Why Green & Sustainable Finance on the Journey towards Climate Neutrality

In the recent past Finance mainly focused on Maximization of shareholder return on investments making it obvious that all decisions i.e. Risk and Return were centered on the Investor. This limited the scope of conversation on profit maximization with little decisions being made on the communities affected through negative environmental and social consequences in the form of externalities that are hardly priced.

The journey towards Climate neutrality is a delicate one considering that most of our economic activities are industrially powered. In the fairness of having realistic timelines across different jurisdictions, inequalities will emerge largely influenced by Policy and Regulatory challenges, Lack of coordination and Consistency, Economic challenges, Data as well as capacity and cultural challenges. Continuous Collaboration therefore will be critical if we have to overcome the hurdles. The United Nations and the World bank have been consistent and pivotal in directing change through a balance of scientific information and Finance Initiatives e.g. UNFCCC, GFANZ, NGFS etcetera.

To then understand how Finance plugs into climate change we must understand the role it has played in GHG emissions. To better understand the GHG emissions measurement different methodologies are used e.g. Carbon dioxide equivalent (CO2 e-), Global Warming Potential (GWP).It's important to note whilst it's important to disclose the type of measurements used, Global standards of measurement are set by the Green House Gas (GHG) protocol established by the World Resources Institute and the World Business Council for Sustainable Development which divided them into Scope 1,2 & 3 emissions. Financial institutions therefore are largely involved in the Scope 3 emissions which representing majority of the emissions through the value chain. Scope 1 emissions though not quite significant can be tracked through Direct ownership of Buildings by financial institutions. Apparently for Finance, Scope 3 emissions are the hardest to measure because the emissions are a result of activities not in control of the reporting organization, good example would be Credit and Investments done by Financial Institutions.

Having understood the finance points of contacts its paramount to understand the key areas of contribution. In keeping on the right pathway, The Intergovernmental Panel on Climate Change (IPCC) through the Paris agreement of 2015 Article 2.1(c) Making Finance flows consistent with a pathway towards Low GHG emissions and Climate resilient development came into place. The UN Climate Summit (COP 28) held in Dubai delved on operationalization void that was missing on the traction process as well as fixing climate finance.

The Finance scope is wide and picking from the words of Mark Carney, 'Every professional financial decision must take climate change into account. 'Financial decisions stem from Climate change mitigation, climate change adaptation and the whole transition process. The demands are OPEX and CAPEX heavy with aspects of short and long-term shot of it.Some of the key areas around finance and climate considerations are;

1. Aligning Strategy, activities and operations with the SDG's in line with the Principles of Responsible Investment, Principle for responsible Banking & Principles for sustainable insurance.
2. Ensure every Investment Decision incorporate ESG linking desired outcomes with SDG's.
3. Providing Debt finance for SDG Solutions e.g. Sustainability Linked Loans, Carbon Financing etc.
4. Promote access to green financing for individuals, entrepreneurs and small enterprises.
5. Align definitions of Fiduciary duty with broader definitions of Sustainability.
6. Develop Innovative financial solutions and products supporting sustainability.
7. Divesting In investments that do not support the SDG's.
8. Encourage more investments which support SDG's e.g. Green and Sustainability Bonds as well as sustainability linked bonds.

These initiatives are just but a guide on how finance plugs into climate action. Alot has to go on around reporting and disclosures, Measurement and Impact reporting like we shall be seeing in my next articles.

Feel free to contribute on how best we can make an impact to People, Planet and Profits as we Finance Green and Green Finance.