According to the press release from GFANZ, Amount of finance committed to achieving 1.5°C now at scale needed to deliver the transition | Glasgow Financial Alliance for Net Zero (gfanzero.com) this is above the c$100tn (c$3tn/y) required for financing an orderly transition to net zero.
Nevertheless, while the announcement is ambitious – there is still a very wide gap between climate related investments – estimated at around $600bn per annum according to the Climate Policy Initiative for 2019/2020 and what is required, in the trillions of dollars per annum.
Stimulating these investments will require concrete action from policymakers, setting a price on carbon globally for example required at above $100 in 2030, compared to an implied global average of $3 currently. Current policies cover a mere 20% of global CO2 emissions – ramping up coverage, especially with a global framework is an area of focus during COP26. Beyond policy, which is the central piece, more accountability is required in the financial sector.
Starting with transparency. Although the wide adoption of TCFD in developed markets (Europe in particular) is positive as it provides consistency and depth of climate reporting, more should be done. More granularity on green/brown exposures is still lacking (see the EBA’s green asset ratio analysis) – and developing not only green but brown taxonomies would go a long way to provide better insight into banks’ current exposures. This does not provide any forward-looking information but will be required in time to see if management teams are walking the walk.
Then comes the most important point – the gap between pledges and action. The GFANZ and associated plethora of net zero commitments sends a powerful message, but useless without credible pathways to reach those. A growing number of issuers are coming with interim targets, clear pathways to reach net zero based on science-based targets – for example La Banque Postale with a 2040 net zero pathway recognized by the SBTi. One of the many pieces of the puzzle missing is closely linking exec/board remuneration to interim targets with a time horizon commensurate with the average CEO’s tenure. This should not only be 10% of variable linked to weakly worded sustainability targets but rather aggressive reductions in variable comp in case (1) a clear and credible strategy is not established and (2) a material deviation from the pathway occurs. Creating a real incentive for change. From a regulatory/policy perspective, more stringency is required to make net zero strategies more comparable is also required.
Ultimately, financial institutions have a major role to play in supporting the transition – by directing the flow of the capital. We’re moving in the right direction, but much more is needed. Bridging the gap between pledges and action still requires efforts from policymakers, regulators, and financial institutions themselves. As investors, we need to provide capital to issuers who will play their part – not only because this is needed to successfully transition to net zero, but also because those not stepping up will be left behind, with severe financial consequences.
