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We know that the climate crisis is the biggest challenge of our generation today. Many sectors are grappling with their net zero goals and navigating pathways to reach targets that align with the Paris Agreement’s 1.5-degree benchmark. The assumed goals, targets and methodologies which allow us to maintain optimal conditions for the planet, and which fall within planetary boundaries modelled by climate scientists, must be actioned within in the next decade.

The record levels of greenhouse gas emissions and record levels of weather-related impacts, costs, and financial losses, prove that climate change can no longer be ignored. We know that its physical, political, economic, and financial implications will only worsen.

The finance sector and the myriad of services which fall under this category will be key to facilitating how businesses and communities are included in the just transition to net zero, early and coordinated action can help deliver a smooth transition for the economy.

Risks

The number of catastrophes caused by natural hazards increased from 249 in 1980 to 820 in 2019, peaking at 848 in 2018. Adjusting for inflation, overall economic losses increased from around USD 60 billion in 1980, to USD 150 billion in 2019, with a peak of USD 350 billion in 2018.

There are tangible ‘transition risks’ for businesses that currently rely heavily on fossil fuels but aim to shift to a low-carbon economy. Their businesses may face declining asset value and reduced profitability, and so finance institutions that invest or lend to these sectors face investment risks.

The credit risks also pose a real threat, and more lenders are looking to re-evaluate their lending criteria based on businesses and people who are living in regions more vulnerable to climate-related risks and could possibly default on loans. It is therefore crucial to respond to climate change to mitigate these risks, not only to protect financial services but also communities and businesses which need a just transition pathway.

Legal and Regulatory Obligations

Transparency and greater disclosure on their climate exposure is key for financial institutions to carry out risk assessments. In turn, this becomes an opportunity to safeguard and better protect assets in the long-term which may be more vulnerable to climate change. Regulatory bodies globally are emphasising the need for climate-related regulations, reporting standards and disclosure requirements, and financial institutions must align their sustainability reporting with these regulations in order to avoid legal consequences, regulatory fines and reputational damage.

Indeed, it is now an expectation by customers, stakeholders and investors for financial institutions to demonstrate their sustainability commitments – failure to do so leads to a lack of trust and, ultimately, loss of business.

Opportunities

So, what could possibly be the opportunities for financial institutions to engage in a low-carbon economy? Many experts believe we are in a ‘green industrial period’, and the finance sector can play a huge role in providing funding and support for sustainable infrastructure, renewable energy, and other climate-friendly initiatives.

Financial institutions can tap into new markets, redefine and stabilise economies and facilitate the transition to a sustainable future. The financial institutions that drive innovation in this way can position themselves as industry leaders and gain a competitive advantage. Responding to the climate crisis is no longer a choice but a necessity for the financial industry’s sustainability and profitability.

Carbon Literacy as a pathway to overcome risk & realise opportunities

Carbon Literacy training can facilitate the education piece for services within the finance sector on current compliance and legislation and help prepare for future regulations that companies may not be aware of. All departments need to understand and learn to navigate this changing landscape, not just sustainability teams, so climate education within this sector is key to getting everyone on board and retaining staff.

There are a number of organisations within the financial service sector (covering banking, car finance, and private equity groups) that have already received Carbon Literacy training. This includes NorthEdge, Palatine, Newcastle Building Society, Lloyds Banking Group, Santander Consumer Finance, and Toyota Financial Services, to name a few.

At The Carbon Literacy Project, we aim to create more resources to help better inform finance institutions on how to decarbonise across their services. The first step is to showcase our progress to date and engage more actors within this space.

That’s why, for the month of November, we will be highlighting the progress we have made within this sector, and sharing some of the success stories so far on the kind of impacts the training has had on these services.

Interested in learning more about how Carbon Literacy could work for your financial institution? Get in touch with Farah at farah.lodhi@carbonliteracy.com, listing ‘Finance sector enquiry’ in the Subject line.