Can the titans of finance really become climate warriors?

With hindsight, COP26 will likely be seen as another tipping point in climate action: not because of all its ambitious pledges – important though they are – but because of sparking what is known in chemistry as phase transition.

Common examples are when water turns to ice or graphite to diamond at high pressure. The particles are the same, but their end states are different.

So it may prove with Mark Carney’s conviction that “we must build a financial system entirely focused on net zero”. He has raised our expectations of what the Glasgow Financial Alliance for Net Zero (GFANZ) can achieve.

Sceptics see his vision as pious hot air. After all, banks have facilitated almost $4 trillion of fossil-fuel financing since the 2015 Paris Agreement. But there is a new behavioural dynamic at work now.

These titans of finance have picked up the mantle of the climate warriors by promising to boldly go where they have not been before. From here on, they will be judged not by what they say, but by what they do and what they deliver. Climate activists are demanding rigorous KPIs.

Or, in the words of Dr Akinwumi Adesina, President of the African Development Bank, at COP26: “We want to know if promises made will be promises kept”. The reputational risk for GFANZ is enormous. Their actions will come under intense scrutiny from their employees, their customers, mass media and wider society. Corporate behaviours change under the public glare, as shown by how Volkswagen reinvented itself following the emissions-cheating scandal in 2014.

GFANZ is expected to intensify pressure on governments to underpin their net zero pledges with clear and credible policies in five key areas: carbon pricing, the phasing out of coal, aid for developing countries, alternative energy and mandatory carbon-related financial disclosure.

This is something they have, thus far, been slow to do, as shown in a new joint report from KPMG, CAIA Association and CREATE-Research, released ahead of COP26 and titled Can capital markets help save the planet?

Thus far, a green investment portfolio has not equated to a green planet. This is because capital markets can’t easily detect the risks and opportunities associated with climate change until they are clear on how public policy will create hard incentives as well as punitive sanctions.

The report concludes that meaningful climate action demands that the invisible hand of capital markets needs to be matched by the visible boot of national governments.

GFANZ could be the catalyst.

A summary of our report appears in this piece by John Authers, Senior Editor for Markets at Bloomberg.

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