran, policy analyst, Nicholas Stern, chair, and Nick Robins, professor in practice – sustainable finance, Grantham Research Institute on Climate Change the Environment.

In raising ambition and accelerating action on climate change, there is one sector that can have an outsized impact on changing the trajectory: the finance sector. In this post for the Sustainable Finance Leadership Series, the authors set out why and how the finance sector should be encouraged to ramp up its focus on climate action.

The recently completed UN climate summit, COP25, has highlighted some of the tensions in acting on climate change and the challenges to raising ambition. While there was some positive progress at the COP, such as announcements from the Coalition on Finance Ministers, overall the frictions between countries continue and reaching consensus on technical issues remains elusive.

However, this does not mean there is no action happening. A recognition of the growth opportunities associated with action, realisation of the risks of breaching 1.5oC in global temperature rise, and pressure from young people are combining to drive action in some areas. The recently announced Green New Deal in the European Union is one example; others include the United Kingdom’s commitment to net-zero greenhouse gas emissions by 2050, and initiatives at the state and city level in the United States.

Yet annual global emissions of greenhouse gases continue to rise, albeit at a slower rate than in the past. Today the world’s emissions trajectory puts it on course for a temperature rise of 3oC by the end of the century. Currently we are on the wrong path.

Clearly there is an urgent need for more action from more countries, and for a raising of ambition to tackle the challenge. In 2020 both will have to be demonstrated. The COP26 summit, to be hosted by the UK in Glasgow, will be the principal forum for demonstrating ambition and communicating what has happened.

The role of the finance sector in leading action and raising ambition

In raising ambition and accelerating action, there is one sector that can have an outsized impact on changing the trajectory, and that is the finance sector. The finance sector interacts with all others: its activities and actions are dictated by a combination of governments, regulators and private actors.

The importance of the finance sector is articulated in the third goal of the Paris Agreement, Article 2.1(c) (PDF): “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

Realising Paris’s climate change goals requires strong, sustained action over the next decade with a focus on the long term. This requires investments now in long-lived assets (infrastructure) that avoid greenhouse gas emissions and are resilient to the physical impacts at 1oC of warming or more. It requires adapting business models and packages to support different approaches and activities. And it requires innovation and the deployment of new technologies. All of these require finance.

However, in recent decades the finance sector has become a dominant sector in and of itself. This is often referred to as ‘financialisation’ and is measured by a strong increase in credit as a portion of GDP. This process has diverted the sector from its ‘notional’ role of intermediation between savers and investors in the real economy, or its role in risk management for insurance, pensions and so on.

Instead, the actions of many of those in the sector have fostered asset bubbles and emboldened a focus on short-termism driven by profit maximisation. Short-termism in turn has placed pressure on investors or corporations to act without due consideration for the impacts of their operations on the environment or wider society.

When taken together, the dynamics within the financial system have resulted in an unwillingness for the private sector to take risks through innovation or investment that may have longer-term pay-offs. Short-termism has slowed vital action on climate change.

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Building a sustainable financial system: the state of practice and future priorities

This paper charts the rise of central bank and supervisor action on climate change and wider sustainability issues, analyses the key features of the ‘new normal’ and highlights priority themes for policy and research in the years ahead. Published by Banco De España as part of Issue 37 of its Financial Stability Review.

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From “green” to “blue finance”: Integrating the ocean into the global climate finance architecture

This special collaboration between LSE’s Institute of Global Affairs and the Grantham Research Institute on Climate Change and the Environment contains contributions from academics, researchers and organisations addressing the strongly interlinked climate threat and the health of the ocean. It features contributions from Grantham’s Head of Adaptation Research Dr Swenja Surminski on nature-based flood resilience and on decarbonisation risks in shipping, and from Professor Declan Conway on making decisions under climate uncertainty in Central and Southern Africa.

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Financing climate change and sustainable growth

Presentation given by Nicholas Stern at the One Planet Event with the Green Climate Fund, outlining how well designed sustainable  infrastructure can be pro-growth, pro-poor and pro-climate.

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One in three major transport firms now align with Paris pledges, but sector must rev up climate ambition to match 2020 fast track

New analysis by the Transition Pathway Initiative (TPI) of the automotive, aviation and shipping sectors shows that 35% of transport companies have emission reduction plans consistent with the national pledges made in Paris in 2015.

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