Sustainability In The Financial Services: What Comes After COP26?

Written by Sabrina McClune | 14 10 21

What does COP26 mean for financial services and what needs to happen next? We break down what financial services firms need to know, what they should plan for, and how they can start today.

Climate Change: An Overview

The United Nations’ Framework Convention on Climate Change (UNFCCC) defines climate change as ‘a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.’

So far, this human activity has caused the average temperature of the Earth’s surface to rise by 1°C, with the UK experiencing an average temperature rise of 0.8°C over the past decade.

The main contributor to this is carbon dioxide, with levels increasing by 45% since the industrial revolution.

This may not sound alarming out of context; however, drastic changes can be observed across the planet, particularly in:

Oceans: Sea levels have risen by 20cm in the past 10 years, with ocean temperatures also steadily rising.
Melting Polar Ice: Sea ice has stopped growing and is now decreasing rapidly, especially noticeable in the ice sheets found in Greenland and the Antarctic.
Extreme Weather: Frequent storms, prolonged heatwaves, and heavier rainfalls have been observed worldwide. Over the past decade, 370,000 deaths can be attributed to extreme weather, alongside an estimated $660 (£450) billion of economic damage.

Financial Services and Climate Change

When considering the financial services’ impact on global warming, there are two areas we must examine – indirect and direct.

Indirect Causes:

UK banks alone were responsible for financing 805 million tonnes of carbon in 2019. This is 1.8 times the annual net emissions of the whole UK.
Since the Paris Agreement, the 60 largest banks in the world have provided £2.7 trillion in finance to high-emission sectors through fossil fuel projects such as oil and coal.
In 2018, less than 1% of the assets within the world's largest pension funds were invested in low-carbon solutions.

Direct Causes:

Banking and insurance companies spend $10.5 (£7.8) billion a year on printing.
The average worker within the finance industry prints 20 pages a day.
507 million documents are sent to financial services customers annually.

Considering that the average tree provides 10,000 sheets of paper, the financial services sector is responsible for the deforestation of over 50,000 trees a year.

Counteracting Climate Change: What's Being Done?

The Climate Change Act 2008

The first legally binding target drawn up by the UK, this legislation initially required the government to reduce greenhouse gas emissions by 80% before 2050.

After achieving a 42% reduction in emissions, the government amended the act in 2018, now stipulating the need to achieve net zero by 2050 instead.

Paris Agreement

Created in 2015 during COP21, the Paris Agreement is an international, legally binding treaty between 196 parties.

The agreement aims to prevent further climate change, ensuring global warming remains below 2°C and ideally below 1.5°C.

COP26 extended and finalised the strategies laid out within the original agreement.

Green Finance Strategy

Formed shortly after the Paris Agreement, this strategy was approved with a joint declaration from the Financial Conduct Authority (FCA), Financial Reporting Council (FRC), The Pensions Regulator (TPR), and Prudential Regulation Authority (PRA).

It outlines the role of the financial services industry in securing climate change goals going forward.

Mandatory Climate Disclosures

In the months leading up to COP26, the UK government committed to making the financial system the greenest in the world.

They declared that all large financial institutions must create and reveal climate-related risks and targets by 2023, expecting these businesses to adapt their offerings to meet these goals.

What Was COP26?

COP26 was an international summit involving discussions among 25,000 delegates, including world leaders, opinion formers, and top businesses, about worldwide climate change and the next steps needed to achieve the original Paris Agreement.

Hosted in Glasgow in partnership with Italy, the event ran from the 31st of October to the 13th of November and resulted in several new agreements.

Key goals on the agenda were:

Secure global net zero by mid-century and keep 1.5°C within reach
Mobilise finance
Adapt to protect communities and natural habitats
Work together to deliver

COP26: What Were The Outcomes?

Mitigation

During the summit, 153 countries put forward new or updated emissions targets, known as Nationally Determined Contributions (NDCs).

This means that 90% of the world’s GDP is now covered by net zero commitments, which are estimated to reduce greenhouse gas emissions by 5 billion tonnes by 2030. These contributions involve:

The continuous journey to global net zero by mid-century, ensuring that global warming does not rise above 1.5°C, as outlined in the Paris Agreement.
190 countries agreeing to phase down their coal power, as it currently accounts for an estimated 40% of annual CO2 emissions.
137 countries committing to end and reverse deforestation by 2030, with 30 large financial companies, such as Schroders, Aviva, and Axa, promising to end investments related to deforestation.
Increasing the pace of transition to zero-emission vehicles, as road transport accounts for over 10% of global greenhouse gas emissions, with General Motors, Jaguar, Fiat, Volvo, Audi, Ford, and Volkswagen committing to produce zero-emission vehicles by 2035.
Over 100 countries declaring they will cut methane emissions by 30% by 2030, as it remains responsible for one-third of current global warming, potentially preventing a further 0.3°C of warming by 2040.

Adaption

COP26 saw the launch of the Adaptation Research Alliance (ARA), a global network of 60 organisations from 30 countries dedicated to protecting vulnerable countries from the harmful effects of climate change. $12.7 billion was pledged to the cause, with significant funds including:

$350 million to the UNFCCC adaptation fund
$600 million to the Least Developed Countries fund
$27 million to the Coalition for Disaster Resilient Infrastructure adaptation fund

Finance

Studies indicate that the global shift to net zero will require an estimated $5-7 trillion per year to ensure full decarbonisation. To contribute towards this, a commitment was made by developed countries in 2009 to raise an accumulative $100 billion a year.

As of 2021, $88 billion had been raised, with the $100 billion goal set to be achieved by 2023. Roughly $500 billion of the total saved so far will be mobilised between 2021-2025, contributing towards costs for ‘renewable energy, flood defences, drought-resistant crops, and the development of green technology’.

Collaboration

COP26 served as the platform for finalising specific details and rules from the Paris Agreement, most of which were agreed upon during COP24. Additionally, the Breakthrough Agenda was endorsed by 40 countries, leading to several collaborative goals to be completed by 2030, including:

Making clean power the most affordable and reliable solution
Making zero-emission vehicles the new normal
Making near-zero-emission steel the preferred choice
Ensuring affordable, renewable, and low-carbon hydrogen is available

Reactions To The Summit

Reactions to the outcomes of COP26 have been mixed, with a common thread of concern around a feeling of ‘diplomacy over substance’.

Several spokespersons have expressed that the event and its outputs focused on the wealthy, ignoring smaller communities that need urgent assistance.

Many believe that the pledges made at the summit, even if fulfilled within their timelines, will not be enough to maintain the 1.5°C goal for global temperature.

This sentiment was heightened by a last-minute wording change from ‘phasing out’ to ‘phasing down’ fossil fuels, with critics stating that the ‘watering down’ of the commitment could have damaging consequences.

How Do The COP26 Outcomes Affect Financial Services?

The leaders of COP26 specifically stated that ‘to achieve our climate goals, every company, every financial firm, every bank, insurer and investor will need to change.’

It's clear that a global effort by financial services companies is essential to ensure that pledges are carried out within their specific time limits. Official guidance suggests that the financial industry needs to:

Utilise and unleash private finance.
Consider the impact on climate with every financial decision made.
Be transparent about the risks and opportunities that climate change and a net-zero economy pose.
Reinforce the financial system to withstand the transition to net zero.
Align investments and lending with net zero aims.

Beyond these broader aims of financial mobilisation and economic stabilisation, firms will need to develop and implement a carbon-conscious strategy in preparation for the mandatory disclosure of climate-action plans set to take effect in 2023.

Businesses will need to think bigger than the bare minimum, going above and beyond to ensure the necessary time and effort is invested to turn plans into actionable pledges.

What Are The Benefits For Financial Organisations?

Financial organisations that take sustainability seriously will do more than support the larger picture of net zero; they will also reap rewards for their efforts. According to existing studies:

51% of consumers believe that financial services organisations should do more to help the environment.
71% are more likely to choose a bank with a positive social and environmental impact.
61% would leave their bank if it was linked to any social or environmental harm – even if they provided the best offers.
40% of banks that implement sustainability initiatives report an increase in cost savings, customer retention, and business growth.

What Are The Next Steps For Financial Services?

Environmental, Social and Governance (ESG) considerations will be increasingly important moving forward, with organisations needing to address their sustainability issues at the core.

The Cambridge Institute for Sustainability Leadership states that an ‘active mindset’ is required, with a focus on fostering financial leadership that views the future as inevitably low carbon.

This might mean financial services companies will need to manage pressure from various stakeholders, including regulators and asset owners, to deliver and communicate commitments effectively and accurately.

For banks and investors, the creation of green finance will be crucial, with stricter policies and increased scrutiny regarding potential financing for businesses. However, this mobilisation of capital will not exclude these companies from addressing their own substantial operational footprints.

Digitisation to Prevent Deforestation

Digitisation is one way in which businesses can address the key COP26 outcome of reducing deforestation.

Statistics show that in the past 40 years, a forest area the size of Europe has been cut down, with 42% of all global wood harvested to make paper.

This unsustainable consumption can be significantly attributed to business use.

Studies reveal that 422 million metric tonnes of paper are consumed globally each year, with the average office worker using 10,000 sheets of paper annually. Within financial services specifically, 70% of the processes in banks and insurance companies remain paper-related.

Shifting paper statements to digital formats could reduce greenhouse gas emissions by 37,000 metric tonnes, alongside water consumption by 136 million gallons.

Beyond the environmental benefits, investing in paper-eliminating technology could cut 25% of operational expenses, with the UK set to achieve industry savings of £1.3 billion if just 80% of their customers were to go paperless.

Consumer demand for sustainable practices is also high, with 45% choosing paperless billing purely because it is a greener alternative.

An estimated 72% of UK banks are already embracing digital technology to make their business operations greener.

By continuing to deploy technology solutions, the financial services industry can use transformation and innovation to proactively combat climate-related challenges.