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Finance day at COP26 underscored financial services’ critical involvement in climate change mitigation and adaptation. Bradley Davidson, ESG Lead at RBS International, shares his thoughts on the major developments.
The world’s biggest financial players pledged $130trn in investment towards tackling climate change on the COP26 finance day. Ultimately, banks recognise their responsibility as financial institutions to drive capital where it matters most in global efforts to tackle the climate emergency. That involves investment in mitigation, for example renewable energy and other solutions that reduce our carbon dependency, and adaptation, recognising that there is a level of damage done to the planet that requires the protection of the people and communities most affected.
My colleague Caroline Haas, Head of Climate and ESG Capital Markets at NatWest Markets, who attended the finance day policy discussions, says: “Finance is now in the room around climate change. The talk of £135bn of asset funds and banking capital being available is transforming the conversation. It is bringing it to life in a way that says we have this net-zero commitment; we need to figure out how we mobilise finance to enable us to deliver it, and the money will make itself available.”
It puts the question back to governments about what they can do, through policy and regulatory approaches that reduce reliance on fossil fuels, to facilitate and accelerate the shift to renewables and clean forms of activity such as electric vehicles.
Haas says: “The role of government in supporting the de-risking of climate solutions so that we mobilise more of the private finance into this sector was a key issue. Similarly, development banks were called on to come in more aggressively with blended finance, which follows the same theme of helping to de-risk so that you mobilise the significant amount of capital that is available. But finance cannot take all the technological and R&D risk that is associated with some of the solutions required.”
Delivering on the agreed targets
Many people have looked to COP26 to set up new carbon-reducing targets; however, the targets were already set by the UN Paris Agreement in 2015. So COP26 is really about how we evaluate our performance towards the 1.5ºC target and limiting global warming well below 2ºC. The conference has very much been about action.
Private investment will have to make up the majority of the investment needed to tackle climate change; Scotland’s ambition to reach net zero by 2045 requires 85% private sector funding and financing. And so data is crucial to firms, both on the financial side but also across environmental and social factors. If we look at the UN Sustainable Development Goals (SDGs), we can’t manage performance towards the goals if we don’t first measure these points as an industry. So the first step is identifying and assessing the opportunities and risks presented by the fight against climate change, and making sure that the data is consistent and robust enough to inform decision-making.
Changing investor perspectives
Much of the new technology we will need to achieve net zero and honour the Paris Agreement will need investment. However, there is a problem here: if these technologies were to be assessed by previous standards, they might fall outside the typical risk appetite for investment because many solutions are yet unproven or scaled widely.
This is why we need our customers to start looking at investments through a different lens. And to support that, we need the public sector to provide assurance. We need the public sector to help identify those technologies that they think are the most meaningful to the communities we serve. Private markets can then take investment forward, while also maintaining the fiduciary duty that investors expect.
Away from policy, NatWest Group was present in the Green Zone at COP26, which focuses on those companies coming up with innovative solutions. The bank supports SMEs to flourish and develop their own solutions via its Accelerator hubs, with 25% of Accelerator slots designated for climate-focused businesses. I was joined by Stuart Foster, Managing Director of Institutional Banking and Depositary Services at RBS International, to explore the Green Zone at COP26 on finance day.
It was great to see and support customers, but we were also there to listen. We must understand what the policymakers are saying in the Blue Zone, but the Green Zone is where the work is being delivered. As a bank, we will continue to support these impressive innovators.
One way in which the bank is supporting SMEs is to make their voices heard at key events such as COP26. NatWest Group hosted the Sustainable Markets Initiative’s Terra Carta Action Forum last week. Leaders from across the bank invited industry leaders and climate-focused SMEs to discuss the challenges faced in gaining access to financing. It was a pleasure to hear diverse viewpoints and identify actions we can bring back into the business.
There were several key events in the Green Zone, including the women in finance discussion hosted by Amanda Blanc, CEO of Aviva. She brought together a panel of women to consider how the financial services sector is progressing its actions, as well as exploring regulation and how the industry brings equality into the mix. It’s important to look at the social aspects of ESG and listen to the experience of women in this industry as well as those who have been impacted by climate change.
This brings us back to the effects that climate change has on real lives. COP26 in Scotland took place just after local flooding. It’s a stark reminder that it has real-life impact and that adaptation needs to address those issues. One in five (20% of) people live in high-risk flooding areas across the UK. So we must be investing in solutions that help people and communities continue to operate.
The way the financial industry talks to each other is often not accessible, and so we need to get better at highlighting the human impacts. And that has been a really strong message throughout finance day. We need to better educate our customers. And we need to deliver thought leadership that ensures that everyone knows that they face an environmental decision when choosing who to bank with.
Ultimately, that decision will have an impact on the climate.