January 25, 2008
This European Business summit (EBS 2008) workshop will discuss and debate EU policies for stimulating green investment.
This post sets out the scope of this EBS 2008 workshop (see EBS ‘08 programme). Everyone interested in the topic, whether they’re coming to EBS 2008 or not, is welcome to use this blog to comment or submit their own ideas – see About this blog.
A. Climate change and the financial sector
- Climate change poses a number of business risks but also creates big opportunities for the financial sector.
- The most obvious risks exist in the form of financial liabilities due to extreme weather events as a result of climate change: storms, floods and forest fires cost the European economy. The insurance sector in particular has already been hit hard and is expecting more challenges in the future. Some reports predict extreme weather losses of 1 trillion dollars by the year 2040.
- Climate change can also lead to constraints on economic growth and, in that sense, banks and asset managers can be hit by global economic slowdown.
- The carbon market, on the other hand, creates lots of opportunities for the financial sector. In 2006, the carbon market reached a value of 30 billion dollars and according to the International Emissions Trading Association could reach 100 billion dollars in 2008.
- Financial institutions also play an increasing role in providing and channeling investments to low-carbon technologies (renewable energy) and energy efficiency projects. The investment capital flowing into renewable energy in 2006 was over 100 billion dollars.
- Some institutions have created new products (carbon funds etc) or started R&D and/or capacity-building projects involving different stakeholders and business clients.
- Last but not least, some financial institutions have started projects to reduce their own emissions and some have plans to become carbon neutral.
- Several international initiatives have been set up to look at the implications of climate change for business and business investments:
B. EU policies related to investments and incentives
- There are no sector-specific EU policies dealing with the climate change impact on the financial sector. Of course, the general mitigation and adaptation policies plus the EU’s energy proposals define the regulatory environment for the sector.
- Member states can also use taxation policies to promote investments in climate-friendly technologies (e.g. tax reductions for green cars)
- In March 2007, the Commission presented a Green Paper on market-based instruments for environment and related policy purposes. One of the policy options mentioned in the Green Paper is a review of the current Energy Taxation Directive.
- The Union also plans to abolish environmentally harmful subsidies. The EU subsidised fossil fuels by 24 billion Euros in 2004 compared to 5.3 billion Euros for renewable energy sources; and international transport fuel is tax-exempt.(source: Allianz-WWF, 2005)
- The European Investment Bank has been supporting EU climate policies through investments in renewable energy, energy efficiency and fuel switching projects.
C. Issues and challenges
- Financial sector needs certainty on investment decisions: need for a reliable, transparent policy framework
- Financial institutions need to develop new tools and products to evaluate risks and help their clients tackle mitigation and adaptation actions
- They should include climate change risks into their internal governance procedures and reporting structures
- Insurers need more risk management expertise on climate change
- Banks should facilitate finance for public programmes to introduce low-carbon technologies
- Climate change issues are not yet much taken into consideration in asset management: difficulties to assess companies’ risk as a result of climate change (see Headland Consultancy 2007)
- Fund managers should provide information on the climate risks of their portfolios
- Financial sector needs more expertise on renewable energy technologies to be able to make financing decisions for low-carbon energy
- Investors’ short-term interests often get in the way of companies’ long-term value creation.
- In view of the EU’s unanimity rule on taxation policy, will it be able to undertake an ecological reform of EU tax regimes.
D. Potential questions for the thematic session
- Do the financial institutions have a transparent and publicly available climate change policy?
- Do banks have the internal capacity to make correct decisions on lending policies for the energy mix?
- Do banks use climate, energy or sustainability criteria when making big lending or investment decisions?
- What are the experiences of the financial sector with the carbon market? What about price volatility and liquidity? How can the system become truly international and more efficient?
- Is the banking sector doing enough to mobilize investment flows into low-carbon solutions? Should financial institutions cut off finance to high carbon emission activities?
- Do financial institutions try to influence the emissions behavior of their clients? Do they help their clients to assess their climate risk exposure?
- How can fund managers be made more aware of the climate change risks of companies?
- Are investors taking carbon disclosures seriously?
- What would the financial sector like to see from policymakers?
- What can the EU do in terms of ecological reform of taxation systems?
E. Further reading
- Allianz-WWF report: Climate change and the financial sector. An agenda for action, 2005
- BankTrack: A challenging climate. What international banks should do to combat climate change, Dec. 2007
- UNEP Financial Initiative Climate Change Working Group (CCWG): Carbon crunch. Meeting the costs, Dec 2007
- UNEP CCWG: Declaration on Climate Change by the Financial Services Sector, June 2007
- UNEP CCWG: Climate Change and the Financial Services Industry (Module 1), 2002
- UNEP CCWG: Climate Change and the Financial Services Industry (Module 2), 2002
- UK FORGE Group: Managing climate change in financial services. A guidance framework, Nov 2007.
- Headland Consultancy: Report “Has the debate on climate change affected institutional investment behaviour?”, June 2007