Justin Guay is director for global climate strategy at the Sunrise Project. This guest essay represents the views of the author, not those of Canary Media.
As we emerge from yet another round of international climate negotiations that did not live up to the crisis we face, many are hoping the private sector, especially the financial system, is stepping up to fill the void.
That was the message from Finance Day during the first week of COP26 in Glasgow, where U.N. Special Envoy on Climate Action and Finance Mark Carney, the former governor of the Bank of England, unveiled a new pledge from the Glasgow Financial Alliance for Net Zero. Essentially an alliance of net-zero alliances (a painful phrase to write if ever there was one), GFANZ claims to represent $130 trillion in assets under management that are now focused on achieving a net-zero-carbon transition by 2050. The announcement was meant to inspire and awe the world with the commitment the financial system has made to act on climate change.
Instead, it landed with a dull thud. As observers looked into the details of the latest in a long line of net-zero pledges, it simply didn’t stand up to the harsh light of day.
For instance, the Net Zero Asset Managers initiative, part of GFANZ, stepped onto the world stage and announced its members were all in — at least 35% in, that is. The NZAM initiative’s announcement actually committed just 35% of assets to be managed in a way that aligns with the transition to net zero, which means the other 65% can continue to finance coal, oil and gas and generally burn the house down.
But it was the Net-Zero Banking Alliance, the centerpiece of GFANZ, that garnered the harshest criticism. As it turns out, the details of its commitment allow banks to opt out in a really big way. Underwriting, the act of facilitating companies issuing bonds or shares and selling them to investors, is not covered by the commitment — despite the fact that it is the largest role banks play in enabling fossil fuel finance.
Those kinds of loopholes are the result of concerted bank lobbying, including a documented effort to delay and water down the GFANZ pledges by avoiding science-based targets. Many of the banks in the alliance have expanded fossil fuel financing even since joining up in April.
Public finance is showing up in the private sector
But while the expectation that private financial institutions would voluntarily lead the way in the transition to clean energy was dashed, old-fashioned public finance actually stepped up. In fact, the most interesting, powerful and potentially game-changing announcements at COP26 all came from sleepy public institutions like the Asian Development Bank and the World Bank.
A series of coal retirement funds were announced with the intention of buying out and permanently retiring old coal assets. A coalition of donors made $8.5 billion available for a just transition beyond coal in South Africa, the most heavily coal-reliant country on the continent. The Asian Development Bank unveiled a plan to retire half of the coal fleet in Indonesia and the Philippines over the next 15 years. Initiatives like these will require careful scrutiny from watchdog groups to ensure they benefit the public, not the big banks, but there’s no doubt they augur a new era in international climate finance.
To top it all off, the Bank of England became the first central bank in the world to exclude coal from its bond-buying programs.
But the biggest finance announcement by far was the news that a coalition of more than 20 countries including the United States would halt overseas finance for oil and gas. Shortly after this was announced, several more European countries signed on, giving even more momentum and validation to the pledge. Considering the incredibly powerful role that public money plays in de-risking and unlocking private finance for energy infrastructure in emerging markets, this will have a powerful effect.
While so many other announcements at Glasgow were about moving beyond coal, this announcement — coupled with the launch of the Beyond Oil and Gas Alliance — could be the start of normalizing the effort to move beyond oil and gas.
Voluntary moves don’t cut it — regulation is needed
Ultimately, COP26 made it clear that voluntary action from the titans of private finance can’t be relied on to end the flow of money to fossil fuels and thus address the climate crisis.
Financial regulators in the world’s largest finance centers — the United States, the European Union and the U.K., among others — need to step in and wield the tools at their disposal to mandate change. We did see some potentially interesting moves on that front, including the fact that the U.K. is aiming to become the world’s first net-zero financial center by requiring companies to submit transition plans outlining how they will achieve decarbonization by 2050, to be measured against a science-based standard. But that’s just one small step. The reality is that financial regulators are not taking the action needed to address the climate crisis.
We’ll feel the impact of that lax regulation of our financial system long before the climate crisis spirals out of control. As financial institutions continue to fan the flames with speculative investments in fossil fuels — today’s subprime assets — the likelihood of another financial crisis only grows.
And if there’s one lesson we learned from the global financial crisis of 2008, it’s that no amount of voluntary commitments or self-regulation can avoid a financial meltdown. On that front, we’ve got a long way to go.
Justin Guay is director for global climate strategy at the Sunrise Project.