Banks Are Following The Money On Climate Change. That’s A Good Thing

This year’s COP26 international climate change conference has seen unprecedented participation from the finance industry, a development that has evoked criticism from those who believe bankers aren’t going nearly far enough to help reduce greenhouse gas emissions.

Greta Thunberg, the celebrated young Swedish environmental activist, has even accused the industry of actively creating loopholes and frameworks that would continue to benefit their business without solving the climate crisis. “This is no longer a climate conference,” she lamented. “This is now a global North greenwash festival, a two-week long celebration of business as usual.”

Comments like those by Thunberg and others reflect the distrust of the finance industry that has ballooned since the Great Recession. While I don’t disagree that bankers will ultimately chase the bottom line, their high-profile role at COP26 is still a positive sign, particularly for government policymakers who are committed to mitigating climate change.

For decades, I have believed that the economically feasible path and the path of moral good ultimately always overlap. Take diversity, which was the topic of a recent Freakonomics podcast episode, which concluded that “evidence from Nazi Germany and 1940’s America … shows that discrimination is incredibly costly — not just to the victims, of course, but also the perpetrators.” The bottom line is that when firms discriminate, they’re leaving money on the table. 

The increasing interest by the finance industry in climate change reflects the fact that we have better data about the long-term impacts of certain investments and an ever-increasing interest among activist investors to direct money into more sustainable projects. Combine that with increasing regulations on fossil fuels and it’s no wonder that more banks and insurance companies are aligning their assets with the terms of the Paris Agreement. It’s simply where the future is heading.

That’s a good thing. Instead of criticizing them, public leaders should be working with the finance industry to promote shared interests. One powerful tool governments have at their disposal is so-called “green bonds,” whose proceeds go toward climate-friendly projects. The Climate Bonds Initiative, which tracks sustainable investment, expects that green bond issuance in 2021 could reach $500 billion worldwide. There’s significant activity on this front in the United States, including among municipal bond issuers: Green-labeled municipal debt is expected to hit a record high in 2021, accounting for 4.1% of total issuance in the market, according to S&P Global Ratings.

Here’s another example where the moral and financial interests align: With interest rates rising, investing in green projects may be a better deal for governments as well. More accountability is expected from issuers of green bonds, but a 2015 University of Oregon study found that timelier information in the municipal market can actually reduce transaction fees on trades by up to 30%. More recently, a Columbia University-sponsored review of academic and practitioner literature concluded that “the weight of the evidence suggests the presence of a positive green bond premium.” Yes, issuing green bonds brings increased reporting requirements, but a multitude of finance companies and startups are lining up to sell governments products that can help with that. 

Finally, like the finance industry, local governments should consider their own costs if they don’t adopt more climate-resilient policies. A recent report by the federal Climate-Related Market Risk Subcommittee warns that climate change and extreme weather events add additional barriers of cost, time, uncertainty and risk to investments. It predicts that demand “will likely grow for public and open access to climate data, including for primary data collected by the government,” noting that data and analytics “can introduce innovations that improve climate risk management.” We are already seeing this demand shift with the new federal infrastructure law, which calls for a number of data initiatives related to climate risk management.  

Perhaps even more terrifying for leaders is this finding by the BlackRock Investment Institute: Within a decade, if significant climate action is not taken, more than 15% of the current S&P National Municipal Bond Index by market value will be issued by cities suffering likely yearly economic losses of 0.5% to 1% percent of their GDP.

In other words, this is no longer just a question of morality. Cities that don’t embrace a data-driven approach to combating climate change and investing in resiliency do so at their own financial peril. And you can be sure that the bankers and insurers at COP26 know this. 

So let’s take this alignment of financial and moral values and run with it. We can’t stop climate change. But the financial industry is a powerful lever to help us slow it.