I was struck by a narrative at #ClimateWeek24. It’s one I’ve heard before and anticipated would get louder. Now that we’re in a period of political volatility, the volume is on full blast. Whilst there are different strains, the basic story goes like this:
“we set our climate targets in good faith, but there’s only so much we can do… the real problem is that until we have policy alignment our strategy cannot fully work”
A key group voicing this concern are the financial sector, who have had a lot of focus on their net zero targets of late. See:
IIF Staff Paper: Resetting the Debate on the Role of Private Finance in the NZ Transition
Bankers say what they really think about net zero at climate week
From a systems perspective, there is a central truth to this narrative. Without policy driving in the right direction, the transition is less likely to occur at the pace we need. Entrepreneurial effort and innovation make a huge difference but without primary policy there are too many gaps and risks of slipping back.
It’s clear that there should be urgent policy focus on repricing externalities, tilting the economics towards transition and catalysing new technologies and approaches to bring about a future sustainable economy. It’s less clear whether legacy industries will transition or be displaced by disruptive innovation – in the way that they have been in the past.
We all need unequivocal transition policy to be in place. It mostly isn’t. And that is causing our net zero strategies to fail.
There’s only one gap in the narrative that’s missing.
Which is that: INFLUENCING POLICY IS PART OF STRATEGY. For the financial sector, how they use their outsized agency in the policy debate is of central importance, backed up, as it can be, with on-the-ground economic and financial insights. And one of the biggest influencers of policy is what everyone sees companies and financiers actually doing.
There seems to be very little evidence that many are showing up to influence primary policy in this direction (exceptions like Aviva and Triodos are notable). Instead, the attention appears to gravitate stubbornly on data/disclosure initiatives leading to a plethora of new regulations and reporting frameworks. So while we’re busier than ever on sustainability policy, there are dwindling consequences for each component. What’s needed is “a little less legislation, a little more action” and financial sector actors to show up where it matters most.
But when many of the largest actors in the financial sector do show up, it isn’t in public, and generally it isn’t on the side of transition. Where are the banks, investors and insurers when policy decisions regarding fossil fuel expansion takes place? Why are they so reticent to reiterate their commitments to net zero at those moments? The majority are somewhere between shuffling back into ‘neutrality’ hiding holes and actively encouraging ministers to not act too hastily.
The commentators shining a light on policy are right to focus on national transition plans and the frameworks around them to reprice environmental benefits and harms. They note that “capital will only move in support of net zero goals at scale when the economics make sense”. The reality is that the financial sector is harbouring too many actors who don’t want the economics to make sense just yet, and are addicted to being the last ones making a profit before the music stops.
Hundreds if not thousands working within financial institutions can see what is going on and desperately want change. They can’t speak openly (indeed there has never been a time so guarded by legal intervention to prevent expressing opinion on climate) and often are channelled into debates around less sensitive policy changes at the fringes.
Their energies, insights and strategic thinking could be harnessed positively in service of the most effective, climate-safe, socially just and smartest transition possible. It would require a major shake-up in organisational strategy, governance and processes. And firms might find it difficult to change their habitual approach to public policy engagement. But it’s hard to imagine a ‘transition’ without a lot of massive changes. Given that we need co-ordinated, national-government transition policy to change fundamentally, we need financial institutions to show up in a radically different way in the policy arena. And if that’s not part of their strategy, it’s only possible to conclude they have a different objective.