global perspectives
Harnessing institutional finance for decarbonisation
Co-Senior Managing Partner Hubert Keller outlined the scale of the challenges involved with the transition to net zero in a panel discussion on harnessing institutional finance for global and domestic decarbonisation.
The Onward/Lombard Odier event also featured the Rt Hon Kwasi Kwarteng MP, Secretary of State for Business, Energy and Industrial Strategy, and Dr. Rhian-Mari Thomas, CEO of the Green Finance Institute. This event focused on the best ways to assess the alignment of the economy and portfolios to the transition to net zero, as well as ways policymakers can best unlock institutional finance to support decarbonisation.
Keller noted that, while the financial industry is increasingly committed to achieving the goals of the Paris Agreement, several major challenges lie ahead.
The first of these challenges is effectively communicating the reality of climate-related financial exposures. To limit global warming to well below 2 degrees Celsius, compared to pre-industrial levels, will necessitate disruption to the existing economic framework.
“Companies across a wide range of sectors and all regions will need to adjust and adapt their business models to make them fit for the net zero economy. This will create transitional exposure that will lead some companies to thrive and others to fail,” he said.
However, in the event we adopt a business-as-usual mindset and fail to meet the goals of the Paris agreement, we will replace the risks presented by transitional exposure for the financial consequences of physical risks generated by climate change.
There is also the challenge presented by the current lack of a common framework to serve as guiding principle for allocating capital. The EU taxonomy for example, currently fails to account for transitioning businesses.
“We need to support those companies which do not qualify as green today but that are making all the right investments, as well as strategy and policy changes, to become greener,” he said.
Finally, he highlighted the problem presented by a real economy that is insufficiently aligned with the goals of the Paris Agreement and net zero. If the majority of companies remain misaligned with these targets, it becomes much harder for the financial industry to deploy capital at scale.
“We need pressure on the real economy to get companies on the right decarbonisation trajectory,” he said.
The focus needs to be on neutralising climate-related financial exposure. This requires moving away from a simply exclusionary approach, and focusing on developing an understanding a company’s transition trajectory.
“We need to understand the decarbonisation pathway a company is pursuing, its strategy to reduce emissions by 50% by 2030, and we to understand the strategy to get to net zero by 2050.
Once understand the specific trajectory, we can start to quantify and assess the financial consequences of that transition.”
Keller also sought to distinguish between the notion of turning existing capital to sustainable objectives and funding green investments.
“The biggest challenge our industry faces is the ‘greening’ of existing capital. This refers to the USD 120tn of capital collectively held by the industry that needs to be redeployed in a way that is aligned with the challenges and opportunities of the climate transition.
“This is separate from green investments. There are a wide range of interesting opportunities to finance, such as natural capital and new technologies. However, this accounts for only a proportion of the overall figure.”
Keller also noted that, in addition to the financial sector and policy makers, consumers stand to play an important role in driving the climate transition.
“The reality is that there are a number of forces driving the transition, and market forces is perhaps the most powerful of these. A number of cleaner solutions, such as electric vehicles, are also cheaper and more efficient and are going to be very important in accelerating the transition to net zero. Consumers will be key in driving the transition forwards.”
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