Climate issues are moving to the very forefront of financial thinking
08 Mar 2016
In December, the international climate negotiations in Paris agreed to work towards “holding the increase in the global average temperature to well below 2°C above pre-industrial levels, and pursuing to limit the temperature increase to 1.5°C”. For most observers, who for a long time had assumed that a target as low and challenging as 1.5°C was off the table, this high ambition goal was an unexpected, albeit welcome, surprise.
Now that the dust has fully settled on the agreement, the thinking required about how to achieve the laudable but ambitious goals of the Paris Agreement must begin. While focus has thus far been on the necessary reductions in 2030 emissions from national governments, non-national actors such as cities and corporations will be expected to play an important role in financing the zero carbon infrastructure required to meet these global commitments. As the Paris Agreement itself notes, achieving its goals will require “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”, a challenge to the entire financial community.
The implications of limiting warming to under 1.5°C either at any point over the century or in 2100 for the whole economy are profound. Net carbon dioxide emissions must be reduced to net-zero by the time human-induced warming reaches 1.5°C. As human-induced warming is currently approaching 1°C above pre-industrial levels, globally averaged emissions must fall by 20% for every 0.1°C of further warming on average in order to stabilize temperatures at 1.5°C. This is double the rate of reduction per 0.1°C that would be required to stabilize at 2°C. Achieving this will require all the tools in our arsenal: large-scale renewable energy deployment, energy efficiency, carbon capture and storage and even negative emissions technologies that draw down carbon directly out of the atmosphere. Getting our emissions to zero in time will require big changes and over a tight timeframe.
As part of beginning this process, we recently hosted an event in Oxford to discuss the implications of the Paris Agreement for the financial system. Stimulating conversation between academia and the financial world will be essential to understand exactly what is required to mobilize the financial flows needed to create a 1.5°C economy in time. From discussions at the meeting it was clear that the entire financial world is swiftly tuning in to scale of the shift required. An emerging challenge for investors thinking about climate-related risk is how to distinguish between the many different environmental metrics that already exist in the financial world, and to find credible and useful information that can accurately measure climate-induced transition risks and can be integrated into everyday investment practices. At the Oxford Martin Net Zero Carbon Investment Initiative we believe that future-focused criteria about a company's business plan to reach net-zero emissions will form an essential part of this transition plan.
Engaging with the financial community makes several parts of the puzzle about how to finance the required transition clear. True sustainability, and thinking about a transition to net-zero, needs to be embedded right across the entire company and corporate world. Companies and investors need to be bold and try to move focus away from a fixation solely on quarterly reporting to allow some space for long-term planning to be incorporated in decision-making. Risks of corporate green-wash need to be reduced by giving clear, direct and simple metrics for companies to report on and engage with.
Across the financial world, the idea that is acceptable to not take a position on climate is quickly diminishing. Initiatives such as the industry-led Task Force on Climate-Related Financial Disclosures, pioneered by Mark Carney and the Financial Stability Board, are steadily moving climate issues from a niche side-issue to the very forefront of financial thinking. We can hope that the Paris agreement marks the end of the age of box ticking and green-washing over climate change, and the beginning of active financial management focused on reducing climate risks and actively contributing solutions to the net-zero emissions challenge facing the world.