7 days in May: The climate finance week when everything changed
Tue, 05/25/2021 – 02:11
Last week may be seen as the pivotal moment when climate change finally got serious.
I’m not talking about the anticipated rise of wildfires, droughts, floods and other natural disasters, although we’re bracing for the worst of what Mother Nature will throw at us this year. I’m not necessarily talking about any breakthroughs in the U.N. process, although those may be forthcoming in the run-up to COP26 in November. And I’m not even talking about the onrush of net-zero commitments by companies, government and others, although they seem to be happening at an almost-daily clip — so much so that they are no longer news.
I’m talking about markets, plain and simple.
Consider these stories from the past week:
“Carbon is now a buzzword on corporate earnings calls,” reported the Financial Times. Corporate execs are uttering the word “carbon” on earnings calls at a “rapidly rising rate, triple over the past three years, to about 1,600 per quarter,” the FT said. It cited data from global finance firm UBS that investing in a portfolio of companies with lower emissions intensity — the amount of carbon dioxide emitted per unit of revenue — led to annual returns 1 percentage point higher than the MSCI World index of developed market stocks.
It’s important to recognize key moments and milestones that foretell a potentially positive outcome. Last week was one of those moments.
“Green finance goes mainstream, lining up trillions behind global energy transition,” read a headline this weekend in the Wall Street Journal. Assets in investment funds focused partly on the environment reached almost $2 trillion globally in the first quarter of 2021, it said, more than tripling in three years. Investors are putting $3 billion a day into these funds, and more than $5 billion worth of bonds and loans designed to fund green initiatives are issued — every day.
“Banks always backed fossil fuels over green projects — until this year,” reported Bloomberg. It noted that banks have poured more than $3.6 trillion into fossil fuel projects — almost three times more than total bonds and loans backing green projects since COP21 in 2015. However, data covering nearly 140 financial-service institutions worldwide found at least $203 billion in bonds and loans going to renewable energy projects and other climate-friendly ventures through mid-May, compared with $189 billion for fossil-fuel projects.
Carrots and sticks
So, why is the financial world going gaga over green? Simply put, it boils down to carrots and sticks.
First, the sticks. Obviously, climate. Last week, the International Energy Agency (IEA) made official what even casual students of the climate crisis have long known: To have any chance of reaching net-zero greenhouse gas emissions by 2050, investors must stop funding new oil, gas and coal projects — immediately. Those investors already are well aware that as the impacts of a changing climate grow, the increased volatility and uncertainty will roil markets. They’re aligning a sizable chunk of their investments with that reality.
Within 48 hours of the IEA report, the G7 countries vowed to stop new financing for overseas coal projects and to make “accelerated efforts” to limit global warming to 1.5 degrees C relative to pre-industrial times, the first time the seven powerful nations have come together with a public statement about 1.5 degrees.
A day later, President Joe Biden issued an executive order that, among other things, “encourages” the Treasury Secretary to assess climate-related financial risk to the stability of the federal government and the stability of the U.S. financial system. It also directed the Labor Secretary to “consider suspending, revising or rescinding any rules from the prior administration that would have barred investment firms from considering environmental, social and governance factors, including climate-related risks, in their investment decisions related to workers’ pensions.”
The fossil-fuel industry just may be seeing the writing on the wall. “The eventual death of oil and thermal coal won’t come from environmentalists or even directly from renewable energy — it will come when big banks decide to stop financing it, rendering it ‘unbankable,'” wrote the influential petroleum industry website OilPrice.com, in response to the report.
The carrots? Simply put, the economics, viability and risk profile of renewables keep getting better and better. A report released last month by the U.K. think tank Carbon Tracker found that with current technology and in a subset of available locations, we can capture at least 6,700 petawatt-hours annually from solar and wind, more than 100 times global energy demand. (For reference, a petawatt-hour is equal to 1 million megawatt-hours.)
As Forbes noted in its coverage of the report: “Renewables could kill off fossil fuel electricity by 2035.”
Wow. Just wow.
Add to all that the seemingly rapid transition to electric vehicles; the growing push to electrify buildings, homes and factories; the increasing viability of alternatives to energy-intensive concrete and steel; and the rise of the circular economy. What a remarkable moment we’re in.
Of course, there’s no end of work to be done. The rise of deforestation, the health of the oceans, the quickening loss of biodiversity, the potentially game-changing climate feedback loops — any one of them could be devastating to human well-being.
All of these have significant business implications. And companies — both customers and suppliers of the products and services connected to these issues — will find themselves in the crosshairs of investors, activists, regulators and other influencers and changemakers. Expect a new wave of campaigns, demonstrations, boycotts, investor pressure and other tools of the trade.
A thought experiment: As the fossil fuel companies turn tail, who will become the next villains?
For now, let’s stop and appreciate where we are and how far we’ve come. Progress all too often feels slow and incremental, largely because it is. But it’s important to recognize key moments and milestones that foretell a potentially positive outcome.
Last week was one of those moments. And from here, there’s simply no turning back.
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