1 April 2021

Finance has an important role to play in tackling the climate crisis. As Scotland gears up to host the UN Climate Change Conference of the Parties (COP26), in November, the need for both governments and the financial sector to make good on their promises has never been greater, writes Dr Ian Cochran.
Ashes left after a forest fire

In the run up to COP26, the pressure is building on the financial sector.

The UK COP26 presidency has set its sights high in terms of leveraging Private Finance for climate goals: "The objective for the private finance work for COP26 is simple: ensure that every professional financial decision takes climate change into account."

The issue of 'Paris Alignment' — or seeking to ensure that all financial tractions are at minimum consistent with, and ideally contribute to, climate goals — will be a major focus between now and November.

This month the non-governmental organisation (NGO) community have called global banks out for providing what at their estimates totals $750 billion in financing to coal, oil, and gas companies last year, despite many having pledged to back the Paris Agreement which seeks to limit global heating.

NGOs put forward that despite the numerous public announcements, it appears that the world’s 60 largest banks have provided $3.8 trillion to fossil fuel companies since 2016, when the Paris Agreement came into effect.

While some financial institutions may challenge the accuracy of these numbers — what is increasingly accepted by all is that finance — and the role the financial sector will play: is key if we are to succeed in reducing greenhouse gas emissions and increasing resilience.

The COP26 summit in Glasgow will be crucial to demonstrate progress on moving from commitments, to actions on mainstreaming climate change into the financial system, and within financial institutions themselves. So, who needs to be doing what to get this done?

Firstly, we need to get the policy and regulatory incentives right. Public authorities have a role in providing economic incentives to increase the competitiveness of low-carbon projects. Governments need to create a clear and stable policy environment that supports the economic viability and returns of low-carbon projects.

At Glasgow, countries will need to have submitted the ambitious national climate strategies (NDCs) that will ensure that pipelines of financially sound low-carbon projects and drive the creation of new low-carbon, resilient markets.

Secondly, central bank and financial regulators have a role in making sure the assessment of the risk that climate change poses to both the financial system and to financial portfolios is fully taken into account. This can ensure that financial actors have the risks and opportunities in focus.

At Glasgow, they can show progress on mandating the changes in reporting and disclosures that will help investors identify opportunities and align their portfolios with the journey toward net-zero.

Thirdly, for financial institutions themselves it can not just be warm words. Actions matter. Many financial institutions are actively engaged on climate change — such as through communities built around sharing practice such as Climate Action in Financial Institutions Initiative (full disclosure: I run the Secretariat of this).

Between now and November, on top of commitments — financial institutions should start training analysts on climate risks and opportunities and hiring those with the knowledge and skills to move from theory to practice. This kind of training is essential, and the Business School is pioneering new approaches in this area: even if as part of our MSc Climate Change Finance and Investment or executive education for market professionals such as our Climate Change Risk in Finance programme.

View Climate Change Risk in Finance Programme

Finally, what we as individuals do also matters. We have a role to engage with institutions and companies to influence their integration of climate change, and drive the demand for low-carbon services. Through the Centre for Business, Climate Change and Sustainability (B-CCAS) we have already started this discussion.

In the run up to the COP26, B-CCAS will be continuing our successful COP26 webcast series, and will be leading the Global Academic Hub of Climate Finance and Solutions to give a voice particularly to those from developing countries on climate change, investment, and finance issues.

Of course, we are still struggling to emerge from the pandemic so there are competing demands on businesses and governments; but the opportunity to "build back better" is crystal clear. Investments in low-carbon and climate-resilient infrastructure, reskilling, retraining, and research are all win-win for jobs and the climate.

Clean energy, upgrading the insulation, and heating of our homes so they are fit for the future, and making it easy for people to walk, cycle, and work remotely, are all popular policy options. Committing to fund them and finding the finance needed to transform our economies — is the real test.

Dr Ian Cochran is the Programme Director of the MSc in Climate Change Finance and Investment at the University of Edinburgh Business School.

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