Emerging market banks are key to climate action
The hard truth is that in much of the developing world, climate change still ranks well below more immediate concerns such as unemployment, disease, poverty and political unrest for households and businesses.
Tell a random selection of bankers in London or New York that you’re going to Glasgow for COP26, and the most likely response will be: “Have you got somewhere to stay?”
Try the same gambit on their peers in Moscow or Jakarta and there’s a good chance it will be met with a blank stare and a “What’s that?”.
For those in countries where climate is an inescapable part of any discussion of the future of finance, it can be hard to realize the extent of the indifference to and lack of awareness of the topic in much of the rest of the world.
This is clearly not because emerging-market bankers are less socially responsible than their developed-market counterparts. Rather, it reflects the priorities of the societies in which they operate.
And the hard truth is that in much of the developing world, climate change still ranks well below more immediate issues such as unemployment, disease, poverty and political unrest for households and businesses.
Where societal pressures on banks are lacking, regulators can help to fill the gap – which is why the steady expansion of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) is very welcome.
Even with 83 regulators signed up, however, the NGFS still has some big gaps in its global network. This means that, not only are banks in many countries potentially ignoring climate risk on their balance sheets, but a big lever for tackling the climate crisis is being underused.
If banks reflect the societies in which they operate, they can also be key conduits for change. Banks connect with almost every section of society, from low-income households to the largest corporates, via entrepreneurs, small and medium-sized enterprises and the wealthiest individuals.
If banks reflect the societies in which they operate, they can also be key conduits for change
Give banks the right incentives to integrate climate into their risk management and decision-making has the potential to raise awareness of climate issue and drive action on it faster than almost any other mechanism.
Multilateral institutions such as the European Bank for Reconstruction and Development and the International Finance Corporation are aware of the role banks in developing markets can play in addressing climate change and are working to ensure they have the tools to do so.
The hope is also that increasing pressure from international investors and counterparts with their own net-zero commitments will in due course prompt emerging-market banks to step up their focus on climate risks and opportunities.
There is no question, however, that the quickest way to achieve results is through direct action by local regulators. As with any other business, nothing concentrates banks’ minds more effectively than the prospect of an immediate impact on their bottom line.
As policymakers, and those hoping to influence them, gather in Glasgow for COP26, the focus of attention has been on whether or not governments – particularly in larger emerging markets – will commit to sufficiently ambitious carbon emissions reduction targets, as specified in the Paris Agreement.
It would be good to see equal airtime given to the need to activate financial regulators in the fight against climate change. They have an equally critical role to play.