Harnessing the Financial Transition

Last Friday the temperature in Death Valley, California, reached 130 F, matching the highest temperature ever recorded since 1931. This year in In Mexico, intense droughts in 80% of its territory have driven scarcity in agricultural products increasing-price indexes. The Bank of Mexico (Central Bank) stepped in to contain inflation by increasing interest rates and recognized the potential impacts of climate change to economic stability.

There is no doubt that the impacts of climate change are becoming more frequent and intense, and their effects transcend specific locations and regions. We are living at a breaking point where climate risk is beginning to set the bar for the decisions of governments, corporations, and capital markets. According to Swiss Re, the impacts of climate change could reach US $23 trillion dollars in losses and a GDP contraction of 14% by 2050, with Mexico standing out among impacted countries given its high vulnerability. ??

Capital markets react to climate risk by penalizing high carbon-footprint assets and rewarding clean projects and technologies. In a number of unprecedented events, the last week of May, we witnessed how citizens and investors are beginning to influence the decisions of large oil and gas corporations. First, a Hague Circuit Court in the Netherlands ruled Shell to cut its CO2 emissions by 45% in 2030. Then, in Texas, the giants Exxon Mobil and Chevron were compelled by investors to enhance their commitments with decarbonization. Citizens will continue to demand greater environmental responsibility through electoral processes, strikes, social media, and now also through courts. Investors will resort to board meetings, letters to asset managers, and portfolio decisions to manage climate and environmental risks.

The transition to “net zero” economies also offers an enormous potential for business, employment and development. According to the International Energy Agency, the possibility of reaching a carbon-neutral economy by midcentury is narrow but attainable. Among other things, it will imply to immediately halt the development of new oil and gas fields, to electrify transport, and to increase wind and solar energy capacity fourfold by 2030. ?Probably, the biggest challenge is financial, since the transition towards “net zero” economies requires $ 5 trillion dollars of investment in clean energy a year. However, such an investment will create 30 million new Jobs and a 0.4% stimulus in global GDP a year.

The news in capital markets is encouraging. Green finance is not a niche market anymore and has gone mainstream. Assets in investment funds focused partly on the environment reached almost $2 trillion globally in the first quarter of 2021, more than tripling with respect to 2019. Investors are putting $3 billion a day into these funds. More than $5 billion worth of bonds and loans designed to fund green initiatives are now issued every day. According to BlackRock, the energy transition represents a $50 trillion business opportunity in the next two decades.

However, this transition will have to speed its pace to meet the Paris Climate Agreement’s geals. In the finance market ecosystem, governments are beginning to induce the supply of low carbon assets through fiscal and monetary policy tools. Last week, the Mexican government issued its second sobering bond aligned to the SDGs, following the first-ever issued bond of this kind also by Mexico last year. In the same line, Mexican financial regulators are embracing the global trend of climate risk assessment and management to shield financial stability through scenario analysis and stress testing. The transition to “net zero” economies is no longer an issue of responsibility but a development imperative. ?

Article originally published in Reforma news: https://www.reforma.com/transicion-financiera-2021-07-16/op208488?pc=102&referer=--7d616165662f3a3a6262623b6770737a6778743b767a783a--

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