In its 2016 New Climate Economy report, The Global Commission on the Economy and Climate stated that a huge US$4.1 trillion of net incremental infrastructure investment would be required to finance a low-carbon transition up to 2030.
Finance leaders have a substantial role to play in shaping this transition to a low (or no carbon) economy and some may even argue a duty to do so. Indeed, they are best placed to influence the channelling of funds into green projects around the world.
But who are these finance leaders? Some may think that investment management companies are the main actors within the financial community to do so. However, investment management companies do not make the financial community on their own and there are many other actors who can influence the integration of environmental factors into the investment decision-making.
The Prince’s Accounting for Sustainability project identified the a number of stakeholders as having a unique position to influence the transition to a low (or no) carbon economy.
CFOs and their finance teams are the ones who can influence the allocation of funds within their organisations and drive the incorporation of more sustainable practices into their business models.
Asset owners such as pension funds and sovereign wealth funds handle vast amounts of money. In its report “Sovereign Investors 2020: A growing force”, PWC estimates sovereign wealth funds’ total assets under management to reach USD 15tn by 2020. Imagine the impact this would have on the transition to a low carbon economy if most of these funds were invested in “low carbon emission” projects?
McKinsey (2009) identified four broad ways in which investment banks can both contribute to and profit from the shift to a low carbon economy i.e. promote carbon transparency, drive innovation amongst the issuers to whom they provide financing as well as industrialise the market for carbon and financing the low-carbon economy.
Insurance companies can also influence a transition to a low carbon economy through climate-linked catastrophe bonds and innovative insurance products such as the Carbon Capture and Sequestration Liability Insurance, recently launched by Zurich.
Financial exchanges have already launched a number of low carbon products such as Certified Emission Reduction (CER) future contracts as well as low carbon indices.
Credit Risk agencies have a role to play in developing more comparable and transparent metrics which would help investors make better informed decisions when investing in so called low carbon emission projects.
The accounting community and more particularly accounting bodies can support the transition to a low (or no) carbon economy by incorporating environmental considerations into their courses’ syllabi and so can business schools and universities whose many students are the finance leaders of tomorrow.
Governments, regulators and policy-makers will also have a substantial role to play in driving this change by enabling a supportive regulatory environment.
In short, investment management companies are not the only actors of the financial community spectrum who can contribute to a shift towards a low (or no) carbon economy and it is through a concerted effort that all the above actors will make a difference.