Reshaping Finance for Climate Action

© Corinne Kutz

It’s impossible to ignore the link between finance and climate change. This is especially true amidst the growing recognition that finance can influence the mechanisms that define how the global community responds to this global challenge.

That recognition is a hopeful sign, but even more promising is the breadth of actors stepping up from across sectors to take action. Financial institutions are showing increasing interest and initiative in incorporating climate awareness and action into their work in a variety of ways. But more and faster action is needed.

A Short History of Finance and the Environment

“The International Finance Corporation of the World Bank declared that financial institutions have a responsibility to be leaders on climate action.” (Photo © Tim Foster)

Long before then-Bank of England Governor Mark Carney spoke in April 2018 of climate change’s potential “catastrophic impact” on the global financial sector, a movement to recognize the intimate connections between this industry and environmental prerogatives was already underway.

Almost two decades have passed since the United Nations Environment Programme Finance Initiative (UNEPFI) commissioned a study on climate change and the financial industry, leading to a sweeping recommendation that the financial community “incorporate climate change considerations into corporate planning, stakeholder communications, product and investment strategy, and operational policy.”

In 2006, the UNEPFI Climate Change Working Group called on the financial sector to “recognise the reality of climate change and mainstream it into all business processes.” Five years later, the International Finance Corporation of the World Bank declared that financial institutions have a responsibility to be leaders on climate action.

The industry responded slowly at first, but by December 2017, 225 investors with $26 trillion in assets under management created the Climate Action 100+ to encourage companies to implement strong governance related to climate change risks, reduce greenhouse gas emissions, and provide transparency on climate impacts. 

A Fundamental Reshaping of Finance

Now the financial sector is finally catching up to the power of its position in relation to environmental change.

In January 2020, BlackRock, a Tides Foundation partner and the world’s largest investor, joined Climate Action 100+, which now boasts 545 investors and $52 trillion in assets under management. The move was in line with a shift announced by BlackRock CEO Larry Fink in his 2020 annual letter to CEOs: “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

“We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.” (Photo © Chris Li)

A year later, his 2021 letter noted a hastening of such reassessment, stating that investments in sustainable assets globally by mutual funds and ETFs had almost doubled in 2020. His perspective in the letter matches that of Climate Action 100+, which emphasizes that climate change is a systemic risk that investors cannot escape by diversification but instead must confront.

“I believe that this is the beginning of a long but rapidly accelerating transition—one that will unfold over many years and reshape asset prices of every type,” Fink writes. “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”

Another Tides Foundation partner, Beneficial State Bank, also recognizes this opportunity, leading on climate action with a values-based banking approach. It is a founding member of the UN’s Collective Commitment to Climate Action and a member of the Global Alliance for Banking on Values. Under a business model based on triple-bottom-line “mission lending,” Beneficial State directs 75 percent or more of its lending to support social justice and environmental sustainability. As of December 2019, $103 million of its $760 million in loan commitments was dedicated to environmental goals. 

Similarly, European bank Triodos focuses on lending in ways that produce social, cultural, or environmental benefits. And innovative fintech startup Doconomy is making the link between finance and climate change more visible than ever. In addition to creating financial tools that educate and drive action on climate change, it has introduced the DO credit card, which has a carbon limit rather than a credit limit. 

Change is happening at the policy level, too. The Security and Exchange Commission recently announced it will be updating its guidelines on how publicly traded companies should disclose climate-change related risks to investors, while the Federal Reserve is taking steps to understand the risks climate change is presenting to the banking system.  

Making a Difference Where it Counts

“We are all responsible for pushing the sector toward taking responsibility and action on climate change.”

Considering that almost every individual and company interacts with the financial system, we are all responsible for pushing the sector toward taking responsibility and action on climate change.

We can start by asking questions of our employers about their investments and learning more about the impact of those choices. What are they invested in? Are they prioritizing values-based investing? Do their retirement plans include options for environmental, social, and governance (ESG) investments? Do my own finances align with my values?

Company leaders can make responsible decisions on how to use profits, preferably proactively investing in ways that directly contribute to climate solutions. For example, Tides does so by sourcing impact investing opportunities that have the potential to create market shifts. Outside of conventional investment opportunities, both the New Energy Fund III and BlackRock Global Renewable Power III Fund focus on building green infrastructure in addition to green jobs. While in the publicly-traded space, the Tides Balanced Fund allows for impact investment across public equities and fixed income, with a focus on environmental shareholder advocacy to pursue long-term change.

Everything considered, investing for impact is easier said than done. There are legitimate concerns about how to measure the efficacy of some of these investments, and companies face the ongoing difficulty of balancing fiduciary responsibility with desired social impact. Strategic thinkers are working on these problems. For instance, the Impact Management Project, a collaborative of foundations and investment managers, is developing tools that can apply rigorous financial performance measurement to the assessment of social and environmental impact.

Beneficial State Foundation is developing Equitable Bank Standards—a set of guidelines that banks can self-apply to set targets and measure their progress toward a universal set of measures. A collaborative and shared resource that provides a measurable pathway for all banks to achieve social and environmental impact, these standards are set for initial release in 2021.

The number and intensity of climate-related natural disasters grow every year; it’s never been more apparent that we need to act now. As Beneficial State Foundation points out, “finance underpins nearly every facet of our society,” and the case for investing for our climate is clear. As the conversation over the social power of investment becomes more mainstream and mature, financial institutions and other major investors will find new ways to ensure that their capital makes the biggest difference where it counts.

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