Kaperi: The financial sector plays a key role in combatting climate change

Climate change has become an everyday concern for banks. If underestimated, climate issues could lead to catastrophic failure in risk management.

We asked Ari Kaperi, senior executive at Nordea, when he last discussed climate change at work. ”Yesterday”, comes the response. Climate change is now a day-to-day topic for bankers.

”It’s no longer mere speculation or a theory, it’s life all around us”, Kaperi says.

Kaperi’s latest climate discussion took place in Nordea’s credit committee meeting, which assessed several large loan applications. One of the discussion points was the effect of climate change on the company that applied for a loan.

”Loan decisions are usually simple binary choices – whether to grant the loan or not. The arguments for either choice are, however, far from simple, and require us to discuss the applications from many different angles”, Kaperi continues.

At the International Climate Risk Conference for Supervisors last April, Mark Carney, governor of the Bank of England, warned the audience that if climate risks are not considered thoroughly, the markets may face a complete failure in risk management, similar to the financial crisis.

Kaperi sides with Carney. ”The magnitude of the issue is important to notice. It is already clear that climate change is real, and recent studies have shown that it is progressing faster than expected. It is going to change the society and the way many companies operate. For those who finance the companies, climate change is therefore a key issue in risk management”, he observes.

Leveraging capital to promote sustainability

The financial sector can have a substantial effect in fighting climate change because it can steer the flows of capital. Finance Finland’s members – in other words, the majority of Finnish banks, finance houses, pension and insurance companies, and securities dealers – have committed to actions that aim to limit global warming to below two degrees Celsius in accordance with the Paris Climate Agreement.

Kaperi notes that climate considerations are a part of normal risk management operations in financial companies, so the financial sector’s climate work had effectively begun before the 2015 agreement. Sustainable investment targets have been gaining emphasis for many years now, and loans have become more difficult to acquire for companies with the highest emissions. Many banks have altogether ceased funding coal-dependent companies, including some energy and mining companies, that have not published plans to reduce their coal usage.

The measures that funders and investors can take include active communication, engaging in company meetings, and, if necessary, refraining from making an investment. Credit granting decisions can also steer capital away from companies that show little regard for the climate and toward companies that apply more sustainable practices.

Cutting off existing funding is a more drastic measure than deciding not to invest. ”Making abrupt changes in a company’s funding can be fatal for it. We have to acknowledge our responsibility in this regard. Communicating with companies and requiring them to take action is usually the better way”, Kaperi asserts.

According to him, engaging in such discussions comes naturally since funders and investors typically discuss strategy and risk analysis with the companies anyway. ”Climate change is now a matter of strategy for the companies”, he adds.

Criteria for assessing climate impact

Finance Finland (FFI) has published a reporting framework to monitor climate work. FFI members can use it to describe their actions in mitigating climate change and to increase the transparency of their work. Kaperi sees the framework as an important step forward because it is easier to focus on something that can be measured.

Different member companies take different climate measures. Insurance companies, for example, are already affected by climate change in a very concrete way. According to the European Commission, last year saw a record-breaking amount of €110 billion in insurance compensations for natural disasters.

”This number hits the message home hard. Weather disasters are compensated more frequently than ever before. It is the price we have to pay for climate change, and a clear indication of how urgent the matter is.”

The insurance sector can also help mitigate climate change by developing preventive measures. For example, large fires are a major source of emissions, which in Finland alone generate approximately 50 million kilos of carbon dioxide annually – roughly the equivalent of the emissions of 16,000 one-family houses.

Kaperi emphasises that prevention has always been a high priority in the insurance sector, but climate change takes it to a new level still.

According to FFI, the financial sector wields a €400 billion potential to invest in sustainable targets, including corporate loans, money markets, bonds and equities. Nearly half of these are owned by pension funds. Kaperi notes that Finnish pension companies have excellent practices for responsible investing, also in international comparison.

The financial sector has also created products with responsible investing in mind. Green bonds, for example, are bonds that fund projects that combat climate change and promote sustainable development. According to Kaperi, their demand sometimes exceeds their supply.

”The work is still somewhat underway to create the final definition for green bonds, and to ensure that they’re used for promoting the right things. Progress is being made all the time, and the work has now moved to a Europe-wide level”, Kaperi explains.

What about profits?

When talking about investments, we cannot ignore profits. According to Kaperi, taking care of the climate does not necessarily come at the price of negative results.

”The exact results remain to be seen. If we can slow down climate change and adapt to it in a controlled manner and through innovation, the current standards of living and economic progress can be maintained by new methods that require fewer natural resources. On the other hand, if climate change surprises us in an uncontrolled crash, our standards of living will certainly fall”, says Kaperi and goes on to remind us that changes tend to also present new business models. Climate change is no different in this regard. ”I see no conflict between climate innovations and profits. Some innovations and new business models will naturally fail, but long-term thinking is the key.”

Physical paperwork is a thing of the past

The financial sector’s own carbon footprint is relatively small. As one of its climate actions, the sector aims for full digitalisation, and is already close to reaching it.

”Finns have made great progress in digitalisation. We pay 90 percent of our bills and do 75 percent of our daily shopping online. It is a relief for the environment when we don’t print and mail invoices or require as many offices for everyday things like this.”

The next step is to retire paper receipts. That work is also underway, although Kaperi notes that it could have been done sooner. For climate change, Kaperi remains optimistic.

”Climate change is happening now, and we need to take measures right now, not sometime in the future. This is something that time will not heal. But I believe we can find solutions and adapt in a controlled way. The worst risks will only come true if we decide to do nothing.”

Original Finnish article written by Merja Mähkä and published by the Confederation of Finnish Industries on 8 November 2018.