As governments fail to act, hopes rest on the ingenuity of people and technological advances, writes Peter Cripps
I am grateful that my job allows me to focus on sustainable finance. It's a fascinating topic.
But the reality of working in the sector can be less glossy than it may initially seem. Being engrossed in the subjects of climate change and other environmental problems can be a bleak experience. The more you learn, the scarier it gets.
The facts and figures make grim reading. Carbon dioxide (CO₂) levels (measured at the US National Oceanic and Atmospheric Administration's Mauna Loa Atmospheric Baseline Observatory) peaked at 424 parts per million in May 2023. CO₂ levels are now more than 50% higher than they were before the onset of the industrial era, it added.
2023 was the hottest year on record, the latest in a series of record-breaking years. Professor Ed Hawkins of the University of Reading, who invented the famous 'Climate Stripes' image in which each year is given a shade of blue or red to depict how hot or cold they were, posted on social media: "Another dark red stripe gets added [for 2023], though I think I need a new colour ... Some datasets will show that 2023 was more than 1.5°C above pre-industrial levels."
Extreme weather is becoming more common and often only makes local headlines. It seems the impacts of climate change are happening quicker than predicted.
On the plus side, we hear less from climate deniers nowadays. But that's because we are living through climate change, and the evidence of it is all around us.
There is now a pressing need for adaptation as the window to restrict warming to 2°C rapidly closes.
We don't like to talk about it, but it seems we can forget 1.5°C already, it's already baked into the atmospheric cake. The European Central Bank this week pointed out that we are on track for 3°C.
Our governments are failing us
Despite warm words and grand commitments, the policies that are needed to combat climate change are simply not being introduced with anything like the speed required.
There have been some encouraging signs in recent years, such as the US's Inflation Reduction Act. But the bottomline is that emissions continue to spiral out of control. The only thing that put a slight dent in them was a pandemic that locked people indoors.
Knowing that it is human behaviour that is causing this devastation is depressing. And it can be hard not to despair.
We are sleepwalking into the abyss. Scientists have been sounding the alarm bell for decades, we have been told endlessly that climate change will bring death, destruction, poverty and famine – and that it is not too late to do something about it.
But this is a pernicious problem that seems cunningly designed to evade human action. Evidently, its impact is too slow to make the case for immediate and drastic intervention (in the way Covid-19 did) and it necessitates actions from current generations on behalf of future generations, on a timeframe is beyond that of most investment cycles. And often there are seemingly more pressing problems to tackle, such as financial crises or wars.
Greenhouse gases do not care for national boundaries. This is a global problem that one country cannot solve on its own – everyone needs to act, and therefore slow movers can obstruct progress.
Those causing the problem are not necessarily those that will feel the worst of its impacts (and they may be able to afford to better protect themselves), and they are therefore less incentivized to act.
And it will cost money to tackle, meaning that it is hard to convince people to act, particularly when they will not necessarily benefit from those impacts in the near term. When money is tight, as is the case amid current inflationary pressures, many people are unwilling or unable to bear the additional costs.
The unequal distribution of wealth adds to this problem, and climate change often butts up against the development agenda: why should people care about climate change when they are embroiled in a daily struggle to put food on the table? And why should poorer communities deprive themselves of development when richer communities have already reaped the benefits of development and have been the main emitters of greenhouse gases in the process?
So, it is a can that is perpetually kicked down the road.
Progress through the main forum for tackling the problem – the UN COPs – are undermined by countries protecting their own short-term economic interests, and calling on others to bear the costs of action. As a result, nothing of substance is ever really achieved apart from grandiose commitments, which never seem to be fulfilled.
For context, greenhouse gas emissions have continued to go up every year (apart from lockdown-blighted 2020) since the landmark Paris climate agreement committed to restrict warming to well below 2°C with the aim of keeping it to 1.5°C.
And while this inertia and filibustering dominates, the world is warming and irreversible tipping points are being reached. Glaciers are melting. Permafrost is lost, releasing methane (a potent greenhouse gas) in the process. Wildfires destroy forests – and the carbon they sequester. Species are lost. And so on.
In short, climate change is always someone else's responsibility to solve. It is a seemingly intractable problem.
And that's just climate change. We have not even mentioned problems such as biodiversity loss, plastic waste and the myriad of social issues.
It begs the question, that faced with such a bleak reality, how are we in sustainable finance, supposedly part of the solution, expected to remain positive?
Take strength from the people around you
There are countless well-intentioned, kind, brilliant and helpful people working in sustainable finance.
I have been doing this job for more than a decade and during that time I have had the privilege of meeting hundreds of them – they are by far the best part of my job.
The sustainable finance industry is brimming with great people. This community of bright, energetic and forward-thinking people spans the globe.
Market failures of epic proportions (such as a lack of a price on carbon) do not faze them.
Many are prepared to collaborate with fierce rivals on the subject of sustainability.
In many ways, the sustainable finance community can claim to have been in the vanguard of actors on climate change in recent years. Leaders within the sector – and there are many – have understood and warned about the systemic threats posed by climate change.
They have spawned countless initiatives to embed sustainability into the financial sector, from measuring and reporting, green bonds, impact investing, making the case for investing in nature, the list goes on and on.
On a daily basis, I speak to people who are trying to steer things in the right direction, whether they work for specialist impact investors or within financial behemoths that are themselves gargantuan oil tankers – archaic, part of the problem, and slow to turn.
Sometimes these people are sniggered at and dismissed as tree huggers or woke capitalists. Sometimes they are having to win arguments and fight battles internally. Some of them are providing much needed thought leadership.
I salute them all, their energy and their determination.
But sometimes I fear that the expectations on sustainable finance are too great. To paraphrase Mark Carney, finance is an enabler of the transition, not the driver of it. Finance is not going to single-handedly solve the climate crisis.
Government policy is what is really needed. Once this is in place, finance can enable it to be delivered.
Financial institutions are restricted by all kinds of considerations, such as fiduciary duty, strategic asset allocation, and competitive pressures such as the need to show returns.
The financial sector needs to place greater emphasis on working out how it can better engage with governments about how to put the right policies in place to enable finance to flow.
In technology we trust
As governments around the world fail to make good on their promises to green the economy, it increasingly seems that technology and human ingenuity is our best hope.
People are inherently aspirational. They want to improve their quality of life and they want their children to have a better quality of life than they have.
Efforts to convince people to consume less have fallen on deaf ears (although there are some interesting consumer trends such as the shift towards vegan diets).
Technology and innovation that allows people to lead the lives they want, but with a less negative impact on the planet, seems to be the way forward.
Costs of renewables like solar and wind continue to fall, as these industries scale.
One of the biggest success stories of recent years has been electric vehicles, with companies like Tesla demonstrating how a new technology can disrupt an incumbent industry.
Increased digitalisation and connectivity will help bring improvements in energy efficiency and in building the agile and responsive energy grids needed to cope with the intermittent nature of renewable energy.
More technological advances are needed, particularly if 'hard-to-abate' sectors such as aviation, shipping, construction and agriculture are to be tackled.
Take the built environment, for example. My own home is heated by a gas boiler (currently at great expense). There are incentives in place in the UK to buy air-source heat pumps. But boiler engineers tell me they will not work effectively with an old house like mine, which is very hard to insulate well. Plus, the cost of these systems is still unaffordable for most. How is the problem going to be solved?
And perhaps in the future, a scaleable and cost effective way of sucking carbon out of the atmosphere will be invented. (But in the meantime, at least we have trees!)
MDBs to the rescue?
Multilateral development banks are showing increasing signs of raising their game.
Their contribution will be vital to efforts to tackle climate change, which as noted above is inherently linked with economic development.
There is brave talk of reform from the new head of the World Bank.
But ultimately MDBs need to take more risk, if they are going to encourage more capital to flow from the Global North to the Global South.
And to do this, I suspect that governments will need to agree to loosen their mandates, to allow them to take more risk and more effectively leverage their balance sheets.
There are already signs of this happening. The G20 is reviewing the capital adequacy frameworks of MDBs to try to find ways to boost the amount of lending these institutions undertake without significantly weakening their own financial strength.
Among its recommendations, the G20 said development banks should utilise hybrid capital to provide themselves with "considerable lending headroom", as recently happened with an interesting deal from the African Development Bank.
Erm... that's all
Well, that's all the positives I can think of, to be honest.
That's why the headline of this article has a question mark on the end of it.
Perhaps you can think of more?
But it is an important question because people working in sustainable finance are doing really important work, but are essentially operating in a policy vacuum. They are being asked to put their own house in order while the rest of the planet burns.
They need to stay on task. So, some kind of coping strategy is needed.
Peter Cripps is the editor of Environmental Finance.