With over 100,000 attendees and well over 1,000 events, London Climate Action Week (LCAW) has become a global source of inspiration for all involved in the climate community.
It was also a source of intense perspiration. Every event I attended mentioned the UK’s sweltering heatwave and record London temperatures.
Much more positively though, the conversation has come of age: every event also mentioned that government policy was key to transitioning the finance system.
In our first public outing under the newly created Finance Transition Centre, David Neaum and I launched our inaugural white paper The Architecture of Transition: The case for transition governance.
Transition governance backed by policy dependency disclosures represents a paradigm shift in market practices by companies, investors, regulators, governments and the multilateral system.
It recognises that while climate change is a market failure, it is for governments to correct. Market participants do not have their hands on the levers of change.
But by raising their stewardship to the macro level and engaging with governments as system-level stewards, asset owners can encourage governments to better shape the market incentives.
We have direct personal experience of effective stewardship at this level from our time at Aviva. For their part, Aviva Investors took the LCAW opportunity to launch the next in their series of policy roadmaps: Boosting low-carbon investment in the UK.
We are in no doubt that this is the way to mobilise capital within the investment chain in the right direction.
While this macro – or system-level – stewardship argument is increasingly well-understood, the evidence suggests that industry practice is wanting.
The Time To Get Real report launched by Volans and the Generation Foundation highlighted that demand for climate policy stewardship falls a long way short. They rightly encourage shifting focus from basic corporate disclosure rules to real-economy policies like renewable power transitions and aggressive emissions targets.
This is a missed opportunity. Asset owners, particularly those with long horizons such as pension schemes, have a dual long-term interest in backing the transition.
First, there are the obvious financial returns to be made from backing electrification today. For example, renewable energy and battery technology are now cheaper than fossil fuels in most parts of the planet and are therefore seeing demand surge due to the conflict in the Strait of Hormuz.
Second – and much longer-term – there is the powerful argument that the financial system is at risk of potential collapse if we allow the physical risks of runaway climate change to manifest.
Any pension trustee with long-term fiduciary horizons should be deeply concerned about such a prospect.
A transition governance-informed response would encourage their investment consultants, asset managers and investment banks to be advocating for change. After all, the asset owners effectively pay them via fees and transaction costs to look after the scheme’s long-term interests.
All the net-zero coalitions have been understandably tested by the backlash. And yet all their commitments were explicitly predicated on governments shifting policy in the right direction.
Rather than walk away from such commitments, signatories should all find new ways of working together that challenge governments to deliver the policies they pledged.
Demand push
We firmly believe there are ways we can address ultimate beneficiaries and asset owners that would lead to shifts in demand for macro stewardship and subsequent policy shifts.
As we see it, two main things need to happen.
First, greater awareness around the potential for financial system climate collapse is required. Second, there is the potential to create an integrated transition governance vision that sets out how we could help to govern a just and smooth transition to net zero from within the financial system.
The core climate private finance mobilisation problem is that private capital will remain misaligned with the transition for as long as climate remains a market failure in the real economy. This is because market failures mean that economic incentives and the profit motive are aligned against the transition.
Crucially, financial institutions also have a huge long-term interest in undertaking this work.
It remains latent because their own long-term commercial interests in maintaining structural market integrity are not yet motivating the behaviours they could, as their boards are not thinking sufficiently long-term.
Similarly, their long-term fiduciary duties to their clients to work in this macro area are also not yet part of the mainstream global debate. They should be.
Shifting policy
However, generating demand for macro stewardship that helps to shift market fundamentals via effective government policy engagement will not be enough by itself.
There remain a series of further strategic hurdles within the finance system that would ideally need to be simultaneously addressed.
These short-termism hurdles include: valuation models; credit rating methodologies; personal pay and incentives; corporate business models; fund manager culture; analyst and fund manager education course content; compliance and regulation; and legal interpretation of fiduciary duty and market integrity laws.
Finally, while there are notable exceptions, civil society and negotiators also tend not to understand the financial system and therefore find it hard to hold to account and mobilise at scale in an efficient and effective manner.
If we are to unlock the private finance element of the roughly $10 trillion per annum of investment capital that is required to deliver the Paris Agreement, then all of these short-termism hurdles will need to be cleared in some way.
Challenging, most definitely. But once the actors in the system recognise that their long-term financial interests are absolutely aligned with the transition, then all will be surmountable.
In short, money talks. Risk-adjusted returns could either be catastrophic if we continue towards the 3C implied temperature increase, or phenomenal if we manage to transition to avoid it.
It’s largely up to governments to decide. And, as LCAW demonstrates, finance has a major role in helping to shift their attention and shape that debate.
That LCAW itself has been hosted during some of the hottest days in London this year has not gone unnoticed by anyone. But it would have been so much fairer on us all if the heatwave had occurred during London Oil and Gas Week…
Steve Waygood is CEO of the Finance Transition Centre
