Financial services industry risking $1 trillion over climate change

By investing in sustainable companies and technologies, financial institutions can reduce risk and increase earnings

Major policy shifts designed to address climate change are inevitable in the UK and across much of the world. Some, such as a carbon tax, will inevitably have negative effects on large corporates, especially those that are slow to change to low carbon models.

Investing in carbon laggards will be increasingly risky for asset managers. However, by moving fast they can instead take part in a growing sustainability revenue pool. Today this is worth $40 billion globally but it is expected to swell to well over $100 billion in the next few years.

In “Climate Change: Three Imperatives for Financial Services,” global management consultancy Oliver Wyman explore this opportunity. Currently the end of term report for the finance industry is “could do better”.

Some banks are indeed reallocating capital to more sustainable prospects. But fewer than 10 per cent have a robust evidence based approach to this. And it’s a huge opportunity they risk missing out on: it’s estimated that the green economy will require up to US$6 trillion of capital in the coming years.

Banks need to act on the risks. For example a carbon tax could drive credit losses of up to $1 trillion. Estimating the nature and extent of climate based risks is difficult but it is clear that they are material. And yet few firms are factoring them into decision-making.

Banks also need to be bold and seize the opportunity. The potential size of new revenue streams, across investing, financing, data and consulting, should be attractive. Agile companies who address this market early will be well placed to keep less responsive competitors out.

To be successful, banks need to be proactive, proving to stakeholders that they are making progress in reducing the carbon intensity of their portfolio. Indeed, as James Davis, Partner and a lead author of the report, says: “The financial industry can have a significant impact on accelerating the transition to a green economy by proactively steering capital towards the businesses and technologies that will drive it.”

The financial services industry is not always popular. But by steering their investments towards this rapidly growing and exciting area they may well paint the industry in a more positive light. This is an opportunity for the industry to lead in the globally crucial area of sustainability.

Oliver Wyman is a global leader in management consulting with offices in 60 cities across 29 countries.
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