Keeping climate on the agenda of the global financial sector

In recent years there has been a significant increase in the level of attention directed towards climate and the global financial sector. In the last of our Climate and… seminar series, Professor Iain Clacher and Professor Jason Lowe shared their thoughts on the emergence of climate as a consideration for the financial sector, and their roles in keeping climate high on the agenda of the global financial system.

From your perspective, what was the main ambition of COP27, and what do you feel was achieved, or not achieved?

Prof Lowe said: “We’ve all heard of the Paris Climate Agreement. That was a real milestone that brought in the need to try to limit warming to well below two degrees relative to pre-industrial levels, and to aim for limiting warming to below 1.5 degrees.

“In recent years, on adaptation the big success was this idea of loss and damage. This essentially is looking at responsibility for climate damage and finding a way of aligning finance to that responsibility. This has been talked about since the Rio Earth Summit in 1992, but this was the first COP where there was real progress, a fund was opened up for this, and it was progress on governance.”

Prof Clacher said: “One of the things which was very big at COP26 was finance, because we actually had a dedicated day for the first time. And with that you had the Glasgow Financial Alliance for Net Zero (GFANZ) announced, which got about $130 trillion of investments committed to transitioning to greening the financial system.

“That’s quite a high-level ambition. But what we’ve seen in between is it starting to fray a little bit, because it’s one thing to say you’re going to green finance but, when you start to understand what that means in terms of tangible action that’s a much harder thing to do.”

“If you look at the loss and damage fund at COP27, it’s an empty bucket. It’s there, it’s got some governance, but what you didn’t see was all the money getting pledged. And if you look at all the adaptation that is necessary, there are really quite meaningful shortfalls in the money that is required. We need the money to flow, and we’ve not got a solution for that yet.”

While recognising the many challenges of the COP process, Prof Lowe also highlighted the positives that came out of COP27, one of which was the UN announcement of putting money into early warning systems: “In the next five years, early warning systems will hopefully cover everybody on the planet. It was interesting that (at COP27) there was a pledge of funding from the V20 group of vulnerable countries and G7 to then work with some of the more vulnerable states to help them plan ahead for extreme weather.

“And I think, when you take it in the round, those positive contributions are really quite helpful. They don’t always come through the formal COP process. It’s interesting that in the early days of COP, everybody really scrutinised the negotiating text, and they still do. But there’s an awful lot of progress that happens alongside the main policy developments.”

You’re both involved with the UK Centre for Greening Finance and Investment at the University of Leeds. Can you explain a little bit about what your roles are within that, and how that links to the current international context?

Prof Clacher: “The UK Centre for Green Finance and Investment is a £10 million National Research Centre funded by NERC led by the Smith School at Oxford, with Bristol, Imperial, Leeds, and Reading and also industry partners from across the financial system. The centre is about the translation of climate science into measures and metrics to be used by financial institutions in making decisions about investments or the mitigation and management of risks.

“It’s important that we emphasise the institutional aspect — we’re not talking about retail finance or payment apps or anything else, but pension funds, insurance companies, asset managers, large global banks, and so on. And this is where the weight of money sits within the system.

“The idea is that we will support the development of these kind of climate risk metrics so we understand what climate risks these institutions are exposed to, and what they can then do about that.

“The other aspect of it is commercialization. We have an innovation hub in Nexus at Leeds, and an innovation hub in the Royal Institution in London, which is led by the Grantham Institute at Imperial College, and what we’re going to do is build public use cases to show what a pension fund needs in terms of climate and environmental risk analytics.”

“By showing what good looks like, what is best practice, in building off transparent data and models, we hope to then accelerate the use of climate science within financial institutions.”

Prof Lowe: “We’ve got a series of flagship projects or case studies that we organise around. So, one of them is focusing very much on insurance, and is looking at the compound hazards of high wind and rainfall. A second one is looking at risk tools combining hazard with exposure and vulnerability for investment decisions. The third one is looking at litigation risks. Fourth one at transition risk. And then the fifth one that Iain is very much leading is around informing pension decisions and investments.

“My particular role is to focus on the climate information, and think about the quality of that information, the sources of that information, and how it might be used in risk frameworks, including thinking very much about high end climate change, which will be very relevant for stress testing.”

One of the things you’ve been looking at is the co-benefits of climate action — can you tell me a bit more about this?

Prof Lowe: “The co-benefits work that’s been led by Lea Berrang Ford at the University of Leeds is a dimension that simply hasn’t featured enough in both of the policy discussions. But I don’t think it features enough in some of the financial work we’re doing as well. And it’s recognising that if you take an action, for instance, to reduce emissions or to adapt, then there’ll be side effects, and some of those will be positive, some will be negative.

“So for instance, many ways of reducing emissions also lead to improvements in air quality. And they might lead to additional improvements in well-being. But I think the one that really joins across to the financial work is thinking about the effect on prosperity — how, if you’re starting to transition to a low carbon economy, does that contribute to green growth? And that’s something that colleagues who are working on integrated assessment modelling are very focused on at the moment, and trying to understand how you how you really get some of these positive co benefits”.

This blog was originally published on the Horizons Institute Medium site. 

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