Global finance must face up to climate challenge

Trillions of dollars need to be redirected into building low-carbon economies to avoid serious climate change, the UN warns.

The world’s financial system must undergo comprehensive change by 2035 if humanity is to make the transition needed to reduce the threat of dangerous climate change, according to a new report by the United Nations Environment Programme (UNEP).

The report, on an inquiry into aligning the financial system with sustainable development, says finance must be focused on moving investments into low-carbon projects.

It quotes World Bank estimates that investments of more than US$90 trillion will be needed over the next 15 years to enable the switch to a low-carbon future that would let the world  stay within the internationally-agreed limit of a 2°C rise in global temperatures on pre-industrial levels by mid-century.

Short-term thinking

The risks of climate change are not properly priced in financial systems, says UNEP. Market and policy failures are exacerbated by short-term thinking and misguided incentive structures, such as the enormous subsidies paid to the fossil fuel industry each year.

Rising carbon emissions cause health problems and affect water supplies and food production, which in turn can cause volatility in financial markets and hit economic growth. In Kenya, says UNEP, climate change is already costing up to 2.4 per cent of gross domestic product (GDP).

Radically altering how the global financial system operates will not only help in the battle against climate change, but is also vital  to ensure sustainable development.

Integrating sustainability criteria that include environment and social factors into the rules that govern the financial system can substantially strengthen the resilience of the world’s financial system.

Achim Steiner, executive director, UNEP

Achim Steiner, UNEP’s executive director, says: “Integrating sustainability criteria that include environment and social factors into the rules that govern the financial system can substantially strengthen the resilience of the world’s financial system, which has been a key goal of governments and regulators since the global financial crises of 2008.

“If brought to scale, the approximately US$300 trillion global financial system could help close the widening gap in sustainable development investment.”

Stronger action is needed to drive the demand for green finance through such measures as giving more incentives to clean energy projects and implementing carbon pricing systems.

At present, UNEP says, the world’s emerging economies are leading the way in transforming their financial and capital markets to reflect the realities of climate change.

In China, annual investment in various green industries and associated infrastructure could reach US$320 billion in the next five years.

In Brazil, integrating environmental risk factors into investment considerations is seen as a way to strengthen the financial system.

Companies and institutions in most developed countries have been slow to recognise the impact that climate change will have on their financial systems.

Climate risks

A notable exception, says UNEP, is the Bank of England, which recently announced a review exploring what risks climate change might pose to the country’s financial system.

Christiana Figueres, the executive secretary of the UN Framework Convention on Climate Change (UNFCCC), says the goal is clear: a peaking of global emissions over the next 10 years, followed by a deep de-carbonisation of the global economy.

“In order to achieve this, and support the aspirations for growth and poverty eradication of developing countries, the globe’s financial systems need to better price pollution and invest in real wealth,” she says. “It is happening, but nowhere near the scale required.”

Figueres believes the UN conference on climate, to be held in Paris in December, “can be a trigger that starts directing the trillions of dollars required away from high-carbon, high-risk investments and infrastructure towards the low-carbon, green economy that is everyone’s future”. 

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