What to watch for in climate finance next year

The green finance industry continued to grow rapidly this year. After circumventing the COVID-19 and have been the center of attention in the COP26, it seems unlikely that the trend will slow down in 2022.

But what can finance, whether public or private, do about it? climate change? To what extent can they drive action, rather than simply reflecting the power structures of the day? The trillions of dollars in assets under some kind of climate-related mandate must have some impact – how, exactly?

Here are the top topics to consider in 2022 that could answer some of those questions:

Beyond the label

The ‘greenwash’ specter loomed even further over the endless range of products and services launched this year targeting climate-conscious customers. However, few companies seem willing or able to solve the problem.

Two former sustainable investment executives, Tariq Fancy of BlackRock Inc. and Desiree Fixler of Deutsche Bank AG’s DWS, became known this year for making allegations that their former employers were failing to do something concrete with well-known environmental, social and corporate governance metrics. as ASG.

Fixler said that DWS did not have a robust way of evaluating companies’ ESG rating to implement in its investments, contrary to what the asset manager publicly stated. His allegations are now being investigated by Germany’s financial regulator. For her part, Fancy said BlackRock markets its sustainability-labeled investment products as a force for good in the world, while internally acknowledging that they don’t make much of a difference.

Changes from within

Fancy’s criticisms are somewhat more philosophical than Fixler’s. They are based on the assumption that doing good is the goal, rather than simply managing the ESG risks of a portfolio. After all, customers tend to expect financial products marketed as “sustainable” or “climate-focused” to actively promote greener business behavior. Concerns about the greenwash rate are higher than concerns about fees.

It is far from clear whether investors can do this on a large scale. Trying to bring about change as shareholders involves painstaking engagement with companies and governments, and even prolonged efforts can fail.

Lagging regulation

A few years ago there was hope that financial authorities could advance climate action where public policy had failed.

The Task Force on Climate-Related Financial Disclosures (TCFD) will be five years old in mid-2022. The initiative, which establishes a framework for reporting emissions, helped spur financial regulators to explore how they should address the climate crisis. (Michael Bloomberg, founder and majority owner of Bloomberg LP, is chairman of TCFD.)

However, many of these policymakers have been stuck in a protracted search for better data and hampered by a narrow interpretation of their mandates. Central banks, for example, still seem to believe that they should only react to current risks, rather than explore precautionary policies to address a clear and accelerating threat to monetary and financial stability.

Some are moving towards a more proactive approach: the European Central Bank is reviewing guarantee frameworks and the Bank of England is considering whether capital requirements should reflect climate risks. It’s progress, but not enough to cut carbon dioxide emissions in half by the end of the decade – the best chance on the planet to avoid catastrophic global warming.

Meanwhile, the same policies and vested interests that have hindered national and international climate action for decades continue to hold back stricter climate regulation.

Where are the green funds going?

Trillions of dollars are needed to finance the global transition to green energy and to cope with more extreme weather conditions. Figuring out how to channel money to the developing countries that need it most is a big part of the decarbonization puzzle.

An important question is how much of this should governments finance and where the private sector should intervene, with the risk that this leaves the choice of winners and losers to the markets. While investors are willing to accept clean energy projects and electric vehicle companies, they are less enthusiastic about measures that don’t fit as well into existing asset classes and financing structures, such as boosting residential energy efficiency or expanding new ones. technologies. Most of the “adaptation” measures, necessary to protect against the effects of climate change, do not have an income stream and are therefore not an obvious attraction for investors.

A global financial system that the poorest countries cannot access cannot withstand the rapid changes necessary to limit warming to 1.5 ° C. To make a real difference, leaders and decision makers will need to adopt disruptive approaches that truly break with the past. Otherwise, we are headed to the beginning of a painful estimation of what can really be achieved with finances.