The end is still nigh with the climate crisis

The coronavirus pandemic almost made the networked world grind to a halt. At some point people will start lifting the economy and the world back on their feet – but what should those feet be like? Governments are becoming more indebted as GDPs fall while debts grow. Recovering from the crisis requires wisdom, which policymakers will hopefully have.

Will the pandemic make us forget the long-term challenges of climate change and ageing societies? The 2008 financial crisis made us focus too much on short-term problems, and the price of that approach is still being paid. Can we avoid that mistake this time?

As far as the financial sector is concerned, we can. Various risks related to sustainability are critical factors in financial risk analysis. Climate change mitigation affects the future of all investing and financing. We need to choose efficient recycling economies over the waste of natural resources, and we need to remember that human rights are not a commodity that can be forgotten in business. All sectors of society create risks that the financial sector must take into account in its decision-making.

Sustainability is the lifeblood of society

The financial sector is not a political actor. It provides its services to improve society. Sustainability concerns are vital for the society, so promoting them is an obvious course of action for the sector.

The financial sector takes care of its customers’ assets, looking for a good but also safe return for them. Mitigating climate change is a good example of what this means. As regulations become tighter, research institutes and companies are looking for more climate-friendly ways to produce energy. It is clear that new technologies, and the companies that invest in them, involve significant investment risks. However, it is even clearer that climate-destroying companies carry a continuously growing risk that investments in them will lose their value. It will happen sooner or later, and even the latter option is getting closer day by day.

The insurance industry plays a key role both as a bearer of risk and as a large investor. This applies to combating climate change as well as adapting to its effects. The insurance industry has seen climate change as a huge risk already since the 1980s.

In all businesses, and especially in the financial sector, sustainability has become a matter for management and the company’s Board of Directors. Many companies started off with climate-themed declarations, which were important first steps towards sustainability and good for the corporate identity, but that stage is now in the past. Today, sustainability is taken as a core element of strategic planning in many companies.

An essential issue for the financial industry is how regulation shapes the operating environment. From the sector’s point of view, regulation that targets directly polluting and climate-damaging businesses works best, as the polluter is then also the payer. There should be a reliable price for coal. Long-term investment can be guided by a binding carbon budget for the EU.

Regulation of the financial sector is also important. However, it is not enough in itself. Excessive or poorly designed regulation could also undermine the financial sector’s ability to help in the society’s sustainability goals. In other words, good intentions can easily cause great harm. The real economy cannot be changed by regulating the financial sector if the real economy needs actions first. For example, from the sustainability perspective meat should be more expensive than plant-based foods, and financial sector regulation cannot achieve that alone.