BreakingviewsGuest view: Getting finance in shape for COP26

Mark CarneyNigel Topping
5 minute read

Mark Carney makes a keynote address to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at Guildhall in London, Britain February 27, 2020.

Achieving a net-zero economy will require changing every part of it. If this sounds like a huge task, that’s because it is. Net-zero means leaving behind the factor that has been both the engine of the global economy and is now the biggest threat to its stability: carbon.

Can it be done? Yes. But to get there, every company, bank, insurer and investor will have to adjust their business models, develop plans for the transition and implement them. And they will need finance, a lot of it. We won’t get to net-zero with niche efforts: only mainstream private finance can shape the incentives we require, scale the solutions we have and fund the breakthrough technologies we need. Moreover, it can turn billions committed to climate investment through public channels into trillions.

Now is the time to act. The need is clear: calculations suggest the financial system as a whole is funding temperature increases of over 3 degrees centigrade. The scale of investment needed is great: up to $100 trillion between now and 2050. The shortfall is large: there’s an estimated funding gap of between 60% and 85%, and the imbalance is greatest in the global south, where resilience and adaptation against climate change is most acute. The returns on investing in the net-zero transition are increasingly attractive, while the cost of climate inaction could be five times greater still.

Investors and bankers are beginning to reckon with these realities: the number of financial institutions setting net-zero targets has increased fivefold within less than a year. But commitments to date have been inconsistent, and there has been no mechanism for coordinating efforts between individual institutions, let alone across sectors of the financial system.

That’s why, on the eve of the United States’ Leader’s Summit, we are uniting the world’s biggest banks, asset owners and asset managers to launch the Glasgow Financial Alliance for Net Zero (GFANZ). This new alliance, which brings together institutions responsible for over $70 trillion in assets, is the breakthrough needed to align private finance with the needs of people and planet. GFANZ brings together for the first time the full breadth of the financial system – from asset managers and owners to insurers and banks -- within a single, unifying framework to drive an economy-wide transition to net-zero.

The alliance will address three fundamental requirements for financing net-zero. First, GFANZ will broaden and deepen the pool of committed capital while bringing much-needed consistency and credibility to the financial sector’s net-zero commitments by ensuring they are backed by robust targets, near-term action, and accountability. It will rely on the technical processes and criteria overseen by Oxford University for the United Nations’ Race to Zero, the world’s largest multi-stakeholder net-zero coalition, to which 30% of FTSE 100 businesses, alongside cities, regions and others, have committed.

Second, GFANZ will coordinate action between institutions and across the financial sector. This will magnify efforts to support companies, especially those in the most carbon intensive sectors, as they realign their business models with net-zero and the historic growth opportunity it presents. Coordination will also allow institutions to make faster headway on technical challenges, such as establishing best practice for implementing their own net-zero objectives and ensuring market infrastructures from credit ratings to exchanges support the transition.

Third, GFANZ will support ambitious government climate policies that can unlock further action in the economy-wide transition, completing the positive cycle of net-zero investment. The more credible and predictable are government policies to achieve net zero, the more the financial sector will pull forward investment, smooth the transition and create jobs and growth.

GFANZ’s first act is to bring global banks into the net-zero fold. The new UN-convened Net-Zero Banking Alliance (NZBA) brings together 43 banks from 23 countries, ranging from Trinidad to South Korea, with assets of $28.5 trillion, including some of the world’s largest institutions such as Bank of America Merrill Lynch, Barclays, Citi, HSBC, Morgan Stanley, NatWest, Santander, and Standard Chartered. The UN Environment Programme Finance Initiative, which will convene the alliance, join forces with banks from the Financial Services Taskforce, part of the Prince of Wales’ Sustainable Markets Initiative.

With a focus on credible commitments, all banks will set an interim target of 2030 or sooner within 18 months of joining, using science-based guidelines. This is significant: banks will determine, disclose and drive their decarbonisation strategies by sector and across their operations. For the first time, global banks will operate off the same minimum standard set by Race to Zero, with the intent to ramp ambition up over time.

Importantly, the process has been designed to ensure that banks engage with their clients’ decarbonisation strategies, helping every part of the real economy to decarbonise, including those in the most complex, carbon intensive sectors. The first 2030 targets will focus on priority sectors where banks can have the most significant impact, meaning the most greenhouse gas-intensive sectors within their portfolios, from agriculture to steel, cement and real estate.

In coming months, a new alliance of insurers will join GFANZ, ensuring that all major sectors of the financial system are represented. With the financial architecture for Net Zero coming into place, we call on all financial institutions to join GFANZ and to be part of this historic opportunity to mobilise the trillions of dollars necessary to deliver a sustainable and prosperous economy consistent with the goals of the Paris Agreement.

CONTEXT NEWS

- Mark Carney is the UK prime minister’s finance advisor for COP26 and United Nations Special Envoy for Climate Action and Finance. Nigel Topping is the United Nations Framework Convention on Climate Change’s High-Level Climate Champion for COP26.

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