If you were in London over the last couple of weeks, you wouldn’t have missed the activities of the extinction rebellion. While I don’t condone all their actions, they are making a valid point and it is being heard at the highest and the lowest levels.
A week ago, I explained to my five year old about the rebellion and how we were hurting our environment. She spent a few quiet moments and suddenly mentioned that we should get rid of all plastics from our home.
And.. Mark Carney, the Governor of Bank of England announced that Banks should manage financial risks due to climate change.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on sustainability and deeptech
The Bank of England released their supervisory statement SS3/19, that describes how financial institutions will need to manage the financial risks due to climate change. It is definitely a pioneering move by a futuristic regulator and something I felt really grateful about.
Climate change initiatives from regulators don’t stop there. A group of regulators and central banks have come together as the Network of Greening the Financial System (NGFS). Similarly, stakeholders in the Insurance world have come together as Sustainable Insurance Forum (SIF).
The SIF works with the UN Environment organisation – who are the UN’s wing focused on environmental initiatives across the world. Both NGFS and the SIF are working to come up with regulations to combat climate change. One of their core mandates is to contribute to the development of environment and climate risk management in the financial sector.
All this looks wonderful. However, the sceptic in me feels that all these efforts may be for optics-sake. The real litmus test would be how soon these supervisors follow BoE’s path in regulating financial institutions for climate risks.
Even with BoE, it remains to be seen how well they can enforce governance around the supervisory policy they have created.
Over the past 5 years atleast, Fintechs have shown banks how they could be customer friendly. Can they now show banks how to be planet friendly?
Over the past few years, I have had the pleasure of looking into several startups, who have often thought ahead of the regulators.
Engaged Tracking, a startup based out of Level 39 in London, have been providing climate risk solutions to financial institutions for over three years now. They provide corporate value chain data on greenhouse gas emissions. They also provide data for the evaluation of absolute and relative greenhouse gas emissions of each company and their trajectory over time.
This helps with the assessment of the amount of renewable energy purchased by each company and the trend over time. This data is used by their clients for risk models and in investment decisions.
I recently came across another startup based out of the US called ClimateNeutral. They are in the business of making businesses pay for their carbon footprint. They provide a certificate for firms that make themselves climate neutral by paying for their emissions. Customers can now look out for firms with the climate neutral certificate, like fairtrade and choose to buy from them.
ClimateNeutral is not a Fintech firm, but the model can be used for banks. We could have a climate rating bureau, very much like an S&P providing credit ratings. Banks could be charged a higher interbank-lending rate if they were not climate neutral. This would in turn reflect in how competitive their products could be for consumers.
As this model matures, banks that are not climate neutral will start seeing customers move to other banks with better priced products.
Therefore, we will need the regulators to lead, but consumer action is perhaps what will create the biggest change in banks’ attitude to climate risks.