Speakers of the session
Vice President, European Investment Bank (EIB)
Directeur du Service du Financement de l’Economie, Ministry of Economy and Finance, France
Deputy Head of the Prudential Regulatory Authority and Executive Director, Bank of England
Vice Chair, Allianz Global Investors Europe
Managing Director, Climate Finance, Bank of America Merrill Lynch
Global Head of Capital Financing, Global Banking and Markets, HSBC
President and Chief Operating Officer, Moody’s Investors Service
Deputy Global Head of Institutional & Sovereign Clients, Amundi
Erik van Houwelingen
Board Member, ABP
Objectives of the sessionThe panellists will be asked to clarify the diverse types of challenges posed by climate change to the financial sphere and the subsequent roles for the public and private sectors to address them appropriately.
The session will also try to assess the sense of urgency that addressing the challenges related to the topic requires, and the impact that the recent Treaty of Paris had on clarifying the issues, related stakes and the roles for public and
Points of discussion
What are the issues faced by the financial sector that result from climate change?
- What are the different categories of risk faced by financial institutions/markets, which result from climate change e.g. credit risk of sovereigns, corporate, retail etc., financial assets impacted by climate catastrophes or stranded assets, technology/regulatory risks related to green energy, etc.?
- What have been the actions of the financial sector vis-à-vis these risks?
- What should be the respective roles of public and private financial institutions to further mitigate these risks? What regulatory agenda might be needed?
What could be the optimal contribution of the financial sector to the climate change agenda?
- What has already been initiated by the financial sector (e.g. rebalancing of asset portfolios, definition of sound practices, green bonds, insurance industry mitigating climate change risk, etc.)?
- Are there some market failures e.g. continuing underwriting of climate-related risk, carbon-intensive assets still supported, people/businesses unable to mitigate climate change risk, etc.
- What are the expected consequences of the Treaty of Paris? What market initiatives are required to foster the funding of a low carbon economy? How big is the need for financing and where?
- What would be the respective roles of public and private financial institutions to further accompany the evolutions required by the +1,5-2° target? Is a regulatory agenda required to provide appropriate incentives? How to link green and infrastructure agendas?
Background of the sessionThe international agreement reached in Paris at the meeting of the COP21 has fixed the goal and the strategy of the international community to combat climate change and to limit the increase of temperature to “well below 2 degrees and to pursue efforts to limit it to 1,5 degrees”.
For the financial sector, climate change and the Paris Treaty involve two important challenges:
- - To take into account the new risks linked to climate change
- To participate fully in the transition to a low carbon economy as agreed in Paris, which implies notably a strong and rapid development of “green finance”.
Investors and lenders are more and more aware of climate change risks.
First there are risks linked to natural disasters and extreme climatic events, which have already increased in recent years. Insurers and re-insurers are very much aware of these risks and were able at least to cover a large part of the damages or losses sustained by households, businesses and local communities. But, in the near future, these events could have greater negative economic consequences and a broader impact on many elements including sovereigns.
There are also risks for portfolio investment or for loans to companies that will be hit by the new international agenda: coal or oil for instance. More broadly, climate change and changes in policy and technology could trigger a reassessment of the value of a wide range of assets.
The new worldwide strategy implies a challenging transition towards a low carbon economy, which has an important financial component. Huge long-term investments are needed in renewable energies, transport and energy infrastructures, buildings and industrial processes.
In the European Union, the amount of investments needed is estimated at around 270B€ each year, i.e. 1,5% of GDP. Given the constraints on public finance, the largest part of these investments will have to be financed by the private sector. But the public sector can help for instance through public guarantees and fiscal incentives. The Juncker Plan will devote at least 30% of its commitments to the “green sector” and the public development banks, like EIB, CDC etc. have decided to increase their loans and investments in this area.
The financial sector has started to re-orient its portfolios and credits by reducing the exposure to fossil energy (coal, oil) and further financing renewable energy sources and energy-saving projects.
New financial products have been created with some success, like the Green Bonds, with an amount of 38B€ in 2015. Green Bonds are issued by a firm, a public authority or an international organisation to finance projects or activities, which generate a direct benefit for the environment. Green Bond Principles have been published by a group of issuers, investors and intermediaries, for whom ICMA serves as a secretariat and specific organisms (like ESR agencies) verify that these principles are respected. Rating agencies have also started to analyse the effects of environmental risks and their impact on creditworthiness.
These recent efforts have to be increased, which requires many issues to be examined by market participants and public authorities.
- They should help to clarify the economic framework, in particular through the pricing of CO2;
- Regulation and supervision could also support the re-orientation of the financial sector without overburdening it;
- “Green transparency” is certainly a priority for the support of the transition, and it is beneficial that the G20 has started to work in this area; a recent French law has asked institutional investors to publish specific “green information” (including the carbon footprint linked to their assets) in their annual report.
In his speech of September 2015 on climate change and financial stability, Governor Carney stated that “a “market” in the transition to a 2-degree world, can be built”. This is a challenging goal, which requires a close cooperation between the private and the public sector.