Since leaving the Bank of England’s top post last year, former Gov. Mark Carney has arguably been the most vocal advocate, urging financial institutions to match targets emissions from the Paris Climate Agreement.
But as shareholders escalate pressure and lawmakers call for stricter regulations on climate disclosures, Carney said fossil fuel divestments should not be the sole focus of tackling the global crisis. . Speaking to Yahoo Finance Live, the UN special envoy for climate action and finance, said investing in the green energy transition was as important as moving capital away from larger sources greenhouse gases.
âWe move from risk to opportunity and like I said, align market value with what we want in the company,â said Carney, also vice president of Brookfield Asset Management.
Carney pushed to do so, in part, by creating the Glasgow Financial Alliance for Net Zero (GFANZ) last month, a UN-backed coalition representing 160 banks, asset managers, investors and insurers. The combined group, responsible for more than $ 70 trillion in assets, represents the financial sector‘s largest effort to date to decarbonize loan portfolios and other practices. The initiative, in particular, calls on financial institutions, including Morgan Stanley (MS) and Citigroup (C), to accelerate their transition to a net zero economy, while establishing science-based policies to achieve this goal of by 2050.
Banks will now be forced to dramatically cut lending to fossil fuel projects, but Carney has stopped calling for outright divestment from oil and gas.
âIt’s as much about investing in companies that are part of the solution as it is about divesting. Obviously, if a company does not have a plan, if it does not want to reduce its emissions, it is very risky and it will be deprived of capital. That’s the reality of this transition, âCarney said. âBut it’s very positive and a very big opportunity. I think that’s where most of the institutions are concentrated. Where the world is going, not what it leaves behind.
The magnitude of the effort and the willingness of financial institutions to comply with a largely voluntary initiative will likely determine its success. A recent analysis by the nonprofit CDP, which operates the world’s largest environmental disclosure system, found that the portfolio issues of global financial institutions were 700 times greater than their direct emissions. Almost half of the financial institutions surveyed said they do not do any analysis on how their portfolio affects the climate.
Yet banks have come under pressure to accelerate their low-carbon transmission because shareholders have linked the company’s economic performance and future financial risks to climate risks. Last year, more than 600 investors requested detailed disclosures from 12,000 companies, documenting everything from energy supply and carbon emissions, to water security and deforestation to unsustainable commodities, according to the CDP.
Stricter climate restrictions
Regulators, government leaders and central banks have all joined in these calls. Last week, US President Joe Biden signed an executive order directing US Treasury Secretary Janet Yellen to work with members of the Financial Stability Supervisory Board to develop standards for mandatory disclosures of climate-related financial risks. The Federal Reserve has created a Climate Watch Committee (SCC) to develop a framework for assessing business risk. while the Bank of England has updated its mandate, to prioritize green bonds and phase out larger polluting companies from its share of its corporate bond portfolio.
But U.S. states that rely heavily on coal and natural gas pushed back tougher climate restrictions on banks, highlighting challenges to regular bank lending activity. In a letter to U.S. climate envoy John Kerry, treasurers from 15 states threatened to pull assets from banks that cut lending to fossil fuel companies, saying the Biden administration’s efforts would threaten jobs in their states.
Carney said GFANZ is focused on helping institutions develop a plan to transition away from fossil fuels and reduce portfolio emissions through carbon offsets, ahead of the COP 26 meeting in Glasgow this fall.
“What [financial institutions are] to seek to do is to work with companies to invest so that these companies can reduce their emissions. It can mean renewable energy [because] there is a huge boom and a huge need for renewable energy, âhe said. âAt the end of the day, if the financial sector isn’t driving – or helping to enable these emission reductions, they just won’t happen.
Akiko Fujita is a presenter and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita