What is next for sustainable finance and banking post Covid-19?
A major focus for me personally, and for the Chartered Banker Institute, in recent years, has been the promotion and mainstreaming of sustainable banking and finance knowledge and skills through our qualifications, CPD materials and through our engagement with our 30,000 members and wide range of partners and stakeholders.
Our global benchmark qualification, the Certificate in Green and Sustainable Finance, has played a big part of this by equipping the global finance profession – not just a small number of sustainable finance specialists - with the knowledge and expertise required to lead their institutions and help their customers and clients apply sustainable finance principles.
At the highest level, sustainable banking and finance address the world’s greatest collective challenges – tackling climate change and ensuring sustainable economic development and social justice.
So, in the light of current health and economic disruption, has the importance, and urgency, of enhancing sustainable banking and finance lessened?
Certainly, in the short-term, in terms of most countries’ immediate priorities, probably yes. In many countries, policy, regulation, central bank activities and so on are now quite rightly focused on the immediate health and economic recovery measures. Until we have a vaccine, or at the very least mass testing, we will still be dealing with health and economic emergencies unprecedented in our lifetimes.
Thus, it may seem as though sustainable finance, and climate and environmental issues in particular, have taken a bit of a back seat. It is true they are perhaps not the immediate priorities. And lockdown and social distancing measures have certainly benefitted the environment in the short-term.
The International Energy Agency estimates we’ll see the largest ever annual fall in global CO2 emissions this year – perhaps 8% lower emissions than in 2019. But to maintain global warming below 2 degrees we’d have to maintain this rate of decline every year. And, of course, as economic activity restarts so will emissions rise.
As we emerge from the crisis, then, sustainable banking and finance will be just as important, if not more so, than before for three reasons.
Firstly, if we think of sustainable finance in a broader sense – sustainable economic, environmental and social objectives, such as those set out in the UN Sustainable Development Goals, – we can see that successful financial responses from governments, central banks, regulators and our sector itself will need to be based on sustainable finance principles. We are facing a very substantial global recession. Climate and green finance are critical, of course, but sustainable banking and finance goes beyond these in framing global and national responses to social and economic alongside environmental issues.
In fact that’s already happening, as I’ve seen in many of the responses to date here in the UK – forbearance for individual and business customers most impacted by Covid-19, and the development of new financing, lending and guarantee schemes for businesses of all shapes and sizes. Plus, and we are certainly seeing this in the UK, a genuine agenda of social purpose being set by many financial institutions.
Secondly, despite seeing car-free cities, cleaner skies and fish returning to rivers, this only gives us a glimpse of what a lower carbon world might look like. We still face a climate emergency – the impacts of which on individuals and communities would far outweigh those of Covid-19.
Limiting global warming requires reducing emissions of carbon dioxide, one of the main greenhouse gases by 45% from 2010 levels by 2030. This seems to be highly unlikely at the current rate of progress. Globally, financial institutions’ portfolios are currently aligned with 3.7 degrees of warming, so there is a very large and sustained transition needed to even get close to the targets set by the Paris Agreement.
Thirdly, the recent collapse in oil prices (with some in negative territory, at least in the short-term) has started to give us an insight into what a low-carbon world might look like, in terms of financial winners and losers – and the impact on the banking sector.
Policymakers and regulators have become increasingly concerned about climate risks, in recent years, especially the risk of stranded assets. We are now beginning to see what the world could look like if there was significant impairment, or stranding of fossil fuel reserves. This must prompt action from financial institutions heavily exposed to high carbon assets and moves toward reducing fossil fuel exposure in portfolios.
So, I would argue, sustainable finance is more important – and mainstreaming sustainable banking and finance is more urgent – than ever. Alongside the very significant commercial and investment opportunities for financial services it provides, there is an even more compelling moral case. Sustainable banking and finance is an opportunity for our banking profession to demonstrate our positive social purpose. We can – and we must – help rebuild lives and communities post Covid-19, and we must also play a leading role in helping individuals, communities, countries and our planet transition to a sustainable, more socially-just, low-carbon world.