The Next Financial Crash Will Be About Climate Change

Banks and investors have poured money into dirty energy for decades. Now it’s time to make them stop.
Barcroft Media via Getty Images

World leaders are meeting in Poland this week to discuss the climate emergency facing the planet. High up on their agenda should be how we can fix one of the key drivers of today’s high-carbon global economy: the financial sector.

As the latest report from the Intergovernmental Panel on Climate Change makes clear, we have just 12 years to transform the economy if we are to avoid “long-lasting or irreversible changes” that would have catastrophic risks for health, livelihoods and human security.

The transition required is profound. Everything from the infrastructure we build to the products we use must now be aimed squarely at building a zero-carbon world. We have to act decisively, and we have to act now.

It’s easy to feel daunted by this challenge and unsure where to start. Government action in the UK is sorely lacking in ambition. But there is one powerful point of leverage that could make a profound difference. We should look to the financial sector, one of the key drivers of so many of the trends that play out across the modern economy, especially in the UK.

Banks and investors have poured money into dirty energy and high-carbon for decades. While no single policy is a magic bullet for the climate crisis, there is also no way of solving it that doesn’t involve a fundamental reimagining of the role of our financial system.

Policymakers have been slow to realise the importance of finance in the low-carbon transition – but they are now beginning to act. The EU has commissioned a high-level group of experts to advise the European Commission on sustainable finance.

And there is a growing recognition that the financial sector itself is highly exposed to the dangers of climate change. As a major report from senior central bankers in October made clear, “climate change will affect the global economy and so the financial system that supports it. The financial risks it presents are in consequence system-wide and potentially irreversible if not addressed.”

Just 10 years on from the 2008 crash, we could soon find ourselves in a climate-induced financial crisis.

In the UK, the Bank of England has been praised for calling on the financial sector to go greener, faster. Sadly, while it talks the talk, it too often doesn’t walk the walk. In October, the regulator published draft expectations of banks and insurers it supervises. Given Bank of England governor Mark Carney’s, previous warnings that climate change could have a “catastrophic impact” on the financial system, its current plans don’t rise to the scale of the challenge.

The Bank does not tell firms to get ready to disclose their exposure to climate risk. There’s really no excuse for not doing so. Disclosure is a crucial first step: we need to uncover the full extent of financial firms’ role in the climate crisis before we can scrutinise and regulate them on that basis.

Disclosure is important, but only the start. Sweeping reforms are necessary to decarbonise the financial system.

Such reforms should be simple: we’ve already seen lots of the required tools used in the past. They just need a bit of tweaking to get them climate-ready. Since 2008, for example, central banks have increased their regulations to try and prevent another crash. The same principle could be used to address climate risk.

Central banks could also guide credit to where it can be used to decarbonise the economy, instead of piling into mortgages or flowing between financial firms themselves, like the majority of bank lending today. All of this would make the financial system safer – and build climate resilience.

At the most basic level, the Bank of England needs to integrate radical climate solutions into all of its operations. As the IPCC report shows, there is no future where the climate isn’t a major factor affecting our economy and prosperity.

If the central bank is not brave enough to take the bold steps required, it is up to politicians to force it to do so. November marked 10 years since the UK saw the Climate Change Act pass into law. That Act set the terms for decarbonisation. Government should show the same level of ambition to ensure we tackle the climate crisis head on, using all the tools at our disposal.

Caroline Lucas is the Green MP for Brighton Pavilion

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