By Will van de Pol, CEO, Market Forces. Mr van de Pol is an expert in ethical asset management and clean energy finance.
It is hard to rationalise the recent decisions United States banks and investors have made to quit climate initiatives at the same time as global warming-fuelled fires have been razing Los Angeles suburbs in the middle of winter. Just days ago, the world’s biggest asset management firm, BlackRock exited the Net Zero Asset Managers Initiative, following hot on the heels of banks such as JPMorgan, Citi and Bank of America pulling out of the Net Zero Banking Alliance.
The withdrawals by some of the world’s largest coal, oil and gas investors send a terrible message about their commitment to limiting the growing risks to our economy from record temperatures that are turbo-charging deadly and costly fires, floods and heatwaves.
However, the recent spate of US financial institutions exiting voluntary climate initiatives does nothing to reduce the real and mounting pressures requiring greater climate action from all banks and big investors, including those in Australia. These pressures include risk management duties, meeting consumer demand, and regulatory scrutiny, none of which can be ignored, whoever the US president may be.
Climate-related financial risks stem from both the market and policy shifts required to transition to a decarbonised economy in line with international legal requirements, and physical damage and hits to productivity caused by more severe and frequent extreme weather events.
Acute risks such as multi-billion dollar property damage bills in the Pacific Palisades and hurricane-ravaged Florida are enough to warrant top-tier risk management strategies. But the systemic financial risks of climate change are even more staggering in scale for financial institutions exposed across the global economy.
Under current global policy trajectories, climate damage would decrease GDP by nearly 10 per cent annually in Japan, according to recent analysis by the Asia Investor Group on Climate Change. The impacts of this damage or market shifts to avoid it would be significant: Japan is Australia’s second-largest trading partner and the number one destination for our coal and gas.
Physical climate impacts under that business-as-usual scenario are projected to wipe out almost AU$10 trillion from Japan’s economy between now and 2050. Something has to give. Investors must take part in the tectonic shift needed to make our economies more sustainable.
Despite the politically expedient rhetoric shifts in the US, all investors and banks must meet their fiduciary duties to clients and shareholders by prudently managing growing climate-related financial risks.
Financial institutions are also accountable to the broader community that makes up their retail customer base. This community is increasing demands for urgent action to limit the worsening impacts of climate change.
Consumer demand has led major financial institutions to adopt their own commitments to support goals like the Paris Agreement’s targets to limit warming to 1.5°C and reach net zero emissions by 2050.
Performance against those commitments is subject to regulatory and legal scrutiny. Just ask ANZ, NAB or AustralianSuper, which were hauled in front of last year’s Senate committee greenwashing inquiry. And ask Mercer, which copped an ASIC lawsuit and $11.3 million fine after Market Forces analysis revealed the fund’s ‘sustainable’ investment options held shares in fossil fuel companies it claimed to exclude.
Regulatory and consumer scrutiny of the greenhouse gas emissions attributable to financing and investment activity is only increasing with new mandatory climate reporting requirements. This reporting adds to growing climate obligations of Australian financial institutions, which go well beyond voluntary initiatives.
No silver bullet
It’s critical to outline that voluntary investor climate initiatives have so far failed to bring real world emissions into line with global goals.
A case in point is the Climate Action 100+ initiative, under which over 600 investor members representing tens of trillions in dollars of assets under management have committed to: “Take action to reduce greenhouse gas emissions across the value chain … consistent with the Paris Agreement.”
The CA100+ focuses on 168 of the most carbon-intensive companies in the world and was launched in 2017. Since then, annual global emissions have increased by around 4 per cent. Market Forces analysis has found the companies with the largest fossil fuel expansion plans among the CA100+ target group are meeting less than half the initiative’s net zero benchmark indicators on average.
Just 1 per cent of CA100+ target companies have met the initiative’s expectations on its two most important metrics: aligning decarbonisation strategy and capital expenditure with the Paris climate goals.
Investor initiatives can and should play a critical role in stewarding the economy and directing finance to drive the rapid clean energy transition needed to limit the devastating social, environmental and economic threats posed by climate change. But to suggest these investor climate initiatives have been successful so far is not backed by evidence.
Big-name exits from global initiatives like the Net Zero Banking Alliance (NZBA) and Net Zero Asset Managers (NZAM) are unhelpful distractions. There remain far more important and binding requirements that must drive Australian financial institutions to manage climate-related financial risks. All financial institutions have a duty to align their lending and investment activities with the internationally-agreed climate goals of the Paris Agreement.
This article first appeared in the Australian Financial Review