It’s easy to see why climate activists would dismiss international negotiations like the recent COP26 climate summit as a hangover. But in a world of geopolitical rivalries and significant coordination challenges, compromise – and the disappointment that can accompany it – is a reality.
Xavier Vives. Illustration: SCT
Xavier Vives. Illustration: SCT
The COP26 agreement also encourages the public and private sectors to mobilize more climate finance and foster innovation in green technologies. To this end, a promising model is Operation Warp Speed, the U.S. public-private partnership that made possible the extremely rapid development of Covid-19 vaccines.
The role of the financial sector in transferring resources from dark technologies to green technologies will be crucial. Asset managers and financial intermediaries can act out of pure self-interest by disengaging from dirty assets that they consider too risky (either because of the effects of climate change or because of the transition that will make them obsolete).
Alternatively, they can divest at the request of others who have a green preference or a longer horizon on which to internalize climate issues. Universal owners such as large pension funds, for example, are increasingly aware of the systemic risks posed by climate change.
In any case, the financial sector is now coordinating to align itself more closely with the global climate agenda, as evidenced by new initiatives such as the Glasgow Financial Alliance for Net Zero, chaired by the former Governor of the Bank of Canada. ‘England, Mark Carney.
It has become increasingly clear that voluntary mandates for sustainable finance backed by financial intermediaries need to be significantly more stringent than they are today.
Green shareholder activism can force greater disclosure of climate risk exposure or even outright divestment; but mandatory disclosure in a clear framework will likely be necessary to control greenwashing. The new International Sustainability Standards Council is a welcome development in this direction.
Finally, financial regulation and central bank policies also have a key role to play in promoting a green economy. Central banks, especially after the 2007-09 financial crisis, have a mandate to ensure financial stability, and as climate change poses a systemic risk, they will need to integrate it into their prudential frameworks.
They will also need to foster a more transparent disclosure environment, so that climate risk is properly assessed (although this is easier said than done). Many central banks are already engaging in weather stress tests and designing prospective transition scenarios.
More controversial are questions of whether, and to what extent, central banks should favor green assets (or penalize browns) in their asset purchase programs, and to what extent capital requirements should be adjusted. to sustainability criteria.
Should brown loans have a capital surcharge beyond risk considerations (or should green loans have a haircut)? Such provisions would make no sense in a world where carbon is properly priced, but we are far from this scenario.
The climate objectives of the international community remain very ambitious, in particular for a world characterized by rivalries between great powers. Rarely do parties with divergent interests work as a team. Compromise is necessary, and âcheap talksâ is the first step towards agreeing on a common course of action.
Xavier Vives, professor of economics and finance at IESE Business School, is co-author of the report âResilience of the financial system to natural disastersâ.
Disclaimer: This article first appeared on Project Syndicate and is published under a Special Syndication Agreement.