Turning Points in Finance

09/11/2015 10:55 GMT | Updated 06/11/2016 10:12 GMT

There is no doubt that significant transformation in the finance sector is paramount to a global warming that stays safely under 2 degrees Celsius. This transformation needs to be both orderly and effective. Fortunately it is well underway and while it is mainly invisible to most people, the scale and the significance of what we already have is huge, and encouraging.

First a reminder of the risks: left unchecked, climate change will act as the ultimate risk multiplier in a manner that will leave no sector or country untouched. The human and ecological impacts of this would be catastrophic were it to occur, but the economic impacts would be no less profound. Companies would see significant losses of assets from extreme weather, supply chains would be disrupted or broken, and the legal battles as a result of liability could be bitter and costly. Mark Carney, the Governor of the Bank of England and Chair of the Financial Stability Board, has warned that the current challenges of climate change are no measure for the future, and that "once climate change becomes a defining issue for financial stability it may already be too late". With a similar tone, some members of the insurance sector have already declared that a world warmed by more than 2 degrees is simply uninsurable.

Many of these risks have been known for some years and a quiet response revolution has been building, but at exactly the right moment, this has hit a turning point. I say this because of overwhelming evidence in three areas: disclosure, understanding of risk, and the realization of massive opportunity. Let me start with disclosure.

Thanks to the work of CDP, GRI, SASB and others, corporations have long become accustomed to investor requests for them to measure and disclose how climate change will impact their businesses. But this year, a step change has taken place. We have seen the French Government require institutional investors to disclose the climate exposure of their portfolios, the European Commission put together plans for mandatory disclosure of environmental and climate change information. As a result of their increasing concern, the G20 have mandated the Financial Stability Board which is recommending that carbon disclosure be standardized and mainstreamed. The coming months will see this rise to prominence in a new way. Within a few short years it will be unthinkable that a company does not identify and take steps to mitigate their climate risk and impact.

Equally significant is the evidence that investors are understanding the risk and starting to actively manage it. Not long ago carbon risk was regarded as superfluous to their core businesses. Now we see action on an impressive scale. This includes major investors taking serious steps towards decarbonizing their portfolios; asset owners engaging with company leadership to drive better management of climate issues and a remarkable $2.6 trillion already shifting from brown to green technologies. Just this week, BlackRock, the world's largest asset manager, added to this momentum by releasing a report that begins with the words "climate change and its risks are going mainstream". The future has arrived.

Along with the realization of risks comes the dawning of the reality of the massive economic opportunity that climate action represents. This is the first intentionally directed industrial revolution and will be the source of good new jobs and strong growth for the coming decades, something developing countries are increasing realizing and taking the lead on. Developing countries are on track this year to invest more in non-hydro renewables than industrialized nations. We have also seen the green bonds market grow to over $40 billion last year and total investment in renewable energy reached more than $300 billion - a more than 6 fold increase in 10 years.

These numbers are still small by comparison to the whole economy but it is the trend that is telling. On a massive scale investors are now using increasingly strong data to make rational decisions about capital reallocation from the economy of yesterday to that of tomorrow. While the path will no doubt be full of unexpected turns, it's not hard to see where this is leading.

The three areas I have outlined tell a story of the world on the cusp of a transformation the like of which we have rarely been privileged to see. COP21 is a critical part of a mutually reinforcing cycle. The agreement that we will see in 5 weeks' time will increase momentum and certainty to the fact that this trend is now irreversible. This in turn will shift capital even faster and the positive cycle of transformation will increase. We still do not know what the future will look like, and we will have to innovate and create our way out of many problems. But we are capable of it, and more than ready for the task.

The next ten years of financial transformation will make the last ten look like we were standing still.