The major challenge of our time is converting to a sustainable economy.
Even though the problem of global warming is not by any means a new one (scientists have been warning about it for decades now), it is yet to be resolved.
The enhanced publicity that global warming was finally starting to attract was interrupted by the sudden and devastating arrival of COVID-19 that took the stage and might have derailed the solution even more.
However, the need for a low carbon economy still seems to be inevitable.
So what does that mean for the future of international banking?
Context
At the moment, global warming is exceeding 1°C above the pre-industrial level. The present research shows that the future global temperature could potentially reach 2°C by the year 2050, and 3.2°C by 2100.
Recently, the global warming issue has become the focal point of numerous public discussions, with prominent scientists and political figures shedding some light on the problem.
There is a small window of opportunity for this issue to be handled since without decisive and uncompromising actions, the situation is only going to escalate in the next few decades.
The worrisome fact is that even though the consequences of that impact can be rather considerable, it is still poorly understood. And the main reason for that is the fact that climate action has been, for the longest time, seen primarily as a cost, rather than an opportunity.
But, traditional banks are beginning to realize just how big of an impact climate changes have on the global market.
The knowledge about this particular subject still needs to be substantially improved and banks have to advance their practices in order to catch up.
For that reason, it is of paramount significance that it is understood in what way can banks accelerate the financing of the low carbon economy in the nearest future. By doing so, a plan for climate progressive banks of the future can be developed.
Risks
Climate change-related risks are a potential threat for the financial system (the euro area is particularly vulnerable), especially for markets that are not pricing the risks in a correct way.
There are two main risks that can threaten financial stability:
- physical risks – brought up by serious disasters such as natural hazards
- transition risks – caused by uncertainty that surrounds the transition process to a low carbon economy.
Transition risks tend to be more complex and long-running and certain industries are more susceptible than others.
The most climate-sensitive industries are defined by the aggregate environmental metric (for example, a measure of carbon emission).
Other industries are also sensitive to changes in regulations and the introduction of new technologies.
The major risk of the transition process (especially an unsuccessful one) is the negative effect it could have not just on the sector in question, but also on all the related ones (e.g. agriculture, tourism, etc).
A step towards minimizing transition risks is mandatory reporting on a firm level, which would provide better pricing and monitoring of firms’ exposure to climate-related risks.
The role of the current financial system
There is an urgent need for more global solutions to reduce climate-related risks beyond just carbon emission.
By now, it is known that government measures are not enough to reduce the emission and it is absolutely necessary to bring different businesses into the fold. For an issue of this magnitude, they need to be a part of the solution.
Transitioning to a low carbon economy can be a complex process and the place that the financial system has in it is rather significant.
Banks play a pivotal role in holding money and moving it across the global economy. The way that money is handled and invested today will define the world of tomorrow.
In that sense, the financial sector has the potential to improve the efficiency of the solutions.
It could help with the transition process in two different ways:
- insurance – a high degree of insurance coverage could reduce the negative impact of disasters on the economy
- funding new technologies – it requires more widespread adoption of carbon-efficient technologies and also funding further research for those that are yet to be developed.
Proper involvement of the financial sector could enable new opportunities for carbon-intensive industries to make that transition and develop green technologies and become more energy-efficient.
In other words, collaboration with diverse participants is key. The financial sector needs to do its part and include other businesses, public and private, local and international, incumbent and innovator.
By creating the right and favorable conditions financial sector will further encourage these businesses to invest.
The vision for the future
The plans for the future of banking are still in development and it is difficult to discuss them in clear details since there is no single path or one distinct, precise concept.
So far it is more of a tendency for a sustainable economy, a set of various measures, policies, and projects to strengthen the commitment toward green goals.
However, some things are fairly certain.
The financial industry needs to take advantage of numerous low carbon opportunities in order to make the transition and adapt the client’s business models.
There are three stages in this process:
- banking as usual
- the transition zone
- the zone of institutionalization.
According to the most recent data and reports, banks could potentially transform the economy to a low carbon one by the year 2030.
It is important to keep in mind the pure scale of the project of turning the world’s major cities into clean, sustainable urban systems.
Additional note: Needless to say that the events caused by the COVID-19 epidemic during the past year of 2020, will leave their mark on the global economy.
It is certain that the previously established trajectory has been disrupted, but the full impact of the coronavirus is yet to be determined.
Since the epidemic is not over, it is quite impossible to know the exact magnitude of the consequences it will leave on the future of, not just the low carbon economy, but on the financial sector as a whole.
