Regulation and the path to green finance
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Despite its promise, if not its necessity, the green fintech space is still just a fraction of the larger banking and financial ecosystem. This partially stems from the need to innovate and market an entirely new kind of finance, but it’s also the result of government inaction—and, sometimes, deliberate sabotage. Three questions affect the future of green finance, and may make or break our ability to decarbonize in time through market forces.
How are fossil fuel-dependent states responding to environmental goals?
In the wake of major Wall Street banks making public ESG-focused commitments, large conservative US states—namely Texas—responded by blacklisting financial institutions that “boycott” fossil fuels. In September, Texas Comptroller Glenn Hegar announced a list of ten financial firms that were banned from doing business with state entities in Texas, including BlackRock, Credit Suisse, UBS, and BNP Paribas.
The move effectively forced the banks’ hand and proved that much of these financial institutions’ commitments were little more than greenwashing. BlackRock, for example, responded to Hegar in a written statement that “BlackRock does not boycott fossil fuels—investing over $100 billion in Texas energy companies on behalf of our clients proves that.” At the same time, Texas’s political ploy suggests that pro-decarbonization goals can only be as strong as the weakest political link. The threat of losing out on state clients is, at present, too high a cost for many major institutions.
How are we defining our terms?
One of many lessons from the Texas ESG blacklisting incident is that many green-focused terms lack stable definitions. What is ESG—whether investment, divestment, some combination, or something else—and how do we measure it?
Similar first-principles debates undergird other green-finance initiatives. The carbon-offset industry notably lacks international standards or a governing body like the ISO. As a result, bad actors can enter the space and compromise a movement’s reputation. For example, French gas company Total “offset” $17 million worth of natural gas through a $600,000 project that went to clearing underbrush in a forest in Zimbabwe. Total then calculated the carbon offset according to an unlikely scenario in which underbrush-clearing had prevented the entire forest from burning down. The project proves the need for international cooperation to define key terms, which can both standardize green-finance initiatives and bolster their reputation.
Who pays for climate change?
Among many contentious topics, the COP27 conference is debating the question of climate reparations. Should industrialized countries with large carbon footprints help foot the bill for the countries dealing most acutely with climate change? The response has significant implications for the future climate finance and insurance. Germany and Ireland, for instance, have pledged $174.5 to a “global shield” project, which would expand the kinds of insurance solutions available to disaster-prone areas. An influx of pledged funding could lead to a surge in international financial and actuarial solutions that respond to the present realities of climate change, while incubating talent to work on other long-term ecological projects and services.
