Banks could be our best hope in the fight against climate change

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By Paul J. Davies

Temperatures are rising and there is a lot of work to be done to avoid dire consequences. Europe sees a quick and easy way to make things happen: through the banks.

Industry executives may not like it, but banks are both an effective way to raise the cost of carbon and ensure that all companies properly disclose their emissions. Governments can force banks to do the supervisory work for them.

If that sounds like an outrageous request, look at them another way. Banks are already being used for political and social purposes, especially by the United States. The rules on money laundering have been tightened considerably over the past 20 years, in particular to combat the financing of terrorism and thwart the activities of politically undesirable or dangerous individuals and groups. Ask BNP Paribas what happens if you help deal with money for America’s enemies. (The French bank was fined $ 9 billion in 2014 for carrying out financial transactions for Sudan, Iran, and Cuba.)

The simple fact is that finance is everything and banks can be controlled relatively easily. The system is an efficient one-stop-shop for the economy and is already closely monitored and regulated.

In terms of climate, the idea is to get banks to think a lot more about the type of companies to which they lend and at what price. Many banks have already stopped funding coal-fired power plants, but stress tests that involve climate-related risks and will lead to higher capital requirements may help create increased funding costs that should help support cleaner business activity and to discourage dirtier practices in all sectors. .

The European Banking Authority said this week that it expects banks to take tighter environmental regulations seriously and start increasing their capital buffers, helping them absorb uncertain losses resulting from the risks. climate related. Upcoming stress tests in the eurozone should start to reveal how much pain climate risks could cause in loan portfolios. To understand this, banks need to collect and report much more information about their exposures.

It is a difficult and costly problem for the industry, but it is inevitable. Why? Because governments have understood that acting through the financial system is both economically and politically expedient.

Voters don’t like additional direct taxes on their cars, energy suppliers, or businesses that push up the prices of things they like to buy. And yet pollution and the high use of fossil fuels must be made more expensive to make people find other ways of doing things. Raising the cost of funding and capital for activities that are worse for the environment is a good answer.

There is still a debate to be had. Some bankers prefer carbon pricing, which affects all industries and should hit the worst offenders with the highest costs. One way to do this is through emissions trading systems or carbon credits. They have a similar effect to taxes, but the rate or cost is set by markets, not governments. One downside is that speculation can lead markets to misjudge things, sometimes in a savage way. Governments should also keep an eye on businesses to ensure that they are using these tools correctly and bearing the right costs.

Beyond political convenience, banks need to understand and prepare for climate-related risks anyway. There are loans to businesses, homes and commercial property that face an increasing risk of fire or flood, for example. If consumer preferences change and shift to greener goods and services, what is the value of loans to established businesses that are being left behind?

Bankers can complain, but using their industry to fight climate change makes a lot of sense. Financial incentives work, and forcing banks to impose the costs is more effective than waiting for politicians to make direct taxes acceptable in one way or another. – Bloomberg.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

This column does not necessarily reflect the opinion of IOL or Bloomberg.


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