More Rigor Needed In Green Finance

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Thanks to the Economist for keeping it real:

The trouble with climate finance

Green investing has shortcomings

The financial system and climate change

The financial industry reflects society, but it can change society, too. One question is the role it might play in decarbonising the economy. Judged by today’s fundraising bonanza and the solemn pronouncements by institutional investors, bankers and regulators, you might think that the industry is about to save the planet. Some 500 environmental, social and governance (esg) funds were launched last year, and many asset managers say they will force companies to cut their emissions and finance new projects. Yet, as we report this week (see article), green finance suffers from woolly thinking, marketing guff and bad data. Finance does have a crucial role in fighting climate change but a far more rigorous approach is needed, and soon.

One of the shortcomings of green finance might be called “materiality”. Some fee-hungry fund managers make hyperbolic claims about their influence, even as big-business bashers pin most of the blame for pollution on companies. The reality is more prosaic. Fund managers have some influence over a big slice of the economy, but many emissions occur outside the firms they control. Estimates by The Economist suggest that publicly listed firms, excluding state-controlled ones, account for 14-32% of the world’s total emissions, depending on the measure you use. Global fund managers cannot directly influence the bosses of state-controlled Chinese coal-fired power plants or Middle Eastern oil and gas producers.

Some European bank regulators hope to cut emissions indirectly, by imposing climate-stress tests on lenders and insurers that penalise their exposures to dirty or vulnerable projects. But the evidence so far suggests that this will not make much difference (assuming there is no change in rules on carbon emissions). The effect on these firms’ solvency is small, because only a fraction of their assets are invested in fossil fuels or in projects whose value is sensitive to physical risks, such as flooding, after being discounted over 10-15 years. Meanwhile, despite all the fundraising, the sums being invested in renewable energy and infrastructure are only about half what would be needed to keep temperatures within 2°C of pre-industrial levels…

Read the whole story here.

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