What did banks agree to at COP26? 24 November 2021
The conference finished without the firm commitments that many were hoping for. But there was still progress on a range of issues. What did the financial sector agree to do?
Gil Scott-Heron wrote, or rather sang, “The revolution will be not televised.” If one tweaks that line just a bit, they might arrive at a decent summation of COP26: the solution will be privatized. This is because at a nation-state level, there is a frustrating lack of coordination on how exactly to keep the planet below temperatures that portend a difficult future. Countries – big, small, democratic, despotic – cannot come to conclusive and concrete agreements regarding the phaseout of fossil fuels. Well, they sort of did. They promised to “revisit and strengthen” new plans by next year. Why rush these things?
The dithering by national governments means the urgent task of ushering in a sustainable transition away from fossil fuels has fallen to other actors. Namely, the private sector. Now, there is a long-running debate over the respective roles of the public and private sector in addressing the climate crisis. I won’t dive into that complex debate here. Instead, let’s look at what the financial sector agreed to in Glasgow.
The topline item from the industry is the Glasgow Financial Alliance for Net Zero, or GFANZ. What is GFANZ and what is its objective? Fundamentally, it is about aligning the assets of global financial institutions with zero emissions targets. More than 450 banks, insurers, and asset managers have signed on to the initiative to decarbonize their investments in coming years. In total, it is claimed that up to $130tn of private capital has now committed to hitting net zero emissions targets by 2050.
$130tn is a splashy number to announce. Surely with that amount of money dedicated to a sustainable transition, fossil fuels will be a thing of the past in short order. But if you look under the hood, the top line number is not quite as impressive as it appears at first glance. That figure represents the total assets under management of the banks, insurers, and asset managers that signed the pledge. That money is not immediately being shifted net-zero activities. It merely represents the potential financial firepower of signatories. In fact, only about a third of that huge figure will be devoted to low-carbon investments in the next decade. And we know the next decade is crucial to averting worst-case scenarios.
The murkiness surrounding the pledge didn’t stop leaders from taking a victory lap. As Mark Carney, former Governor of the Bank of England, put it, the pledge means we now have the “essential plumbing in place to move climate change from the fringes to the forefront of finance so that every financial decision takes climate change into account.” But plumbing does not a house make. What the world really needs is a sustainable house, constructed with clean, renewable energy. Perhaps more importantly, financing for fossil fuel projects needs to end.
GFANZ is certainly helping with the first part of that equation. It will further accelerate the flow of money toward sustainable projects. The money is desperately needed as rich nations have yet to meet their pledge from 2009 to send at least $100bn a year in climate finance to poorer countries by 2020. It is 2021 and that target has not been met. Financing green projects – whether they are in developed or developing countries – will not come cheap. But it is essential. If nations continue to drop the ball, that means the finance sector will have to fill the gap.
That brings us back to the problem of countries not being able to agree to definite targets and regulations. Government bodies – from regulatory agencies to parliaments to law enforcement – remain the sole way to actually enforce these commitments. Pledges – or promises, assurances, or guarantees – lack teeth without proper regulatory oversight. That is why so many of these types of pledges go unfulfilled. It is why countries have yet to hit the $100bn pledge they made all the way back in 2009.
To be sure, GFANZ is a step in the right direction. The finance sector is a key lever by which impactful change is being enacted. If governments are going to keep punting on their responsibility, the role of banks and insurers will grow ever more critical. There are also serious conversations around how to monitor and account for progress toward net zero emissions. But one flashy announcement with the word trillion won’t suffice. Swiftness of action and accountability will be key to ensuring the lever is pulled for maximum effect. Governments may not be moving at the necessary pace, but the financial sector can, and must, use its unique position to move the needle.
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