The climate crisis is both a risk and an opportunity for the financial world

VThe eternists of the annual United Nations climate summits were stunned at Cop26 in Glasgow last month by the number of financial executives in attendance.

Bankers, fund managers and venture capitalists have been steadily rising to these heights for years. But the increase in environmental, social and governance investments since 2019 has transformed what had always been an academic and regulatory meeting into what has been called a “mini-Davos”, with side meetings and private hearings with world leaders.

The lucrative opportunities around renewables, electric vehicles and new technologies to suck dangerous carbon from the atmosphere have captured the imaginations of a new generation of investors. But it took Covid, and the global shutdown it produced last year, to really focus the minds of the financial elite on the flip side of this opportunity – risk.

Greta Thunberg and her young protesters might oppose it, but besides being an existential threat, climate change is a $ 22 trillion financial problem. This is the amount of money that banks, insurance companies and asset managers around the world have currently tied up in the oil and gas industry, according to Moody’s Investors Service. More than half of this amount is in outstanding bank loans, while the rest is in investments.

While shutting down the global fossil fuel industry is seen as the ultimate goal for many young climate enthusiasts, how it can be done without creating a global financial crisis will be one of the key flashpoints. emergency in 2022.

World leaders including US President Joe Biden and British Prime Minister Boris Johnson have been largely powerless against the forces of fossil fuels, in large part because new renewable strategies cannot meet the world’s energy needs by development, as in China and Africa.

Bankers and financial elites also have a poor track record, having exploded the business world 15 years ago with dangerous real estate derivatives during the global financial crisis. No one went to jail, but several large companies collapsed and it took years for the economies to recover.

Yet, it is some of the young survivors of this crisis who have now grown up to dominate the next phase of the energy transition. Companies like First Solar, Sunpower and, yes, Tesla, can thank the investors who shot them at the time.

Who will be the next generation of these solar, wind and electric companies and how they will perform over the coming year is one of the most exciting board games in City, Wall Street and Silicon Valley this year. holiday season.

In terms of where the action will be taken, London leads Europe in terms of the number of climate tech startups and is second to the San Francisco Bay Area overall, according to a recent report. from London & Partners, a group that promotes financial activity in the City. . London’s Square Mile is responsible for more than half of the funds raised for climate technology funds over the past five years. Wall Street, home to big new climate players like BlackRock, is also climbing the list.

A third leg of the financial stool, along with risk and opportunity, is aid – particularly how rich countries can help poorer countries, such as island states, afford an economic transition. Institutions such as the International Monetary Fund and the World Bank, as well as central banks such as the US Federal Reserve, have been criticized for not doing enough to facilitate the billions in aid that will be needed.

Much of the discussion is now either about easing aid restrictions or tapping new sources of private capital flows. Banks and asset managers are banding together to buy out old oil and gas wells and shut them down cleanly, for example.

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Twelve months ago, as the gloomy days of the 2020 pandemic gave way to hope for vaccines in 2021, many climate leaders, like John Kerry in the United States, said this year must be the year. hinge year for the world to finally begin to act. climate change.

It was not the pivotal year, and neither was 2022. Rather, the conditions for a response to the climate emergency are developing as countries grapple with high oil prices and lack of energy resources. Australia and China come to mind. Soaring carbon prices in Europe this holiday season have also hurt, forcing polluters to switch back to coal from more expensive gas.

The ESG story is also running out of steam and starting to succumb to accusations of “green laundering” and financial manipulation as more companies commit to moving to net zero emissions. Investors are in a tough race next year.

But the forces that have made climate change a financial issue in recent years will continue to evolve in 2022. As the risk becomes more identifiable, the opportunities also become clearer. Climate summits may never be the same, but at least the financial world and the political world are finally pulling on the same oars.

David Callaway is the founder of Callaway Climate Insights

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