The climate catastrophe is having an impact on global finance, and Graham Vanbergen wonders if we should pay for it now or pay for it later.
Several studies conducted in 2019 revealed that the world’s major investment banks gave more than $700 billion in financing to fossil fuel corporations that had been rapidly expanding into new coal, oil, and gas projects since the Paris (climate) Agreement in 2016 were the most aggressive.
The fossil fuel industry received an estimated total of $1.9 trillion in funding between 2016 and 2018, thanks to the efforts of thirty-three strong financial institutions. To put this in perspective, this amount of money is sufficient to abolish world poverty for a decade.
And one of the most notable of those financiers has been JPMorgan Chase, the Wall Street behemoth that has spearheaded the charge. It made loans of $75 billion (67 billion Euros) to enterprises operating in energy-related industries such as fracking and Arctic oil and gas development, among others. In contrast, Barclays, one of the most heavily involved financial institutions, has supplied $85 billion (£65 billion) in finance to fossil fuel companies and carbon-intensive projects.
Change is in the air.
A resolution submitted against Barclays in January publicly questioned the bank’s decision to continue funding fossil fuel corporations that are contributing to the climate problem. This was the first time such a resolution had been brought against a European bank.
Eleven pension funds with a combined assets under management of £130 billion have filed a petition calling on Barclays to align its actions with the Paris Agreement.
This is just the beginning of the ‘uncoupling’ of big finance from the fossil fuel sector, which will take years.
Bank of England Governor Mark Carney recently said that financial corporations had been too sluggish to cut their investment in fossil fuels and warned that many assets were at danger of being made “worthless” as a result of the climate catastrophe. Afterwards, in December, the Bank of England made history by becoming the first central bank in the world to publish what it refers to as a “banking stress test” in response to climate change. Consider the following scenario: A British bank lends money to a coal-fired power plant developer, and the Bank of England (BoE) requires the bank to hold a significant amount of additional capital to cover the risks of the project being abandoned due to new regulations or other climate change-related factors.2
In the same manner, if an insurance company has extended coverage to homes located in a flood plain, coastal properties that may be exposed to sea level rise, or mortgages secured by these properties, extra funds must be put aside.
For the first time, environmental worries dominated long-term global threats for business executives, investors, and policymakers at the World Economic Forum in Davos, echoing the Bank of England’s warnings. According to the organization’s annual risks poll, climate change and other environmental hazards were ranked higher than the dangers provided by geopolitical conflicts and cyberattacks. In fact, even the company’s 81-year-old founder Klaus Schwab has said that the globe is in “a state of emergency.”
As a result of dire scientific predictions, natural catastrophes, and increased activism over the last year or so, global leaders and citizens alike have begun to recognize the seriousness of the climate issue and the need to act quickly. Organizations such as Extinction Rebellion (XR), the world’s fastest-growing political pressure organization, and climate activist rockstars such as Greta Thunberg are helping to tip the scales in the right direction.
As a counterpoint to climate change,
Nonetheless, an ever-increasing global population is a significant factor supporting the continued usage of fossil fuels. Every year, a population the size of Germany (80 million people, or 1.1 percent of the world’s population) is added to our globe, placing even greater strain on the world’s energy supplies. In addition, according to study, we are on course to generate 120 percent more fossil fuels in 2030 than we did in 2020. A recent poll indicated that climate breakdown is considered as the most critical problem confronting the globe, ahead of migration, terrorism, and the global economy, in seven out of the eight nations that participated in the survey, according to the findings.
The transition from physical danger to financial risk
It is certain that this asset-cumulative environmental calamity will soon pose two types of hazards to the financial system: physical risk from natural catastrophes and financial risk from the shift away from fossil fuels, both of which will be felt by the financial system.
Even if every nation met their existing carbon reduction commitments under the Paris Agreement, we would still be on track for a 3.2 degree Celsius rise in global temperatures. This is double the threshold required before the climate problem becomes a daily crisis for millions of people, resulting in billions of dollars being spent to tackle it.
According to the International Energy Agency, renewables will generate a third of the world’s electricity by 2024 (representing a 50 percent increase globally in the next five years) – but we will still fall “far short” of the amount of energy needed to achieve anything close to the targets that have been set.
While countries are rapidly embracing solar and wind energy, the International Energy Agency (IEA) predicts that coal will continue to be the world’s most important source of electricity in 2024. China, on the other hand, is predicted to replace the EU as the world’s leading user of solar panels as early as 2021.