How the Finance Sector Can Fight Climate Change
Could climate change spending and innovation be the greatest economic opportunity of our times? Funding of climate change mitigation and adaptation activities can, according to one estimate, boost the global economy by over $20 trillion USD and result in over 60 million new jobs. Money is needed to fund renewable energy, energy efficiency, green cities, electric vehicles, public transit, net-zero energy buildings and building retrofits, sustainable agriculture, zero-waste projects, etc.
Preventing catastrophic climate change, where human life as we know it is threatened, requires trillions of dollars of investments annually. Funding for this amount more than exists but more funds need to be redirected towards sustainable climate-friendly activities. Unfortunately, a recent 2018 estimate from the Climate Policy Initiative global think tank says that the world is annually spending less than one-tenth of what is needed. More public and private finance sector practices are needed to fight climate change.
Public Sector – Finance Policies
Governments must take action in several ways. Governments must verify that all public spending occurs in ways that align with mitigating and/or adapting to climate change. Fossil fuel subsidies must be eliminated and climate-friendly procurement and tax policies must be put into effect. A sufficient price on climate emissions applicable across all sectors of the economy is necessary. According to one account limiting warming to 2°C or less (essential to avoid catastrophic climate change) requires working towards a tax of $75 USD per tonne of carbon dioxide by 2030 (or a corresponding strong cap and trade policy). This does not necessarily have to damage the economy. Consider the case of Sweden which has the highest carbon tax rates in the world. Its carbon tax, which is currently about $130 USD per tonne, has resulted in a reduction of emissions by 25% since 1995 with its economy expanding by 75% since that time. Canada’s tax on carbon dioxide is planned to hit $50 per tonne by 2022 with decisions about additional increases uncertain at present.
Banks
Banks, with their significant global assets, are powerful actors and must play a strong role in fighting climate change. They can do this – and some are – by supporting climate-friendly loans such as for renewable energy and opposing climate emission industries such as coal mines and coal power plants. They can also link executive compensation to performance on climate goals, achieve carbon neutrality for their operations, and work with the public sector to encourage climate-friendly investments.
By 2019 over one-third of the global banking industry (worth $47 trillion USD) has committed to moving away from loans contributing to climate change as a result of a UN-backed responsible banking initiative.
Canadian banks are also pressing for climate-friendly policies. TD Bank has committed to fund over $100 billion CDN “in low-carbon lending, financing, asset management and other programs by 2030”. Also, TD Bank became the first bank in North America to go carbon neutral for its operations. Other major Canadian banks have also made similar commitments.
Capital Markets
Capital markets are mighty when it comes to securing funds with the power to direct tens of trillions of dollars into sustainable development practices. This is significantly more than what government assistance offers today. Examples of capital markets include the stock market and the bond market. Consider the case of the global bond market which is about $100 trillion USD but has less than 1% (or $1 trillion USD) invested in green bonds (money which is used for environmentally friendly projects including fighting climate change) as of 2019.
Capital markets have tended to allocate capital to unsustainable causes for 2 reasons. First is the lack of environmental costs noted in profit and loss statements due to governments not requiring businesses to pay (eg. the lack of a carbon tax). Second is the long term nature of sustainable actions resulting in investors likely waiting before supporting sustainable companies and thus taking their investments elsewhere.
An example of a push for sustainable markets is the South African Pension Act which requires that investors who manage pension funds consider environmental factors to ensure long term profitability.
Canada – The Present and Future
In 2016 Canada’s premiers agreed to the Pan Canadian Framework for Clean Growth and Climate Change (PFC) which included a tax on carbon and investments to encourage low-carbon activities in different sectors of the economy. To create the right finance structures in fighting climate change the government created Canada’s Expert Panel on Sustainable Finance in the spring of 2018 and its report was released in 2019. Recommendations included public sector investment strategies to meet 2030 and 2050 climate change goals, opening up climate change investment opportunities for Canadians with tax deductions, and requirements for companies to perform climate-related reporting (in financial filings or annual reports).
Conclusion
You as an individual can take action on your own to fund the fight against climate change. This might mean buying products that have a reduced toll on the climate. You can vote for politicians who look through a climate change lens when making investment and regulatory decisions. If you invest you can consider aligning your investments towards stocks and bonds that emphasize climate-friendly policies. Individual actions by those who can finance the transition to a low carbon world can help significantly to avoid catastrophic climate change. What will your actions show?
