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The climate finance industry continued to grow rapidly this year. Having weathered COVID-19 and taken center stage at COP26, the trend seems unlikely to slow in 2022.

But what can finance — whether public or private — do about climate change? To what extent can it drive action, rather than simply reflect the power structures of the day? The trillions of dollars of assets under some kind of climate-related mandate must have some impact. How, exactly?

Here are the biggest issues to watch in 2022 that might answer some of those questions:

Going beyond the label

The specter of “greenwashing” hovered even closer over the endless array of products and services rolled out this year aimed at climate-conscious customers. Yet few companies seem willing or able to solve the problem.

Two former sustainable investment executives, Tariq Fancy from BlackRock Inc. and Desiree Fixler from Deutsche Bank AG’s DWS, separately went public this year with accusations that their ex-employers were only paying lip service to environmental, social and governance metrics, known as ESG.

Fixler said that DWS didn’t have a robust way to evaluate companies’ ESG standings and implement that across their investments — contrary to what the asset manager claimed publicly. Her claims are now being investigated by Germany’s financial regulator. Fancy said BlackRock marketed its sustainability-labeled investment products as a force of good for the world, while internally recognizing that they don’t make much of a difference.

Making change from within

Fancy’s criticisms are somewhat more philosophical than Fixler’s. They’re based on the assumption that doing good is the goal, rather than simply managing the ESG risks of a portfolio. After all, clients tend to expect that financial products marketed as “sustainable” or “climate-focused” should actively be promoting greener corporate behavior. Worries about greenwash will rate higher than concerns about fees.

A person wearing a mask depicting Britain's Prime Minister Boris Johnson protests during COP26 in Glasgow in Nov. 2021. | REUTERS
A person wearing a mask depicting Britain’s Prime Minister Boris Johnson protests during COP26 in Glasgow in Nov. 2021. | REUTERS

At least some investment managers agree. A large survey published by CREATE-Research showed that most asset owners and asset managers feel a duty to make the world a better place because they invest across the market. They also think it’s at least as important to try and compel companies to be better on climate change as it is to sell out of polluting businesses altogether. This work, known as “stewardship,” is quite different — and more difficult — than simply buying and selling shares, respondents said.

It’s far from clear if investors can do this at scale. Trying to effect change as shareholders involves painstaking engagement with companies and governments, and even long drawn out efforts can fail.

Regulation gets left behind

A few years ago there was hope that financial authorities could make some headway on climate action where public policy had failed.

The Task Force on Climate-related Financial Disclosures will turn five in mid-2022. The initiative, which lays out a framework for reporting emissions, helped prompt financial regulators to explore how they should tackle the climate crisis. (Michael Bloomberg, founder and majority owner of Bloomberg LP, is chairman of TCFD.)

Yet many of those policy makers have become bogged down in a lengthy quest for better data and stymied by a narrow interpretation of their mandates. Central banks, for example, still seem to believe that they should only react to current risks, rather than explore precautionary policies to address a clear and accelerating threat to monetary and financial stability.

Some are edging toward a more proactive approach: the European Central Bank is reviewing collateral frameworks, and the Bank of England is considering whether capital requirements should reflect climate risks. It’s some progress, but nowhere near enough to halve carbon dioxide emissions by the end of the decade — the planet’s best chance for avoiding catastrophic global warming.

Meanwhile, the same politics and vested interests that have stymied international and domestic climate action for decades continue to hold back stronger climate regulation. The starkest example yet is attempts to water down the EU’s sustainable finance taxonomy by Germany and France to protect their gas and nuclear industries. Other countries could take the same path, with South Korea’s draft taxonomy also allowing for unabated gas-fired power.

If similar accommodations get locked in around the world, it will make it all that much harder for the global economy to break its addiction to fossil fuels.

Where do green funds go?

Trillions of dollars are needed to fund the global transition to green energy and deal with more extreme weather. Figuring out how to channel money to developing countries that need it most is a huge part of the decarbonization puzzle.

One major question is what share should be financed by governments and where the private sector should come in, with the risk that it leaves it to markets to pick winners and losers. While investors are amenable to clean energy projects and electric vehicle companies, they’re less enthusiastic about measures that don’t fit so neatly into existing asset classes and financing structures, such as boosting residential energy efficiency or scaling up new technologies. Most “adaptation” measures — needed to protect against effects of climate change — have no revenue stream and thus no obvious appeal to investors.

A global financial system that can’t be accessed by the poorest countries can’t support the rapid changes necessary to limit warming to 1.5°C. To make a real difference, leaders and decision makers will have to embrace disruptive approaches that genuinely break with the past. Otherwise we’re headed for the start of a painful reckoning about what can really be achieved with finance.

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