About me
First, why do I care? As a King’s student studying Law, I have always had an interest in sustainability. Last year, I attended the Student Energy Summit (SES) at COP28 together with a group of young professionals working on the energy transition. I left with a sense of hope, but I also realised one crucial piece was missing: large-scale funding from the private sector. Simultaneously I was learning about the difficulties around the lack of finance to fund the transition to a low-carbon world in a Green Finance module taught by Professor Bowman. I also had the opportunity to get some insights into how green finance operated in practice at the investment office of a bank. It quickly became a topic I could spend hours learning about, despite its complexity and sometimes frustratingly conflicted nature. It is clear that governments and NGOs cannot fund the entire transition. Simultaneously, financial institutions such as banks cannot be expected to change their entire operations overnight. To do it right, such a change takes time. After all, most investments and loans, especially within banks, are made with long lifetimes.
The challenge
The figures speak volumes—according to a study by McKinsey, a staggering $275 trillion is needed worldwide between 2021 and 2050 to fund this transition, equating to $9.2 trillion annually. Furthermore, the Paris Agreement clearly states that we need to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” Although interpretations differ, it broadly means that the way money is spent needs to help reduce greenhouse gas emissions and help to adapt to a world impacted by climate change. Tthese astronomical figures cannot merely be funded by governments and charities; to reach such levels of investment will require private financial institutions to get involved.
But what is green finance?
According to UNEP, “green financing is to increase level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities.” In practice this can have different implications; sometimes it means, environmental impact is the primary consideration, but more commonly, environmental impact is considered alongisde the ability to make money. In all cases, the aim is to ensure that money has a positive impact on the environment. However, as great as this may sound, green finance does not come without its challenges. Three are highlighted here: greenwashing, the time pressure, and the risk of inaction.
Greenwashing
As financial institutions engage in green finance and demonstrate their commitment to sustainability, there exists the risk of greenwashing — a phenomenon where entities exaggerate or misrepresent their environmental efforts. This risk was highlighted in the lead-up to COP26 when HSBC faced criticism for advertising its climate-friendly initiatives while continuing to invest heavily in industries with high emissions levels, eventually being told to take it down. The Advertising Standards Authority (ASA) deemed the advertisements misleading, highlighting the need for transparency and accountability in green finance.
Yet, there are signs the industry is moving in the right direction. An example is in shipping finance, which involves financing the building and purchasing of ships. While attending an event for a research essay on shipping finance, I learned about the Poseidon Principles, an initiative introduced by the private sector to promote sustainable financing within the shipping industry. It does so mainly through reporting, requiring the disclosing of environmental impact of loan portfolios with the aim of increasing transparency and accountability in the industry. Although it is too early to assess the impact of the principles, it is a clear sign of initiative and willingness from private financial institutions.
Time pressure
As time passes, the impact of climate change continues to cost the world more money. Whether it is the growing cost of adaptation or the increasing frequency of extreme weather events, all consequences and occurrences contribute to the bill. Yet, behind this urgent need lies a tricky balance to strike. A speech by Mark Carney at Lloyds in 2015 highlighted that although we need to act swiftly, we also need to ensure we minimise unnecessary risk and cost when it comes to green finance.
Personally, this balance became very clear when researching green shipping finance. The industry faces many technological uncertainties. Acting too quickly may mean building up a new shipping fleet of which we do not know all the risks. If there are indeed risks that we do not realise already exist, it may result in stranded assets, such as unusable ships, resulting in financial losses. As such, although the time pressure is high, the financial industry has to tread a delicate balance of the risks of financing the transition.
Risk of inaction
It is clear inaction is not an option; private financial institutions must take their share of responsibility for financing the transition. Yet it is worth highlighting that it is also in the interest of the financial industry itself. Mark Carney highlighted that the insurance markets are already seeing the impacts of climate change equating to increased payouts, which are of course caused by the effects of climate change. Furthermore, climate change itself poses risks not only to the insurance industry but to the financial industry more broadly. Carney even went so far as to say it could even cause the next financial crisis.
Companies and institutions
Clearly, private financial institutions must take responsibility and contribute to financing the transition. With the trillions needed, it is essential that all investment decisions take climate change into account. Yet the implications do not end here. Companies and institutions like universities must play their part too. They must ensure climate-related considerations are at the heart of investment decisions and expenditure on daily operations. In this light, it is exciting to work with the Carbon Offsetting Working Group to contribute to King’s offsetting policy. Although offsetting is a tricky area in and of itself, as highlighted by Jone de Roode Jauregi, it may provide a pathway to increase funding available for climate-friendly projects.
Takeaway
Overall, private financial institutions clearly play an important role in financing the transition. Although there are many challenges, we are heading in the right direction, and everyone, including the private sector, must step up to meet these challenges.