Navigating the transition to a net-zero emissions future

Climate change is affecting all sectors in the financial services industry (FSI) and all aspects of an organization’s functions, from its day-to-day operations to its financing activities. FSI executives pondering the multidimensional implications of climate change on their loan books, investments, risk profiles, and business models must understand that it’s ineffective to set long-range, net-zero targets without identifying interim steps for attaining them. An effective course of action must align strategic vision with tactical execution based on reliable data. This paper offers some practical suggestions for getting started.

Unlike agriculture and the energy, resources, and industrials sector (ER&I), the FSI industry contributes very little to global greenhouse gas (GHG) emissions in terms of its physical operations. Many banks, pension funds, private equity investors, and insurers have already become carbon-neutral in their day-to-day operations by improving the energy efficiency of their buildings and data centres, directly investing in renewable energy assets, and procuring renewable energy credits and carbon offsets.

However, decarbonizing the sector’s financing activities is a different story. The FSI sector plays a far-reaching role in funding the global energy transition away from fossil fuels, supplying capital and generating returns for traditional and low-carbon asset classes while meeting the broader needs of all stakeholders, not only investors. This poses both unique challenges and opportunities in the journey to net-zero.

Some common challenges

On a pratical level

FSI organizations are concerned about the escalating risk of defaults in their loan books or poor performance within their investment portfolios. The prospect of stranded assets looms large in investment sectors such as ER&I, where companies could be caught off guard by the velocity of the transition to a low-carbon economy.

Concern for climate risk

Many FSI organizations are also struggling with how to quantify and incorporate climate-specific risk into their investment underwriting, including how to balance this risk with meeting thresholds for internal rates of return and fulfilling their fiduciary duties

Lack of standardized climatic data

To date, there has been little guidance from the governing bodies to help them incorporate climate risk into their investment models and fair valuations. The lack of standardized climate data in certain sectors exacerbates the challenge of pricing climate risk into FSI products and services.

Uncertainties about decarbonization

These challenges are compounded by uncertainty about what it takes to decarbonize, including questions about the cost and feasibility of existing technologies such as wind, solar, and battery storage, as well as the potential value of emerging solutions such as hydrogen and carbon capture and sequestration (CCS).

2050 transformation goal

While there are generally more questions than answers, the impetus to transform is being widely felt. Some FSI companies have responded by setting net-zero emissions targets for 2050 or sooner. The net-zero target is part of a global climate action plan, which also includes establishing dedicated teams to advise and support clients as they work to capture the opportunities of the low-carbon economy.

As early as 1992, the United Nations Environment Program - Finance Initiative (UNEP-FI) was created at the Rio Summit. Within this initiative, several thematic alliances have been developed and, simultaneously, private initiatives led by industry players have emerged. In April 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) was launched with the aim of coordinating these different actors. The role of GFANZ, according to its founders, is to broaden and deepen financial sector’s ambitions by mobilizing all stakeholders to align themselves with a net-zero strategy. GFANZ is part of the Race to Zero, a global campaign supported by the United Nations that brings together a wide variety of actors with the primary goal of halving emissions by 2030. All GFANZ member alliances must be accredited by the UN Race to Zero campaign and commit to the highest standards for achieving net zero emissions, in particular by covering all emission fields, setting individual interim targets for 2030, and committing to transparent reporting and accounting in accordance with the Race to Zero criteria.

Financial services

Navigating the transition to a net-zero emissions future

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