The Intergovernmental Panel on Climate Change published its sixth climate report in early April, issuing a reminder to take action very promptly to reduce global warming - including funding.
Keeping to the 1.5-degree target in man-made climate change is still possible, the report says, but only if greenhouse emissions increase only in the next three years to 2025 and then nearly halve (43%) by 2030. In the first sub-report, according to the International Panel on Climate Change (IPCC), the range of global warming by the end of the century is possible from 1.4 - 4.4 degrees, depending on the activities undertaken to counteract the heating of the Earth. Global temperatures would stabilize, according to the Intergovernmental Panel on Climate Change, if CO₂ emissions dropped to zero. The prerequisite for global warming of no more than two degrees is that global emissions of 0 percent carbon dioxide be achieved by the beginning of 2070.
Phasing out the burning of fossil fuels in favor of renewables or nuclear power, are powerful options. Other measures include greening cities and using sustainable energy, as well as subsidizing electric vehicles. More green space can help filter and store CO₂ from the air. Converting current production processes in almost all industries and using new technological solutions can be other ways to fight climate change.
However, these measures require financial foundations. One criticism made clear in the IPCC report is that the flow of capital must be three to six times higher in order to limit warming to below two degrees. To combat climate change or adapt to its consequences, an additional annual investment of 180-270 billion euros is needed, according to the European Investment Bank. The report calls for sufficient global capital and liquidity to come from governments and the international community, including the public sector, the financial community and policymakers, to fill the investment gaps.
If we consider in this context the criticism published by the ECB in March that banks are only providing scanty feedback in the current climate stress test, it becomes clear once again that banks still have some catching up to do on the subject of climate change.
In May last year, the European Banking Authority (EBA) published its first estimate regarding the KPI of environmentally sustainable loans based on EU taxonomy in the portfolios of banks, which account for about half of the European Union's banking assets. The KPI value of the Green Asset Ratio turns out to be extremely meager at 7.9 percent, which is alarming when considering the admonition of the Intergovernmental Panel on Climate Change. The Green Asset Ratio is to be introduced at the end of 2022 and gives rise to discussions.
A survey of some 20 major European banks found that financiers rely on customers' key figures. However, many companies will not give them out. In particular, since banks already have climate risks in their portfolios but do not take them into account in their system in the same way as credit risks, climate scenarios would have to be calculated and taken into account in the same way as credit default probabilities.
On the one hand, to be financially and economically prepared against the risks from the almost inconsistent global warming, but on the other hand also to position the own bank assets more green and to be ecologically and economically sustainable.
About the author:
Romina Stuhrmann has been a consultant at CURENTIS AG since 2021 and has extensive project experience from major banks. She specializes in the areas of Know-Your-Costumer (KYC) and Sustainable Finance.