GTR: What role can financiers play in promoting and incentivising such policies? Meléndez-Ortiz: The role of financiers is absolutely critical. From an investor’s perspective, policy signals by governments around transformational steps towards a low-carbon economy can prompt changes in levels of support for the kind of goods and services that we want to see playing an important role going forward. At the UN climate talks in December 2015, Michael Bloomberg launched a task force on climaterelated financial disclosures under the remit of the international Financial Stability Board (FSB). The task force will develop voluntary climate-related financial risk disclosures for companies to provide information to investors, lenders, insurers and other stakeholders. The information relates to physical, liability and transition asset risks associated with climate change. This transparency and exercise can be helpful in sending market signals to investors and re-aligning business models for sustainable development. The Bank of England’s governor and FSB chairman, Mark Carney, has outlined the nature of these risks for the global financial system: “Shifts in our climate bring potentially profound implications for insurers, financial stability and the economy,” he said in a speech at a Lloyd’s of London event in September last year. Further (paraphrased): “First, physical risks: insurance liabilities and value of financial assets that arise from climate property damage or disrupted trade. Second, liability risks: likely to hit carbon extractors and emitters and their insurers the hardest. Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy.” That is probably one of the most important signals that has been given to investors in connection with the Paris Agreement and is a very important reason why financiers should be looking into these issues. Another critical market signal is carbon pricing. In a section on non-state actors, the Paris Agreement recognises the important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing. Carbon taxes are now being established in several economies at various levels of jurisdiction. Increasing numbers of emissionstrading schemes are coming online as each year passes. Carbon pricing helps to capture the external cost of fossil fuel use, sending a strong signal to companies and
28 | Global Trade Review
GTR SUSTAINABILITY FOCUS
investors to shift from high to low emission practices and investments. It is a powerful means of spurring innovation and modernisation, and altering competitive advantages in favour of low-carbon economies. And fossil fuel subsidies are being phased out, even if not at the scale and pace that would be desirable so as not to counteract the effect of carbon pricing. GTR: Should financiers care whether or not they are financing sustainable trade? What responsibilities do they bear? Meléndez-Ortiz: I think that financiers are an absolutely critical piece in the economy, and if we are going to move the world towards a low-carbon economy, they bear a huge responsibility in doing so. There are both financial and normative reasons to care. Some estimates suggest that an average of US$2.5tn, or 1.8%, of the world’s financial assets are at risk from climate impacts if global temperatures rise by 2.5 degrees Celsius above pre-industrial levels by 2100.
“Financiers are an absolutely critical piece in the economy, and if we are going to move the world towards a low-carbon economy, they bear a huge responsibility in doing so.” Ricardo Meléndez-Ortiz, ICTSD
A new report from BlackRock – the world’s largest asset manager, responsible for more than US$4.9tn in assets – details how climate change presents asset risks and opportunities through four channels, including physical (extreme weather), technological (advances in batteries, electric vehicles, etc), regulatory (subsidies, taxes and energy efficiency) and social (changing consumer and corporate preferences). The report says that all asset owners should take advantage of a growing array of climate-related investment tools and strategies to manage risk, search for excess returns, or improve market exposure. The report adds that carbon pricing is the most cost-effective way for governments to meet emissions-reduction targets. Formal initiatives have encouraged investors to incorporate sustainable development criteria into