Can global finance keep 1.5 alive?

Finance officials speak at COP26 (image sourced from The New York Times)

​By Ed Holtom

In the lead up to the 26th Conference of Parties, which took place in November 2021, Queen Elizabeth II was caught on video at an official visit for the opening of the Welsh Senedd expressing frustration at ‘irritating’ world leaders who ‘talk, but won’t do’ on the issue of climate change. The unguarded comment represented an awareness of the stakes of the upcoming talks, which would represent the most serious meeting of countries on climate change since COP21 in Paris in 2015. 
 
When COP26 President Alok Sharma shed a tear as he bought the gavel down on the final proceeding of the conference, it was taken by some pundits as an indication that the talks had failed in their most important and ambitious goal: to ‘keep 1.5 alive’, or, to limit global warming to 1.5°C to avoid irreversible damage to the climate and the environment. 
 
Last minute concessions to India led to a change in the agreement reached from a ‘phasing out’ of coal by 2030 to a ‘phasing down’. In many ways the conference was historic: there were global agreements on deforestation and even cooperation between the United States and China in their joint declaration of intent to do more to combat the climate crisis. However, without an agreement to remove coal from the energy infrastructure globally, it remains to be seen if the most ambitious goal of the 2015 Paris Climate Accord - to reduce global warming to 1.5°C in the next decade (the figure which scientists state is needed if humanity has any hope of the continued destruction of the environment) – can be met. As the Queen feared, there had been a lot of ‘talk’ but still not enough ‘do’. 
 
Speaking at the Global Investment Summit before COP26, Boris Johnson called upon private businesses to help avert climate disaster, stating ‘I can deploy billions – with the approval of the Chancellor obviously – but you, you in this room, you can deploy trillions.' And deploy they appeared to do, with the announcement on Finance Day at the Conference that $130tn of assets from 450 companies - approximately 40% of all assets globally - would be bought in line with the agreements of the 2015 Paris Climate Accord to reduce global warming to 1.5°C.
 
However, though the Blue Zone hogged the spotlight for much of the conference with glistening announcements, political drama, and diplomatic wrangling coming from an intensely guarded SSE Hydro, over in the Innovation Zone business leaders met with key stakeholders to discuss the reworking of the financial ‘plumbing’ that was needed if these commitments were going to amount to material change. 
 
One of the primary barriers businesses face to reaching Net Zero is the lack of a globally agreed upon standard for meaningfully doing so. In other words, businesses may invent their own criteria for what counts as Net Zero and thus declare themselves so. Such an approach is hazardous if the goal is to truly reduce, or eradicate, the negative impacts of businesses on the environment. One of the ways in which the Paris Climate Accord seeks to address this is through Nationally Determined Contributions (NDCs). Through these, each country sets targets for a certain level of green investment depending on how developed their economy is. It is hoped that NDC targets will spur green investment and motivate countries to put serious financial weight between green solutions, in order to motivate the whole-scale restructuring of economies which is needed to meet the ambitions of decarbonisation and a Net Zero world. 
 
So far, progress on NDCs has been frustratingly slow. Their purpose is not widely known or understood. Sarah Gordon, CEO of the Impact Investing Group, speaking about the need for collaboration in addressing this issue, stated, ‘it is about private sector capital having the courage of its convictions. It needs to be simultaneous between banks and private entities. If we don't see that after COP, it will need to be called out.' 
 
Indeed, one of the key methods for ‘calling out’ exists in the framework established by the Task-Force on Climate-Related Finance Disclosures (TCFDs). The framework provides a clear process to help establish the potential climate impact of different businesses for investors. Research by the Climate Disclosure Standards Board found that all fourteen of the countries which had announced requirements for climate disclosure had based their policies on the TCFD. However, a lack of a standardisation of requirements for sustainable financing still means that ‘we have a market that is extremely uneducated’ according to Kentaro Kawamori, Co-Founder and CEO of climate account software start-up Persefoni.
 
It is certainly concerning to hear that although $130tn in assets may be committed to reaching Net Zero, by-and-large few investors, banks, governments, or companies have a clear idea of how to get there or what it even means. However, discussions at the Sustainable Innovation Forum prioritised action and pragmatism in a way that the bureaucracy and politics of the main United Nations conference could not. Kawamori stated, ‘At the end of the day, decarbonisation is not that difficult’. 
 
Thus, despite ongoing policy debates about Net Zero’s meaning, companies and finance players are making the decision to press on regardless. However, not all industry actors are acting with the same urgency, and some are wilfully dragging their feet.  
 
By many metrics, JP Morgan is the largest player in global finance. The conglomerate remains the world’s largest financier of fossil fuel-related enterprise. Speaking at the Sustainable Innovation Forum, the investment bank seemed unperturbed by the flak which it received in the press. Marisa Buchanan, Global Head of Sustainability at JP Morgan, stated, ‘80% of our energy demand is supplied by fossil fuels today. We need new innovations and to bring the cost down for these technologies. Until we have alternatives, we are going to need to continue to rely on fossil fuels.'
 
Buchanan sought to remind the audience that demand for energy is set to increase drastically in the coming years, especially as the developing world catches up with more mature Western economies and affluent countries in Asia. Of course, this is true, but calling for ‘new innovations’ set in the context of the already existing strategies for reducing harm to the climate seems so obtuse as to be wilfully ignorant. By failing to offer up significant or meaningful methods of climate accounting for its own clients, or industry in general, when so many others players are moving with urgency and pragmatism, it appears doubtful that JP Morgan has identified the true business imperative to include impact on the climate as a potential risk factor in investments. 
 
So, there exists an immense amount of will and determination by many players in industry and government to keep 1.5 alive and to approach barriers to doing so with a radical level of collaboration. In spite of this, some key institutions are burying their heads in the sand. If big banks and industry are to keep 1.5 alive despite the failure of governments to reach meaningful agreements at COP26, they will have to push naysayers into doing the same through their investment decisions or ‘the invisible hand’ of the market. This is a very tall order. But it may be the only hope we have to avoid climate catastrophe.