As we approach the height of summer, it seems that extreme weather events are again having a damaging and disruptive effect across the world.
Europe is currently in the midst of a record-breaking heatwave, with France even going so far as to postpone national school exams last week until temperatures cooled. Meanwhile, Germany is on the watch out for yet more forest fires – having witnessed over 1,700 in 2018, more than four times as many as the previous year. Closer to home, hundreds of families were recently displaced from their homes in Lincolnshire because of flooding.
Alongside Brexit and the Conservative leadership battle, climate change has clearly been top of the news agenda in 2019. There is, of course, nothing more quintessentially British than talking about the weather but this movement has also been energised globally by a remarkable young Swedish lady, Greta Thunberg. She was right to call for urgent action when speaking eloquently about the climate emergency in the House of Commons earlier this year.
It would be wrong, however, to ignore the big strides that have already been made both domestically and internationally. For the first time since the Industrial Revolution, the UK is generating a larger proportion of power through zero-carbon energy sources than fossil fuels. This demonstrates how the market and public policy can work hand-in-hand to encourage a smooth shift to cleaner energy sources. The rapid rise of renewables and a dramatically reduced reliance on coal are welcome steps on our journey to cutting greenhouse gas emissions.
The UK has also taken the significant step of becoming the first major economy to demonstrate leadership in tackling the climate emergency by committing to become net-zero carbon by 2050, building on the Paris agreement, and on the Climate Change Act 2008, also a global ground breaker.
Considerable investment will be required to catalyse this transition of the global economy away from fossil fuels. The financial sector must be a key part of any viable solution, with London uniquely positioned as a global centre for green investment and expertise to support the huge reallocation of capital needed.
The Global Commission on the Economy and Climate Change estimates around $93 trillion of global infrastructure investment will need to be green by 2030 in order to meet climate change commitments. This is a daunting social challenge, but it is also a commercial opportunity. The green bond market, for example, has doubled every year since 2012 to reach over $500 billion outstanding today.
The new Green Finance Institute, which is being launched today [Tuesday 2nd July] at a summit attended by 1,000 green leaders at Guildhall, will play a crucial role in bringing together the public and private sectors to accelerate the domestic and global shift to a zero-carbon, climate-resilient economy. The Institute – funded by HM Treasury, the Department for Business, Energy and Industrial Strategy and the City of London Corporation – forms a key plank of the Government’s green finance strategy that is also set to be unveiled by the Economic Secretary to the Treasury at this event.
The City is already at the forefront of this challenge given how closely climate risk and financial risk are linked. Insurers, for example, have been bearing a rising tide of losses from a wide range of extreme weather events in recent years.
In the medium-term, climate change will also affect the share prices of firms and indeed the viability of some sectors unless appropriate corporate strategies are adopted now. The market needs to look beyond the next quarter towards the potential negative outcomes on the horizon.
This issue has been recognised by the Bank of England, with Mark Carney setting out plans to start stress testing financial institutions for their resilience to climate change at the Mansion House last month. The Task Force on Climate-related Financial Disclosures has also put forward recommendations to improve climate risk assessments, which will enable firms and investors to take informed decisions and price risk appropriately. Greater transparency and common standards will be essential to the development of effective market-based solutions.
It is undeniable that the financial sector is waking up to climate risk and rising to the opportunities and challenges that it brings. The UK is at the vanguard of this transition to a more sustainable economy but climate change is a global problem that requires global as well as local solutions. As a world leading financial centre, the City has a responsibility to drive this shift to net-zero carbon emissions by showing leadership when it comes to governance, risk management and investment.
The health of our planet and the health of our financial system is inextricably intertwined. Finance has the power not only to change our economy, but also the way we live – and the time to act is now.
Sir Roger Gifford is Chair of the Green Finance Institute and Senior Banker at SEB