Changes to the financial system are needed to achieve a just transition towards a net zero future.
Achieving net zero carbon emissions requires the engagement of the finance system to address climate considerations in more strategic ways. In December 2019, the Society hosted a discussion forum, Financing net zero: how can investment meet the climate challenge, where geographers met with experts from the finance and investment sectors to explore these challenges in more depth. Our briefing report summarises the action needed by government, the financial sector, business and the third sector to meet the scale and pace of change needed.
Private financial investment is now widely recognised to be crucial to the decarbonisation of the economy and society. A net zero economy will require at least 1-2% additional and appropriately targeted investment per annum. Action is needed in a range of sectors as diverse as energy and electricity, agriculture, steel, paper and petrochemicals, all of which have complex value chains involving multiple investors. Reorienting existing private financial investment and risk management towards climate considerations is critical to the decarbonisation of economy and society, as is a public policy environment that enables and stimulates this reorientation.
As the UK steps up its commitment to achieve net zero carbon emissions, the leading role it has played in the growth of green finance is increasingly vital. But this recent growth has not yet closed a persistent 'investment gap' between targets and current realities in terms of scale or the nature of investment needed.
Watch the video below to hear from our expert contributors about meeting the net zero challenge.
The time frame of net zero, and the scale of change required, are key challenges that require policy and regulatory action alongside changes to the financial system and sector. While private investors are often framed as at the heart of green finance, stock markets and indices can also enable, inhibit or direct flows of green finance. Economic policy and regulation helps to recalibrate asset-investor relations, and transitional initiatives play a critical role in raising awareness and mobilising financial actors. Businesses and the third sector can help to ramp up the ambition of net zero goals and work collaboratively to trial the implementation of new initiatives, financial instruments and mechanisms.
Creating the quantity, quality and diversity of finance needed for achieving a net zero economy will take fundamental changes to the ways in which governments, the financial system and deeply-carbonised sectors work together.
Read full report
It is well-recognised that a massive reallocation of capital from 'brown' (high-carbon) to 'green' (low-carbon) investments in required to meet the UK's net zero target. This may be achieved by:
Increasing the diversity and use of labelled green financial instruments;
Making low-carbon legible to investors through standardised mechanisms;
Moving finance out of 'brown' activities, including by making the risk and impact of investment on the climate more visible;
Increasing the diversity of assets and sectors utilising green finance;
Measuring and demonstrating the impact of green investment, moving beyond a focus solely on quantified flows to a share understanding of impact;
Delivering socio-economic benefits and mitigating adverse consequences for people and places in the transition from a brown to a green economy.
Explore these recommendations in further detail in the event briefing report.
The financing of explicit low-carbon activities is unlikely to be sufficient to meet net zero without reorientation of the financial sector. Central banks and stock exchanges are central players in realigning the global financial system, through such actions as:
The establishment of carbon markets with the net zero goal in mind;
Incorporating climate risk into all financial decision-making, including changes to climate risk disclosures and risk management practices;
Advancement of tools and metrics to enable them to be meaningfully integrated into decision-making.
This event was delivered as part of the Society's Environment and Society Forum series of knowledge exchange events, which address complex and sensitive policy challenges by bringing geographers into dialogue with policy makers and decision-makers to encourage evidence-led policy, regulation, innovation and business delivery. You can view other outputs from our most recent events on our Impact of Geography page.
The research underpinning this event was undertaken by a European research team analysing decarbonisation in four industrial sectors, using an interdisciplinary approach to study the entire value chains of these sectors to understand emissions and the possibilities for transition.
The Society thanks Professor Harriet Bulkeley and Dr Bregje van Veelen for co-organising the event and authoring the event report.
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