How financial services firms are shaping the real economy

International Banker features Anindita Pal on how the financial services industry can play a leading role in the transition to net zero. The article is excerpted below.

The urgency of action needed to combat climate change has been further amplified by recently released reports from IPCC (Sixth Assessment Report on Climate Change) and IEA (Global Energy Review – CO2 emissions in 2021). Against the alarming backdrop of some of the already irreversible impacts from rise in weather and climate extremes, what is notable is that global CO2 emissions rebounded to their highest level in history in 2021, more than reversing the pandemic-induced decline experienced in 2020.

If we are to have any chance of staying on the already narrow pathway of net-zero by 2050, both the public and private sectors will need to act collaboratively and with urgency. The transition will require massive deployment of clean energy technologies, leaps in energy innovation and low-carbon infrastructure, and this will require many trillions of dollars of investment this decade and beyond.

Financial services are uniquely positioned to finance a large proportion of this investment and can, and must, be at the heart of this change. Doing so effectively will require financial services firms to make some important strategic choices.

Become your client’s transition partner

A fundamental priority for financial services firms needs to be their lending and investments related Scope 3 emissions, making customer engagement and supporting decarbonisation efforts of customers a key lever for transition.

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Embrace product innovation with care

Following on from gaining an understanding of the level of portfolio steering they will need to do, banks can seize the opportunity to provide green, sustainable and transition finance products to meet their client’s needs. We have seen significant growth in green and sustainable bonds and sustainability linked loans in recent years. The profitability of these products will undoubtedly vary, as will the risk / return profile of some of the emerging investment opportunities.  Products such as transition bonds are emerging as a new asset class to support carbon-intensive industries.

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Prepare for regulations and frameworks

As standards and disclosure rules develop further, there will need to be greater harmonization of requirements and less fragmentation across jurisdiction. While there continues to be some uncertainty in how regulation might evolve in some regions, firms shouldn’t delay their efforts in adopting available best-practice frameworks.

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Invest in data, processes, policies, and people

Currently, most financial institutions are not at the point where net-zero and climate risk considerations are operationalized in their client-deal making processes, policies and risk appetite. Banks have not been traditionally run with carbon as a constraint for instance. There needs to be a clear shift in this, starting with management creating the right incentives to prioritise green and transition investments, while penalizing brown deals, such as through internal mechanisms to charge for cost of carbon.

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Advocate to accelerate

Boards and executives of financial institutions are increasingly realising that committing to net zero and acting on these commitments is fast becoming fundamental to their growth strategy. We are starting to see a shift away from solely thinking about what they shouldn’t be doing, for example, investing in coal-mining or coal-fired power, and starting to act upon what they should be doing more to accelerate decarbonisation efforts.

You can read the full article here. To find out more about how we can help you on your transition to net zero, please email Anindita Pal.