SHARM EL-SHEIKH, Egypt, Nov 8 (Reuters Breakingviews) – GFANZ has lost some of its fans. A year after financial institutions joined forces to lower carbon emissions as part of the Glasgow Financial Alliance for Net Zero, the initiative faces criticism from all sides. Climate campaigners accuse it of not moving fast enough. Meanwhile, governments fret it’s choking off funding for energy amid a crisis triggered by Russia’s invasion of Ukraine.
Despite some teething problems, GFANZ has made a positive contribution. But the initiative is starting to hit the limits of what financial institutions can achieve through voluntary cooperation. At the U.N. climate conference in Egypt, which kicked off this week, the onus will be on governments to help unlock more of the $3.5 trillion a year in investments that may be required to finance the energy transition.
At last year’s summit in Glasgow, finance took centre stage when former Bank of England Governor Mark Carney convened the alliance of banks, investors, insurers and others with an appetising armoury of $130 trillion in combined assets. Despite some setbacks, it has made some positive contributions.
First, GFANZ has brought climate risk into bank and asset managers’ boardrooms and into their day-to-day risk management processes. Among the alliance’s members, by far the biggest growth in new jobs has been in roles focusing on the energy transition and climate metrics. Without this information, financial markets cannot effectively price risks and opportunities related to global warming.
Financial institutions have also started to adopt rigorous goals. It’s easy to forget that at the start of 2021 not a single bank had set a science-based target for reducing emissions by 2030 that included carbon discharged by its clients. Today, 53 banks have issued these objectives; more will follow.
Firms have worked with regulators to enhance their collective understanding of the financial risks from global warming. More than 30 central banks including the U.S. Federal Reserve have started running climate scenarios on their largest lenders. These tests could help reprice the cost of capital for different companies.
Most importantly, money is moving. The largest member of GFANZ, JPMorgan (JPM.N), alone has a $1 trillion target for renewable energy and clean technologies over the decade. According to one leading firm, a third of new venture capital deals have a climate angle.
But voluntary disclosures, sharing best practice and some peer pressure can only go so far. Firms that make voluntary commitments are still subject to the legal and regulatory frameworks where they operate. Chief executives of financial institutions worry that participating in GFANZ opens them up to accusations of anti-competitive behaviour and litigation risk.
Then there’s the question of squaring carbon reduction with honouring money managers’ fiduciary duty to investors. This helps explain the conscious decoupling of GFANZ from the United Nations’ “Race to Zero” campaign. The U.N. group recently announced tougher requirements for accredited organisations, including clearer plans for phasing out fossil fuels, that plans be consistent with global warming of at most 1.5 degrees Celsius above pre-industrial levels, and positive advocacy on climate policy. These measures prompted some GFANZ members to conclude they might need to leave the alliance.
As BlackRock (BLK.N) boss Larry Fink put it, financial firms cannot be the “environmental police”. Global efforts to combat climate change must be rooted in local laws and accountability. The transition to net zero is incredibly complex. Each country will make different trade-offs between energy security, affordability and the environment. It’s for politicians to set the legislative framework and financial institutions to abide by it.
For example, governments can help by providing policy clarity. The U.S. Inflation Reduction Act is a major step forward in this regard. While the bill earmarks $370 billion for clean energy and climate change, Kaya Advisory reckons it provides close to $1 trillion in tax measures and related lending incentives. The 10-year timeframe for credits and support will allow investors and financiers to provide bigger and cheaper loans. As a result, the United States is fast becoming one of the most attractive places to develop some renewable technologies.
Policymakers can also help when it comes to striking the right balance between cutting emissions and strengthening energy security. Taxonomies developed by the European Union are often too binary. Take the EU’s Green Asset Ratio for banks, which attempts to classify each loan as either green or brown. Leaving aside the complexity of the rules, this framing may inadvertently discourage investment in the necessary transition. Rather than just championing green technologies, policymakers should also encourage “khaki finance” that helps turn utilities and heavy industry from grey to green.
With the right policies, public and private capital can flow to emerging markets. Multilateral lenders like the World Bank could magnify the role of the private sector within GFANZ. Development banks provided $66 billion of green-related finance in 2020. This could double or treble by increasing development banks’ capital, by changing their capital frameworks and mandates, or through smarter public-private partnerships.
Like the industrial revolution of the 19th century or the technological revolution at the end of the 20th century, the energy transition will be fuelled by capital markets and banks. Innovation by GFANZ members in financing practices, products and metrics therefore remains key. But first, governments need to set the pace.
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Huw van Steenis was senior adviser to Mark Carney as governor of the Bank of England, and led the Future of Finance report which recommended climate stress tests of banks and insurers.
Editing by Peter Thal Larsen and Oliver Taslic
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