11 March 2020

Bloomberg: Finance can’t decide how it wants to deal with climate change

Whether markets should help prevent ecological disaster or simply minimize the losses from it is a major open question. As concern about climate change grows, and as marketing of “sustainable finance” products ramps up, it may be customers—both retail and institutional—and policymakers who have the final say.

Many financial managers see climate change as an opportunity, as expanding into services and products that claim to take it into account is a way for active investment managers to rise above the stiff competition posed by cheaper passive index funds. These products tend to bear the “environmental, social, and governance” label, indicating they’re not just good investments, they’re good investments.

Meanwhile, government officials working on mitigating climate change are putting the financial sector at the forefront of efforts to corral the international community into helping. The U.K., which is scheduled to host the United Nations’ annual climate change meeting in November, has chosen finance as a key element of its diplomacy before the summit.

This effort to put finance at the center of the climate conversation partly reflects a hope that the capital markets will be faster and more rational than political bodies, where efforts to arrest climate change have tended to struggle and languish.

On top of being a risk to individual financial assets, climate change is a risk to the entire financial system. It seems reasonable to believe the all-powerful market could help ward off this threat. Bringing climate change into financial decisions, however, is not necessarily the same as finance taking action to address climate change. That might sound obvious, but it’s not unusual to be at a panel discussion or roundtable about climate finance and hear some participants speak in the narrow sense of risks and returns while others talk about limiting climate change broadly.

This dissonance in attitudes within the industry can be seen acutely in its response to the European Union’s sustainable finance taxonomy, a list of economic activities categorized by their impacts on the climate, which was handed down on Monday. Technical experts stewarded the drafting of the list; if the name “taxonomy” doesn’t give it away, it’s entirely fair to say that this is a dry and detailed piece of work. The list will underpin future financial rules in Europe, including a green bond standard and a consumer-focused eco-label for investment products, and it’s thought likely to become a de facto standard in other parts of the world.

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