War and the essential green transition
Russia’s invasion of Ukraine shocks us all. The images of daily destruction, death, and desolation are relentless; the impact on energy prices, supplies, and our economies are immediately felt, and especially painful for the less well-off and the vulnerable. The solution to this geopolitical crisis is not to ‘drill, baby, drill’ but instead we require a renewed collective drive to do all we can today to speed the green transition and wean our economies off fossil fuels.
In addressing the effects of this war, each firm within the financial sector must redouble and accelerate commitments to the net-zero transition, to corporate restructuring and realignment with green goals, and to investments necessary to pull forward the green future to today and tomorrow. To help us get there, banks should take a series of interlinked steps.
Banks, as part of their net-zero 2050 (and earlier short-term 2030 goals) and planning processes, should rule out new lending to fossil fuel projects, as some leading firms have already begun to do.
If such investments are considered at all, banks should apply a one-for-one internal capital charge reflective of the dangers of such lending. Basel capital rules do not yet include capital charges for fossil-fuel lending, but businesses should prepare for this eventuality and get ahead of it in their own modelling of risks and costs.
Banks should also speed their exit from existing lending to fossil-fuel projects, lowering their risk exposure to legacy loans that damage the planet, and add year-after-year to the stock and flow of greenhouse gases warming the globe.
Exposure to mounting climate risks also requires enhanced transparency, and many firms have committed to Task Force on Climate-related Financial Disclosures (TCFD) disclosure, shifting strategies, creating new products and plans. Leaders such as NatWest, Swiss Re, Axa, Enel, and Scottish Power are showing us the way ahead on transparency.
Corporate laggards must be pushed to commit to and improve disclosure of net-zero plans.
Investors and asset managers should face scrutiny from shareholders and customers, and demands to shift investments to sustainable green projects, judged against measurable outcomes, reliant on science-based standards.
The Ukraine war underscores that all firms must align their goals with net-zero targets and deliverables, exit brown projects, pull forward new alternative investments, and invest in 50 shades of green.
In taking these steps banks can orient their strategies with the International Energy Agency’s warning in 2021 that the majority of fossil fuels must become stranded assets if we are to avoid disastrous climate tipping points to a dystopian hot-house world of no return.
In sending these portfolio and investment signals, the financial sector can help redirect investment flows to green tech, to green power generation, to battery- and large-scale storage solutions, to carbon capture and sequestration, to a myriad of net-zero and net-negative products and technological solutions.
“Corporate laggards must be pushed to commit to...net-zero plans.”
The firms that have leapt and are leading are already reaping rising equity values and price premia. The profits are there for the dynamic and forward-focused.
By hastening this necessary and urgent ongoing green realignment, finance and banking can help set the stage for increased productivity, greater prosperity, and broad-based growth via a refashioning reseeding of the nature of globalisation. By shifting their portfolios, by pricing carbon and climate-rising risks soberly, and by seizing the opportunities that result, banks will be essential agents of change. A multi-decade-long investment cycle in the green industrial revolution is commencing – a cycle that that can help assure ecological and environmental sustainability for future generations, human and non-human.
The war and its effects are a clear warning signal that we must not rely on fossil fuels for our future prosperity, but instead redouble our efforts to construct a green pathway to net zero. I can see the renewable future of the UK. It can be constructed. We know what is needed to be done. Let us get on with it.