Key role urged on central banks in climate fight

Key role urged on central banks in climate fight

In the aftermath of the 2008/9 global financial crisis central banks around the world pumped billions of dollars into the monetary system to safeguard the world economy. Now they are being asked to do so again – to tackle climate change.

LONDON, 21 April, 2015 – The Green Climate Fund (GCF) – set up in 2010 under UN auspices with the aim of channelling funds to developing countries to fight climate change – is having a hard time of it.

The aim was for the GCF to raise US$100 billion per year by 2020: so far total pledges of just over $10 bn have been received by the Fund.

Now a new way of funnelling money to the GCF is being proposed, with central banks playing a central role.

The idea is for the GCF to issue “Green Climate Bonds” which would be purchased by central banks around the world: the money raised – billions and billions of dollars – would then be used to help fund renewable energy projects and other climate-related projects in developing countries.

The proposal is being made by the World Future Council, (WFC), a Germany-based group which helps governments and organisations with policy formulation.

Money creation

The central banks would, in essence, be enacting similar measures to those undertaken in the aftermath of the 2008/9 financial crisis.  To avert money supply drying up and the whole financial system grinding to a halt, the central banks pushed vast amounts of cash onto the market – using reserves and printing money.

The WFC points out that central banks cannot go bust in their own currency as they have monopolies on issuing legal tender – even if they purchase assets which give no returns.

The Green Climate Bonds would, in effect, be another form of money creation similar in some respects to what’s called quantitative easing – increasing money supply to stimulate the economy. Only in the case of the climate bonds, this new money would be used to combat climate change.

Under the WFC’s proposals, between US$100 bn and $300 bn would be raised through green bond purchases each year. The bonds would be valid for at least 100 years and become more or less enduring assets of the central banks, though they would give only a small or no rate of interest.

Dr Matthias Kroll, a finance researcher at the WFC, told the Climate News Network that the bulk of green bond purchases would have to be made by central banks in the industrialised world, with the US Federal Reserve and the European Central Bank perhaps each purchasing $20 bn of climate bonds annually.

Modest demands

“But other states with strong currency reserves like China could – and should – take part in the new green finance system”, says Dr Kroll.

How the proposal for green bonds will be received among central bankers and governments round the world is unclear.

Compared to the sums which have been injected into the financial system by central banks in the wake of the global financial crisis, the amount of money at present being sought to tackle the potentially much more serious problem of climate change is relatively small.

The WFC says the Bank of England (BOE) has been among those investigating alternative ways of raising money in order to combat climate change. A recently released research paper by the BOE said that central banks in future may have to respond to the challenges posed by climate change. – Climate News Network

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Banks put a price on Earth’s life support

Banks put a price on Earth’s life support

EMBARGOED until 0900 GMT on Friday 30 August
Clean water, forests and other natural resources are being used unsustainably, so some of the world’s largest banks plan to cut credit for companies which rely on them but fail to value them.

LONDON, 30 August - It is not easy to put a value on a forest, a clean river, or unpolluted air, but that is what a group of the world’s biggest banks is attempting to do.

They have agreed that the way the present economic system uses and often destroys the environment without paying to do so is not sustainable.

The banks are also concerned that some companies are using up natural resources so fast, with no thought for their own future, let alone that of the planet, that they will collapse. They want a way of warning them and ultimately withdrawing their credit unless the companies mend their ways.

The 43 financial institutions, including the International Finance Corporation, the private sector arm of the World Bank, are setting up a working party as a consequence of the UN Conference on Sustainable Development in 2012, also known as the Rio+20 summit, when the initial 39 large banks signed a Natural Capital Declaration.

The declaration defined natural capital as “the Earth’s natural assets (soil, air, water, flora and fauna), and the ecosystem services resulting from them, which make human life possible.”

The document went on to say that the food, fibre, water, health, energy, climate security and other essential services provided by natural capital were worth trillions of dollars a year, but that they were not adequately valued.

Carrot and stick

“Despite being fundamental to our wellbeing, their daily use remains almost undetected within our economic system. Using natural capital in this way is not sustainable”, the declaration says.

The bankers went on to acknowledge this was partly their fault because they had no way of valuing this natural capital, nor did they currently recognize the danger to the stability of some companies because of its destruction.

They want governments to force companies to disclose their dependence on natural capital and the impact they have on it by disclosures in annual financial reports. They also want penalties for companies not doing so and tax incentives for those who protect natural capital as part of their business.

Mining and fracking

However, the bankers know that in order to value natural capital someone has to work out what it is worth in monetary terms. What value can you place on a hectare of forest for the clean air, rain collecting, carbon sequestration and foodstuffs it provides? Just as important, what is the economic loss if it is destroyed?

Industries like mining and fracking are in the front line because their operations are already perceived to damage and use up clean water resources and to cause pollution. The banks involved in the project are not attempting to directly put a value on nature but rather are looking to assess how much they are set to lose by being exposed to clients that are too dependent or having too great an impact on nature, and if necessary withdrawing credit as a result.

But all businesses, even the banks that control investments, have an impact on the natural environment, which generally they do not pay for and which does not appear in the accounts. So to turn their heady declaration of a year ago into something more tangible, the bankers have set up a high-powered working party to put a value on the natural world.

Liesel Van Ast, project manager for the Natural Capital Declaration, is based at the Global Canopy Programme in Oxford, England. She is working with the UNEP Finance Initiative in Geneva to help the bankers set up a series of committees to implement the declaration.

No illusions

She said: “The bankers need to address how they will account for natural capital, explain to everyone why they need to do it and then tell them how to do it.”

At the moment overuse of natural capital is not seen as a business risk, because everyone believes they can get out before the resources run out and the crash occurs. We are hoping to change that attitude and get companies to pay a price for overuse of natural capital.”

No one has any illusions that the commitment by bankers to get natural capital accounted for on balance sheets, and then taken into account in the share price, interest on loans and cost of insurance is going to happen quickly.

They have set themselves a target of 2020 to get an international system up and running and recognized by all governments signed up to the UN Framework Climate Change Convention. It may be slow and difficult work, but they believe this is vital to prevent the current economic system destroying the planet. – Climate News Network

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Climate action ‘could halve energy firms’ worth’

Climate action 'could halve energy firms' worth'

If the world succeeds in reaching its targets for curbing greenhouse gases, a leading bank says, this will mean huge quantities of oil and gas reserves must be left unused.

LONDON, 2 February – Oil and gas multinationals could lose up to 60% of their market value if the world cuts its carbon emissions to limit climate change, according to the world’s second-largest bank.

This is the first time the financial sector has been warned by one of its own that shares could plummet if the necessary action is taken to prevent disaster.

The study, Oil and Carbon revisited: Value at risk from ‘unburnable’ reserves, is published by HSBC Global Research.

The International Energy Agency (IEA) said in its 2012  World Energy Outlook that in order to have a 50% chance of limiting the rise in global temperatures to 2°C, only a third of current fossil fuel reserves can be burned before 2050.

Staying within the 2°C limit would mean keeping carbon dioxide concentrations in the atmosphere to 450 parts per million (ppm). They are already at 390 ppm, and are increasing by about 2 ppm a year.

To stop them crossing the 450 ppm boundary, scientists say the world can emit only around 1,440 gigatonnes (Gt) of carbon between now and mid-century. It has already emitted 400 Gt, leaving only around 1,000 Gt in the budget – one-third of current proven oil and gas  reserves.

The 2°C target has been the goal of many policymakers for years, although there is a growing scientific consensus that it is already out of reach.

The World Bank has said that the Earth may warm by as much as 4°C, and some predictions suggest that even a 6°C rise is possible – a prospect whose impacts would be devastating.

“We haven’t forgotten climate change, but we have forgotten that we have to do something about it”

The HSBC study says the economic impact on parts of the hydrocarbon industry of exploiting only a third of fossil fuel reserves would also be devastating.

The Norwegian company Statoil would be hardest hit, with 17% of its reserves unburnable.  The study says about 6% of BP’s reserves are at risk, 5% of Total’s and 2% of Shell’s.

But it says a bigger risk is that reduced demand for fossil fuels could force down oil and gas prices, meaning that between 40 and 60% of leading fossil fuel firms’ current market capitalisation – essentially their net worth – could be at risk.

The study’s authors say: “We believe that investors have yet to price in such a risk, perhaps because it seems so long-term.

“And we accept that our scenario probably exaggerates the risk as we assume a low-carbon world today rather than beyond 2020.”

They advise investors to focus on companies with low-cost projects, and say they think capital intensive, high-cost projects like heavy oil and oil sands will be the riskiest.

The HSBC authors’ argument that much of the world’s fossil fuel reserves cannot be used if climate change is to be tackled seriously is not new: it has been advanced  by scientists and conservationists for years.

What is striking is that this appears to be the first time the argument has been made by the financial sector itself. James Leaton of  the NGO Carbon Tracker told the Climate News Network: “The question this raises for investors is this: is this investment compatible with a 2°C world?”

Andrew Simms, a fellow of the new economics foundation, said: “I wonder whether this will wake us up from the strange spellbound state that has persisted since the Copenhagen climate summit in 2009?

“We haven’t forgotten climate change, but we have forgotten that we have to do something about it.” – Climate News Network

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