Investors are leading the climate change charge towards zero emissions and cleaner fuels while governments lag behind

  • Financial giants are redirecting massive money flows away from fossil fuels as slow movers report losses. But trillions of dollars in carbon assets remain on investors’ balance sheets
  • More needs to be done, by both financiers and governments, and next month’s UN Climate Action Summit is an opportunity

Some of the most influential players in the global economy are spearheading the shift towards a clean, green, emissions-free world, even while key governments stand idle. Financial giants from Europe, China, Japan, the United States, Australia and elsewhere can see the looming risks and rewards, and they are not waiting for policymakers to signal what needs to be done.

By immediately banning new fossil-fuel investments, labelling clean and dirty energy producers, and dumping unappealing stocks, the financial industry is redirecting huge money flows from fossil fuels to low-carbon technology.

Such decisions can ripple across economies. Consider, for example, the split between state and private energy finance in India. According to the Delhi-based Centre for Financial Accountability, primary finance for coal-fired power plants dropped by 93 per cent between 2017 and 2018, while finance for renewables rose by 10 per cent. Loans for coal projects last year mostly came from government-controlled institutions, whereas three-quarters of renewables financing came from private banks.

In Japan, banks and traders are abandoning coal projects in favour of renewables, even though the government resisted setting a phase-out date for coal-powered energy. Three Japanese coal-plant projects have been cancelled or delayed this year.

Globally, the International Energy Agency (IEA) reports investments in coal-power plants hit a century low last year, with more coal generators retired. This trend will become more pronounced as more financial firms shift from fossil fuels. Consider the headlines since March.

Norway’s sovereign wealth fund is divesting US$13 billion in fossil-fuel stocks. Japan’s Mitsubishi UFJ Financial Group has stopped financing new coal-fired power projects. Chubb became the first major US insurer to ban coal coverage and Suncorp the last Australian insurer to end coverage for new coal-mining and coal-power projects.

Moreover, the London Stock Exchange has recategorised oil and gas stocks as “non-renewable energy” and green-energy stocks as “renewable” instead of “alternative”. The world’s largest investor in overseas coal projects, Oversea-Chinese Banking Corporation, is ending financing for coal-power plants (once it finishes two Vietnam projects), while China’s State Development & Investment Corporation will stop investing in new coal-fired plants and focus on new energy sources.

More broadly, the Investor Agenda for a low-carbon world has attracted 477 signatories, representing around US$34 trillion in assets under management. These investors are calling on governments to limit rising temperatures and meet the Paris climate agreement’s more difficult goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.

Meanwhile, those who ignored climate-change warnings are taking financial hits. BlackRock, the world’s largest fund manager, lost around US$90 billion over the past decade, three-quarters of it from holdings in ExxonMobil, Chevron, Shell and BP.

The shift from fossil fuels is monumental but far more needs to be done; and trillions of dollars in carbon assets remain on investors’ balance sheets. Coal investments have fallen but capital spending on oil, gas and coal bounced back last year, according to the IEA, and investment in energy efficiency and renewables stalled.

Worse, the consultancy Wood Mackenzie finds that the renewables boom has translated into only 2 per cent of global energy demand. Coal, oil and gas could still supply 85 per cent of primary energy by 2040, from 90 per cent today.

To complete the transition from fossil fuels requires drilling down to the core of the global economy. Companies cannot keep producing oil, gas and internal combustion engines while shifting to cleaner technologies; they need to make a clean break.

Financiers need to withdraw support for all fossil fuels. Governments must impel their economies to adhere to the 1.5 degree limit on warming. Our current path will lead to warming of 3 degrees or more, with catastrophic consequences.

The UN Climate Action Summit on September 23 offers an opportunity for financial institutions and governments. Secretary-General António Guterres has called for gold-standard leadership: government and private-sector commitments to slash emissions to net zero, with interim targets every five years.

Investors need to rise to the occasion by structuring portfolios to achieve net-zero emissions by 2050. That means pushing companies in their portfolios to change or risk being cut off. But setting long-term aspirations will not be enough. Actionable steps must accompany the commitments, to keep progress on track.

Andrew Higham is chief executive of Mission 2020 and a visiting fellow of practice at the University of Oxford’s Blavatnik School of Government.

The article, first published in the South China Morning Post, can be accessed here.

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