A paper titled "Private finance and its role in supporting the transition to net zero" was released by Guernsey Green Finance and Baringa Partners to highlight the crucial contribution that the financial services industry can have in enabling a “just transition” to net zero. Since there is no single, agreed definition of a just transition, there are variations in how different nations and regions view it. A true “just transition” focuses on theory, procedure and action. The topic has gained prominence in the energy transition debate in recent years, with the major focus on ensuring that all levels of governance integrate development agendas and the rapid deployment of low-carbon technologies and systemic shifts toward decarbonisation.[i] The new report highlights the possibilities for financial services companies and offers a plan for accelerating the economy's decarbonisation over the next three decades.
It’s undeniable that one of the most important macroeconomic and financial policy issues the world will have to deal with in the coming decades is climate change. Recent increases in the price of food and petrol, as well as the associated dangers of social unrest, highlight how important it is to invest in green energy and build shock resilience. In order to solve the climate issue and shock vulnerabilities, significant global expenditure will be needed. Up to 2050, IMF estimates range from $3 trillion to $6 trillion annually. Just a small portion of what is required is being spent at the moment—roughly $630 billion—and very little of it goes to developing nations.[ii]
Financial services companies that are accountable for over $130 trillion in AUM (Assets Under Management) rushed to join the Race to Zero in the wake of the enthusiasm surrounding COP26 in November 2021. Asset owners, asset managers, insurers, and banks joined together under the GFANZ (Glasgow Financial Alliance for Net Zero) banner, led by Mark Carney, and vowed to align their financial flows with the net zero objective. GFANZ is considered one of COP26's major accomplishments and a turning point where global private finance accepted the net zero challenge.[iii]
Scope 3 emissions represent the majority of the footprint and the biggest challenge for the bulk of financial services companies. Commonly referred to as "funded emissions," this term refers to emissions made possible by a company's lending, investments, or from underwriting portfolios, as well as by individual company-level emissions assessments. Many organisations in the private finance field are using the PCAF (Partnership for Carbon Accounting Financials) standard to measure these emissions in an attempt to turn their zero carbon dreams into reality. Frequently, the major obstacle in computing funded emissions is a lack of data, but according to the PCAF, financial institutions shouldn't let this stop them from beginning their GHG accounting journeys. Identifying carbon-intensive hotspots in lending and investment portfolios can be aided by starting with estimated or proxy data. Data transparency is facilitated by the Standard's guidance on data quality rating for each asset type, which promotes medium- and long-term improvements to data quality. The Standard also includes disclosure suggestions and standards, including a minimum disclosure threshold with room to disclose above it. Any requirements that are not met require an accompanying explanation from the organisation beholden to the standard.[iv]
Source: PCAF
This standard predates GFANZ and COP26, and as such were not affected by the wake of the enthusiasm generated by the pair. Now many are now trying to improve upon it using the insights and improvements that are a result of a more unified effort. In this pursuit, as with most others, moving quickly often means mistakes can be made. The investing market has seen strong growth in sustainable finance products, particularly in ETFs (Exchange Traded Funds) with sustainable or ESG (Environmental, Social, and Governance) branding. However, there is a lot of variance in the measures and guidelines used to create these funds, and many place more emphasis on ESG exclusion criteria than on achieving particular sustainability or ESG goals. Some of them are merely previously existing funds that have been given a sustainable name. Increased regulatory interest and scrutiny over potential "greenwashing" or distortion of sustainability claims linked with such products have resulted from confusion over what ESG products and labels genuinely entail. Regulators have concentrated on the concept of sustainable finance and the development or strengthening of sustainability disclosure standards to combat this.[v] With the shortfall in climate finance indicated by the IMF, every effort must be made to ensure that every penny put into green financing is as climate-friendly as it claims. There are arguments that a focus on a “just transition” can support this.
GGF (Guernsey Green Finance) point out that geopolitical tensions and energy price shocks are currently causing significant social and economic upheaval in the UK and around the world. They say this emphasises the requirement to work toward a “just transition”. According to each organisation’s resources and capacity for change, this entails a measured transition that takes place at a different pace and scale for each group. As a result, important industries and socially marginalised populations are safeguarded, while less developed regions can decarbonise at varying rates to support economic growth and expanding access to energy. In the minds of those that created this report, a “just transition” is what can assist in ensuring the conversion of "brown" activities to "green" ones and preserve otherwise "stranded" value.[vi] In all of the financial services that the report recommends, capability and education are all key facets. At Zero Carbon Academy, our new online courses mean that learning more can start today.
[i] UNDP- Issue Brief: Just Transition
[ii] IMF- Public Sector Must Play Major Role In Catalysing Private Climate Finance
[iv] PCAF- The Global GHG Accounting and Reporting Standard for the Financial Industry
[v] WEF- Why ESG Exchange-Traded Funds might not be as green as you think
[vi] Guernsey Green Finance- Private finance and its role in supporting the transition to net zero
Oscar is a recent graduate with a background in earth science. He is currently studying an MSc focussing on disaster responses, emergency planning and community resilience. His postgraduate research project will assess the link between climate crisis risk perception and attitudes to green energy projects. “Adapting to the climate crisis through the pursuit of net zero requires community engagement and understanding. Zero Carbon Academy’s goals closely align with this approach and I’m excited to have the opportunity to research and communicate a variety of topics relating to our environment and sustainability”.
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