A change in climate
The City is starting to take the risks of global warming seriously
IT IS about time the City took climate change risks seriously. The earth is hurtling towards an unlivable temperature rise of between three and four degrees centigrade, with the effects of global warming already being felt through the deadly heatwaves, storms, droughts and wildfires happening with increasing frequency around the world.
That was the message from the Bank of England yesterday, when it warned financiers that a “too little, too late” scenario could lead to the most “severe financial risks crystallising” across the banking and insurance sectors. The window for firms to reduce financial risks from climate change is now “finite and closing”, it said.
Threadneedle Street’s call for change comes days after the UN’s climate change report warned that “we only have the slimmest of opportunities remaining to avoid unthinkable damage” after finding that global warming impacts have hit sooner and harder than predicted. City giants including Aviva Investors and Legal & General have since called on the Government to legislate even tougher goals.
“We are engaging with the largest banks and insurance companies on how they engage with climate change.
“You do have divergent views, but there’s absolutely been a change of attitude [in recent months],” says Legal & General’s head of sustainability Meryam Omi. “It went from ‘haven’t really thought about it too much’ to a completely different conversation.”
Few companies have absorbed the changes more than the insurers battered by last summer’s deadly storms. The sector racked up billions of pounds in claims after Hurricane Harvey, the most powerful hurricane to hit Texas in half a century, wreaked havoc alongside Hurricanes Maria and Irma, one of the strongest storms ever recorded. Scientists said the scale of the destruction was exacerbated by climate change. As the planet warms, more extreme weather will follow.
“Insurance companies quietly shape modern society, deciding what type of projects can be financed, built and operated,” says Lucie Pinson of the Unfriend Coal campaign. “Insurers, and the financial community, have a huge amount to gain from effectively assessing and acting on climate risk. Payouts after extreme weather events and the risk of stranded assets present a severe risk to business models that fail to conduct a rapid exit from fossil fuels.”
Insurers have pulled more than $20bn (£15.2bn) from coal companies, but have for years also been under pressure to come up with products or investments that could change consumer behaviour. Aviva launched a “pay-as-you-drive” scheme a number of years ago with the goal of slashing CO2 emissions, while Lloyd’s has previously suggested that insurers invest in coral reefs and mangroves to dampen the impact of coastal storms. The idea is that this would reduce the amount insurers pay out in claims.
But more needs to be done. In its warning to the City, the central bank’s Prudential Regulation Authority urged financial institutions to pick a top executive to take responsibility for managing climate change risks and keep the board informed. It also urged companies to run their own climate change scenario testing to review their exposure to extreme weather events or other risks, such as mortgages on homes in flood plains.
The Bank has previously warned against complacency, after its survey last month revealed just one in 10 lenders were managing climate risks for the long term.
While the Bank’s intervention was welcomed by environmental groups, it faced criticism for going soft as none of its demands were mandatory.
Frank van Lerven, economist at the New Economic Foundation and author of a report on finance and climate change, said it did not go far enough. “There is no incentive for banks to do this. It has not come out and said if you don’t face severe consequences. It’s not mandatory so it’s still falling short.”
He added that the Bank needed to “practise what it preaches” by applying climate impact methodology to its own work, including monetary policy and the investments it has made through quantitative easing. Lenders have taken their own action in going green in recent years, under pressure by environmental pressure groups and institutional investors. Emerging markets bank Standard Chartered became the latest in a long line to stop funding new coal power stations last month, following green commitments from HSBC, RBS, ING, Deutsche Bank and Credit Agricole.
Investor group Share Action is one of the organisations piling pressure on lenders, working behind the scenes with large shareholders. Sonia Hierzig of the group says banks are making progress but “in many cases they don’t go far enough”.
The group has criticised HSBC because it has made an exception for financing of coal projects in Indonesia, Bangladesh and Vietnam until 2023 under its commitment. HSBC argues it is balancing its climate commitments with helping to get power to developing areas.
Share Action wants other banks to step up, including Barclays, which had its annual general meeting in May disrupted by climate protesters calling for it to stop “climate violence” before being forcibly removed by event security. Barclays is currently reviewing its support for fossil fuel industries.
Experts argue finance needs to take a lead to tackle the problem, by directing cash into investments in energy, transportation and other sectors that can help achieve climate goals.
Big banks have pledged major sums to fighting climate change. Last year HSBC and JP Morgan pledged $100bn and $200bn respectively to clean financing up to 2025 – although campaigners point out both until recently were among the largest backers of dirty industries.
Private firms have also stepped in where the public sector has fallen short, such as Australian lender Macquarie Bank which snapped up the UK government’s Green Investment Bank for £2.3bn after it was controversially put up for sale last year.
Van Leeren says finance must lead the way. “It’s completely massive,” he says. “Without major changes over the next 10 years we are going to be facing serious climate catastrophe.
“Finance can play a huge role in facilitating a sustainable green transition. But we need to stop tinkering around the edges and come up with the bold, radical, disruptive solutions that are really going to help.”
Police cut protesters from a set of tyres at fracking firm Cuadrilla’s Lancashire site as the Bank issued a climate change warning