Finance is finally waking up to the market failures that contribute to climate change. Now governments need to step forward with policies to incentivise action across the industry and drive the climate transition, writes Steve Waygood.

A new BBC drama, The Trick, vividly dramatises the events leading up to COP15 in Copenhagen in 2009. Climate sceptics hacked into scientists’ email accounts and misrepresented their private correspondence to imply they had faked the evidence for global warming. The resulting media storm sowed doubt about the severity of the climate crisis and hampered progress at the Copenhagen summit.

Today, the problem is no longer climate scepticism, but foot-dragging; not deliberate sabotage, but inertia

The programme serves as a reminder of how attitudes have changed since “Climategate”– and how much time we’ve wasted in the interim. Twelve years later, on the eve of another crucial COP meeting, the reality of climate change is undeniable. Wildfires rage through our forests and floodwaters sluice through our cities. Today, the problem is no longer climate scepticism, but foot-dragging; not deliberate sabotage, but inertia. 

What is needed is a coherent, coordinated and comprehensive strategy to rebalance our economies away from fossil fuels. The global financial system will be a vitally important part of this shift, and financial institutions across the world have already made commitments to a net-zero future. But the industry is still incentivised to provide capital to companies that pollute the atmosphere and damage the environment. This is a market failure. Only governments can correct it.

In bringing together political, business and climate leaders, the meetings of the G20 in Rome and COP26 in Glasgow provide an opportunity to agree the policies needed to shift capital at scale and drive momentum behind the climate transition. Aviva Investors, alongside a coalition of other financial institutions, is calling on governments to deliver in four specific areas.

Until the costs of emissions are disclosed and accounted for on balance sheets, they will not affect companies’ profitability or valuations

First, implement policies to make polluters pay the full cost of their emissions, and to incentivise climate solutions. Until the costs of emissions are disclosed and accounted for on balance sheets, they will not affect companies’ profitability or valuations. As a consequence, unsustainable firms will continue to have a lower cost of capital than they should and will be more likely to win financing than their sustainable peers. 

Second, produce a global finance transition strategy that updates the international financial architecture so that it governs finance in a way that supports the delivery of the transition, in line with the Paris Agreement. A large-scale international finance planning effort can mobilise capital markets to address the climate crisis, while also helping to accelerate a sustainable economic recovery from the COVID-19 pandemic.

Third, create an International Platform for Climate Finance (IPCF) to provide technical assistance for countries as they draw up capital-raising plans to finance and deliver enhanced Nationally Determined Contributions. The Organisation for Economic Cooperation and Development is ideally placed to convene and host the IPCF: it is well-funded, well-connected and staffed with technical experts from across the world. This means it will be able to offer financial and technical support to both developed and developing economies in the interests of a smooth and just transition. The IPCF could also provide an overview of financing on a global scale and help match investment needs with investment appetite. 

Fourth, ensure that the forthcoming Global Stocktake for COP27 and COP28 includes a focus on private as well as public finance and the measures needed to deliver Article 2.1.c of the Paris Agreement (which affirms the need to coordinate the whole of finance in tackling climate change). By looking ahead to future summits now, we can ensure we are ready to build immediately on any progress made in Rome and Glasgow.

Harnessing the power of financial markets to deliver the transition to net zero will be crucial to achieving the aims of the Paris Agreement. We have lost years due to scepticism, bad faith arguments and vested interests, to the point where the survival of civilisation is at stake. But now we have the chance to enact a plan that will kickstart climate action across the world. We must take it.

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