According to Bloomberg News, the clock continues to tick for the asset managers, insurers, and banks that are still offering support to coal, gas, and oil producers as well. Here, lies not just the moral imperative of using fossil fuels which are damaging the atmosphere and the life on our planet. What matters is their financial health at the moment.
As per Moody’s Investor Service, the financial institutions belonging to the Group of 20 leading industrial and developing countries have exposure of $22 trillion to carbon-intensive industries. This is equivalent to approximately 20% of their overall investment and loans. So, unless such companies shift rapidly to climate-friendly funding, they must face the risk of reporting losses.
According to Moody’s report, the insurers, banks, and asset managers must migrate to business models in lending and investing and facilitating the development of green infrastructure projects while they support the corporates in the carbon-intensive segments that are banking on low carbon business models. The following is how Moody breaks down the exposure to carbon-intensive sectors.
- Banks-$13.8 trillion, where 19% of on-balance sheet loans
- Insurers-$1.8 trillion, 13% of the cash and invested assets
- Asset managers- $6.6 trillion, 28% of equity holdings.
The warning Moody expressed was followed by that of the European Central Bank, expressing that most of the lenders are yet to come out with concrete plans revealing how they would adjust and change their business strategies so that they can show their accounting for the prevailing climate crisis.
Bloomberg News reports that of the 112 institutions that are monitored by ECB, half of them are planning to establish exclusion targets for some segments of the market but only a handful of them are trying to operate along the lines of the Paris Agreement trajectory. Banks have to date and ever since the 2015 Paris climate agreement, organized almost $4 trillion of loans and bonds for the coal, oil, and gas sectors in comparison to only $1.6 trillion of green-labeled loans and bonds, as per data gathered by Bloomberg.
At the beginning of this month, it was declared that more than 450 companies are now a part of the Glasgow Financial Alliance for Net-Zero. The ones that have signed pledged to target net-zero carbon dioxide emission by the middle of the century across their investment and lending portfolios.
It has become a litmus test for the financial industry when it comes to taking global warming seriously, with the ones that have failed to meet the targets being more likely to be publicly shamed. However, time and again, it has been seen that countries have pledged and broken their promises repeatedly.
Moody’s report also states that the greatest risk to financial firms is a “delayed and disorderly carbon transition” related to credit impact since the increase in the frequency of adverse weather conditions and consequent catastrophic events might lead to excessive defaults in loans and insurance claims not being met.
Experts also say that those banks that can adopt the predictable shift rapidly will be able to best preserve the credit quality. For those banks that enjoy a high credit rating, it is crucial because they depend on low funding costs to make loans at a higher rate of interest and profit from net interest spread.
According to Blomberg News, the Energy Transmission Commission assesses that more than $1 trillion of funding investments might be needed every year so that net-zero emissions by the middle of the century can be achieved. And green capital markets along with bank lending are key to achieving the goal.
The Organization for Economic Cooperation and Development, separately said that $6.9 trillion per year is required through 2030 so that the climate and other objectives related to the Paris Agreement can be met and with the developing nations requiring two-thirds of the funds. The United States has implied that it will be investing $2.3 trillion in the current decade that will be invested for climate-resilient infrastructure and China is expecting to allocate as much as $3.4 trillion in efforts towards the reduction of carbon emissions during the same period.
