Climate change affects finance sector

An open cast mine near Fort McMurray, Alberta, Canada, pictured in 2009, which was being used to extract oil from the Athabasca tar sands fields. A group objected to HM Treasury's holding in the project (Emily Beament/PA Wire)

An open cast mine near Fort McMurray, Alberta, Canada, pictured in 2009, which was being used to extract oil from the Athabasca tar sands fields. A group objected to HM Treasury's holding in the project (Emily Beament/PA Wire)

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This week, IoM Friends of the Earth’s Cat Turner reflects on ways the world’s financial services industry will be affected by (and can respond positively to) climate change.

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As a result of some 30-odd years in the finance sector, both as an employee and as a lecturer/author on the subject, I’m privileged to sit on the Sustainability Committee of the UK’s Institute of Financial Services.

We’re charged with the task of ensuring that those employed in the UK financial services industry understand the issues that arise for them from issues such as climate change, resource depletion, pollution and deforestation.

The aim is to ensure that financial services companies:

– have employees who understand what sustainability is all about, and why it matters

– can comply with the mandatory requirements which governments are introducing, to try and protect the environment for us and for future generations. These include energy efficiency requirements, carbon footprint and environmental responsibility reporting requirements for listed companies, and the like.

– can run their own day to day operations in a sustainable way, for example through better recycling and procurement, which usually helps not only the environment, but their own bottom lines

– importantly, can respond to the sweeping changes we’re going through, to introduce new products and services which work well in a sustainable world and don’t contribute to worsening the situation.

There’s tremendous potential for the finance industry to create new solutions, and new skills and jobs, from these changes – and many finance centres are seizing the opportunity. So I thought I’d focus for the next series of columns on some of these, in the hope of inspiring any leaders in our own finance sector who might not yet be up to speed.

First, I’ll focus on climate change. Although there are a host of other environmental and social justice issues coming home to roost in financial markets, this one is probably the most urgent.

Climate change impacts on investors (including banks, institutional investors like your pension provider, insurers and individual shareholders) in two main ways

– directly, through the impact of climate change on operating their business. For example, some big organisations in the UK are subject to the UK’s CRC Energy Efficiency Scheme, a piece of climate legislation which came into force inl 2010.

– indirectly, through the effect of climate change on the companies that they lend to, or invest in.

Investors are probably most concerned with the indirect effects of climate change on the value of their investments, including:

– climate change legislation: this may limit the ability of the companies they invest in to operate, or it might affect their growth strategies. Companies may also incur compliance costs – eg, to install new equipment to limit greenhouse gas emissions.

– resources: It may be harder for companies to secure resources, such as energy and water.

– physical impacts: companies’ operations may be affected by extreme weather events, such as droughts, flooding or storms.

– market risk: there’s already reduced demand for some companies’ products - for example, car-makers are under pressure from consumers for more fuel-efficient cars.

– reputational risk: companies are increasingly expected to recognise and, where possible, mitigate their climate change impacts. Failure to do so can affect a company’s reputation and brand, and this can drag share prices down.

– litigation risk: in the US, companies in carbon-intensive industries (for example, electricity generation and oil and gas) are already starting to face litigation in respect of their contribution to global climate change - as they rightly should. I’d doubt if a civil claim for damages owing to climate change would be successful in England and Wales right now, given the difficulties in proving causation, but environmental groups are nonetheless pressurising banks in respect of the climate change impact of their activities.

This last element isn’t new. In June 2009 and February 2010, a coalition of environmental groups applied for judicial review of HM Treasury’s financial holdings in Royal Bank of Scotland and other banks, claiming that RBS investments in projects such as the Canadian tar sands was inconsistent with the government’s own climate change commitments.

But it’s not all bad news.

Investors are also realising, fast, that climate change can offer new business opportunities, for example, in the ‘clean tech’ and renewables sectors – an area the Isle of Man is fast developing expertise in, and one which needs the type of corporate and financial structuring skills the island has in spades.

In future weeks, we’ll take a look at some of the ways in which our own financial services organisations can identify and respond to some of these, and many other ‘new economy’ opportunities.

The island is blessed with a responsive and nimble regulatory and legislative infrastructure.

It would be good if we can use these to respond to these emerging opportunities, as we have done so often in the past.

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