2
Outline
I. Why climate change is a big deal for financial system?
Macroeconomic impact, implications for risk and opportunities, and roles of
the financial system
Assessing current progress in the financial system
II. Some thoughts on ways forward for financial system in emerging markets
Key principles on how to move the issue forward
Some practical problems and challenges for emerging markets
III. Conclusion
3
I. Why climate change is a big deal for financial system?
1. Macroeconomic impact of climate change, is thought to be large, but uncertain, thus posing risk to the financial system.
2. Economic transformation in response to climate change i.e., adaptation and mitigation will require the financial system to adapt by managing risk and
exploring new business opportunities. 3. Financial system can be an agent of change i.e., supporting adaptation and
mitigation, through its influence on resource allocation, developing supportive financial services, markets, and products, as well as engaging
climate change in its own business agenda.
4
Macroeconomic impacts and implications for financial sector
Macroeconomic impact is expected to be large, but uncertain. Estimates from three benchmark studies point to a mean GDP loss of about 0-3 percent of global GDP for
3 °C warming IMF WEO, April 2008. South and Southeast Asia are among the regions most likely to experience the most negative effects.
Impact is tantamount to a major supply shock on the economy’s productive capacities i.e., capital stock and technology. Expected effects include long-term
output decline, higher cost and inflation, shift in relative prices, and declining productivity. Some economies could encounter balance of payments problems.
There is also uncertainty about possible large catastrophic damages. As the financial sector is related closely to performance of the macro economy,
long-term implications for the sector i.e., insurance, banking, and fund management are significant through increased exposure to a variety of risks both its own and
through its clients, as well as possible physical damages to its assets. Threat to financial stability depends on whether the impact is slow-moving, which can
be offset through risk management, adaptation, and financial response, or a series of catastrophic events that could impair the operative capacity of financial institutions.
5
Mean GDP losses at various levels of warming
1
6
Source: CEO Briefing: Adaptation and Vulnerability to Climate Change: The Role of Finance Sector, UNEPFI, 2006
7
Economic transformation, in response to climate change, will require banks to manage risk and explore new business opportunities
Three triggers namely: 1 regulations by Government; 2 mitigation and adaptation by the private sector; and 3 increased public awareness of the
issue; will drive economic transformation toward a low-carbon economy. Such transformation will shift relative prices away from carbon-based
technology, influence the patterns of demand and production toward non-carbon, carbon efficient, and carbon-capture technology, and redirect
financial resources to support the process. Being a service industry, these forces will require the financial system to
adapt through 1 managing risk and the impact of climate change; 2 assisting the transformation by developing supportive financial services,
markets, investment, and risk management products; and 3 exploring related business opportunities.
Awareness, right incentives, and market-mechanism will be key in setting the pace of change.
8
Risk and opportunities of financial sector and climate change
9
Financial sector can spur transformation and support adaptation and mitigation in three main roles
Directly influence resource allocation by internalizing climate change in its core business decisions i.e. lending, investment, fund management
Indirectly influence resource allocation by developing supportive finance services, markets, risk management, and investment to assist adaptation
i.e. insurance, weather derivatives, cat-bond and mitigation i.e. trading of carbon credit and allowances
Scope of opportunities can be large Engage climate change in banks own agenda as part of business planning
and corporate social responsibility CSR
10
Source: “Banks Warm to the Climate Issue”, Environmental Finance, November 2007.
11
Banks are changing ways they do business in response to climate change
Pressures from bank stakeholders, i.e. customers, shareholders, employees, as well as peer pressure are pushing banks to become more
engaged with the issue. In response, banks have paid attention to their own exposure to climate risk
and put up a comprehensive climate strategy by incorporating climate change-induced risk in business planning.
Engage bank management and staffs on climate change as part of CSR
12
Assessing the current progress in the financial system
On direct lending and investment;
Climate considerations in lending -
Citi incorporates the potential costs of carbon in the firm’s financing of power generation. -
Merrill Lynch has specific policy on financing coal-fired electricity generation. -
Credit Agricole has hired a full-time carbon analyst to measure the financial impact of carbon constraints on European companies subject to E.U. Emission Trading Scheme.
- HSBC has called clients to disclose their carbon emissions and mitigation strategies in a
consistent way. Equator principles
- ABN AMRO, Barclays, Citigroup
and WestLB worked with the World Bank to launch the
Equator Principles in 2003 which integrates environmental
considerations into project finance. To date, 54 banks have
signed on the Equator Principles.
13
On market development: Clean Development Mechanism CDM is the
key driver of growth in primary and secondary trading in carbon market.
Assessing the current progress in the financial system
Primary CDM annual volumes MtCo
2
e by regions
3,000 6,000
9,000 12,000
15,000
2005 2006
2007 Voluntary market
other JI
Secondary CDM Primary CDM
Project-based transaction million US
Note: Emission Trading Scheme ETS came into effect in January 2005.
14
On CSR; According to the survey
1
, most banks have done little or nothing to elevate climate change as a governance priority.
– Out of 40 of the world largest banks, only 12 banks have board-level involvement in
climate change initiatives – only 1 in Asia and in US, 3 in Canada, and 7 in Europe. –
Only 13 banks have specific climate-related policies or strategies.
However, board of directors and company’s CEOs consider climate change as an issue they have a duty to address.
– Twenty-four banks have set greenhouse gas reduction targets for internal operations.
– A small but growing number of banks are calculating carbon risk in their loan
portfolios.
Climate change risk becomes an important issue for corporate disclosure in response to investor and other stakeholder initiatives.
– Thirty-four banks responded to the latest climate-disclosure annual survey conducted
by Carbon Disclosure Project CDP.
1. Douglas G.Cogan, “Corporate Governance and Climate Change: The Banking Sector”, A Ceres Report, January 2008.
Assessing the current progress in the financial system
15
Globally, the direction of response by financial institutions is positive, but still in an early stage.
Progress in Asia There is limited progress in Asia
– Although China is main supplier of carbon credit in CDM, but the rest of Asia lags behind.
– Progress is hampered partly by inadequate supporting framework: absence of clear policy framework, incentive structure, information and
knowledge of key players.
Assessing the current progress in the financial system
16
The challenge is how financial system in emerging markets can engage more in assisting the adaptation and mitigation process.
Some thoughts on the key principles for moving the issue forward.
1: Critical role of state and policy in ensuring global rule of the
market is clear and continuous beyond 2012.
2: Government policy should focus on providing market
infrastructure i.e., legal, tax, regulatory framework, accounting, information and ensure correct incentive
structure to internalize benefits from clean technology.
II. Some thoughts on ways forward for financial system in emerging markets
