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Unleashing the Power of the Financial System for Transition

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How do we unlock the power of the financial market to help drive the world to net zero by 2050? How do we create the right incentives for everyone in the economy to take the right steps to change behavior and make the investments needed to address the challenge?

Those were some of the key questions tackled by a high-level panel at this year’s BMO Global Reserve and Asset Managers Conference. The panel, Aligning the Financial System with Global Climate Ambition, was moderated by Michael Torrance, Chief Sustainability Officer at BMO, and featured Bertrand de Mazières, Director General for Finance at the European Investment Bank (EIB) and Joy Williams, Executive Director of the Glasgow Financial Alliance for Net Zero (GFANZ).

As much as climate change is a priority for organizations and governments worldwide, the consensus among scientists is that the world is not on track to solve for and avert many of the catastrophic consequences of a warming planet. Some of the impacts are already locked in, but it’s still possible, if dramatic action is taken, to mitigate the worst effects of climate change, Torrance said to open the one-hour panel conversation.

“That's where this idea of ‘Net Zero by 2050’ as an aspiration, as a goal, as an imperative is really defining the scale of the challenge,” said Torrance. “It’s orders of magnitude higher than any economic transition that's happened in history – from the Industrial Revolution to the electrification of our economies.”

Driven by Policy

In the past, technology and innovation have driven the great economic transitions, which meant that financial incentives were baked into the shift for companies, and policy came later. New technologies surfaced that allowed people to find profitable ways of solving problems and improve efficiencies, like industrialization, electrification and, most recently, the technology for the Information Age.

In contrast, the road to net zero is a policy-driven transition, which means there aren’t the same inherent incentives for companies, organizations and governments to join in.

“The policy goals around this, though, have been accepted,” noted Torrance. “The risk aspect of this has been recognized by financial regulators. We see physical and transition risks becoming part and parcel of how risks to financial systems are being assessed and we're developing new and very innovative ways to look at this issue.”

Mobilizing Capital to Influence Change

For Bertrand de Mazières, Director General for Finance for the EIB, mobilizing the transition comes down to influencing change, like channeling long-term investments to drive clean and renewable forms of energy. As an example, he said the EIB is financing the world’s largest hydrogen plant, in Spain.

He said the bank, the lending arm of the European Union, has been mandated to be the European Union’s climate bank, which informs its two horizontal policy goals, to influence environmental sustainability in the face of climate change, and to engender social cohesion in its activities.

In this vein, the Bank is taking steps to influence the narrative through qualitative as well as quantitative actions, including plans to help finance EUR 1 trillion of investments for climate action and environmental sustainability in this decade. The EIB is also trying to influence behaviors with its own decisions and policies, like one that excluded gas power generation from its investment.

“Gas cannot be the long-term solution for environmental sustainability,” De Mazières told the conference, noting that while gas procurement may continue to be part of the transition to renewable energy, the EIB does no longer finance such projects, and will instead focus on renewable energy both within the EU and worldwide.

In the race to Net Zero, much is said about a “Just Transition” that mitigates potentially adverse social implications through means like re-education of the labor force, opening new economic prospects for populations and thinking about local impacts.

Whether it’s the GFANZ, organizations like the EIB or individual institutions like BMO, it’s a topic that is top of mind, including the need to “myth bust” that a just transition implies an argument against change.

“Just transition for the EIB means a very, very high priority to invest in the parts of society … I would say the parts of society that are more fragile,” said De Mazières.

He said that for the EIB a just transition means everything from investing more in public infrastructure - making transportation systems safer and building better schools and hospitals - in regions that are most impacted by the transition to driving job creation. The EIB, for example, is financing projects to modernize municipal infrastructure and making social housing more energy efficient in regions ranging from Czech Republic to Slovenia and even outside of the EU, both in the neighbours to Europe and in Africa, South America and Asia. To support further this action, EIB has also developed, in coordination with the European Commission, technical assistance programs that, for example, assist local authorities in the design of their sustainable public housing and infrastructure policies.

Unlocking Financial Markets

The critical issue to solve for in reaching net zero, our panelists agreed, revolves around how to unlock the power of the financial market to help finance a transition that will cost some $10 trillion per year for the next few decades, which is orders of magnitude higher than any other in history.

”So, the amount of capital that will be needed to actually achieve this is just overwhelmingly large,” said Torrance, noting that the trick to harnessing and mobilizing that capital, some $150 trillion between now and 2050, will come down to creating the right incentives to change behaviors and make the investments needed to address the challenge.

That’s where GFANZ, an umbrella organization to seven different net zero alliances in private finance, comes in. Launched just one year ago, in April 2021, in partnership with the UN-backed Race to Zero, GFANZ was created to help the financial sector to collaborate on a large scale to tackle common challenges. The alliance is already playing an important role in driving decarbonization.

According to Joy Williams, Executive Director of GFANZ, at the heart of the alliance is a focus on bringing a pan-sector view to net zero requirements and the tools and frameworks in place. That includes a goal to develop a set of recommendations for the entire financial sector to help companies understand what a net zero transition plan should look like; the recommendations and guidelines will be open for feedback in June, with the intention of formally releasing them at the next U.N. climate change conference, COP27 in Egypt.

Critical to the approach of financial institutions, said Williams, is that they are taking an economy-wide perspective, rather than just focusing on the emissions of their portfolios.

“It has to be about emissions reductions in the real economy. It's not about just getting your portfolio footprint down to zero,” said Williams, adding that this shift in mindset will be the catalyst to mobilize private finance to make the necessary changes.

Financial institutions, and the world, are stepping up to the plate, taking massive steps forward in recent years and giving cause for optimism to people like Williams who have been involved in climate change policy for decades.

“I've been doing this for over 20 years, and I've never seen the momentum that I've seen even through COVID in the last two years,” said Williams. “Essentially the financial sector last year at COP 26 stood up and said, Okay, we're going to do net zero. That was the ‘what’.”

At COP27, she said, the focus will be on the “how” and on delivering on the commitments made in Glasgow last November.

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Michael Torrance Chief Sustainability Officer

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