Lord Mayor of the City of London visits Edinburgh to meet with Nicola Sturgeon

After a series of meetings between senior Scottish Government and City of London officials, including First Minister Nicola Sturgeon and Lord Mayor Nick Lyons, GEFI convened financiers and policymakers at Phoenix Group’s Edinburgh offices last week on 24th January.

The panel featured Amanda Young, abrdn, Richard Rollison, Scottish Government, Chris Hayward, The City of London, David Pitt-Watson, Cambridge Judge Business School and Dame Susan Rice, GEFI & The Financial Services Culture Board, and came together to discuss the nature of collaboration between Scotland and London on finance, and the role that Scotland’s sustainable finance community can play.

The discussion emphasised that Scotland has power in the investment space, in particular in regards to sustainability and ethical investment where it is leading the way with a community of sustainable finance practitioners.
This is in part down to the size of the industry: people know each other in a way that is difficult in a city as large as London. Another factor is the disproportionate number of SMEs in the Scottish economy.

Scotland’s strengths are in long-term investing, and in values-led approaches such as sustainable investing, which means it complements the City of London’s global reach. Panellists emphasised that there is not a competition between London and Scotland: we all bring different things to the equation and many people in Scotland have deep ties to London.

Overall, the scale of problems like climate change can feel huge, but focusing on tangible actions in a specific place can be a fantastic start.

Watch Chris Hayward and Richard Rollison outline their view on Scotland-London collaboration.

Radical Uncertainty with Sir John Kay

John Kay joined us today to discuss the difference between risk and uncertainty, what this means for finance and how societies can collectively deal with the unknown by ensuring systems build in resilience.

As John explained to series host Kaisie Rayner FRSA, risk can be estimated, while uncertainty is truly unknowable, a distinction forged in the wake of the Great Depression.

Over the last half century, finance and economics have gradually merged these two concepts. The economist Milton Friedman explicitly stated, in his quest to model society as a collection of perfectly informed utility maximiser.

This reflects a general bias towards quantifying phenomena among policymakers, a fear of the unknown and the unknowable. Models should be treated not as quantitative answers to these intractable problem, but rather tools to be used to organise thinking.

Sir John Kay argued that this is reflected in the paradox of the perfect map; if a map were to represent reality perfectly, it would be a 1:1 copy of it, and therefore no map at all.

What a map or model should do is simplify information in a way that retains what is useful while cutting out other information. London's Tube map is a great way of navigating the city by train, but much less helpful on foot.

By treating models as gospel, rather than helpful simplifications, we risk ignoring that which has been left out. Resilience and robustness - which are key to dealing with uncertainty - will be viewed as inefficiency.

An example of this is the global financial crisis, where sophisticated risk modelling and the unrelenting pursuit of profit sidelined experienced professional judgement. Another is that of privatisation of public services, where resilience and robustness can be cut to make profit, with the state ready to step in if the unexpected does happen.

Purchase Radical Uncertainty: https://lnkd.in/epTk7ujb or https://lnkd.in/gHD4h5P3
Find out more about our Radical Old Idea series https://lnkd.in/eKYu2uny
Watch the full webinar on our YouTube page.

Festive Fireside | Wrapping Up 2022 & Unwrapping 2023

Our final event of 2022 saw us wrap up the year just gone and look ahead of 2023 with Amanda Young of abrdn, Thom Kenrick of NatWest Group, Dr Sarah Ivory of the University of Edinburgh, David Pitt-Watson of Cambridge Judge Business School and GEFI's own Graham Burnside.

The discussion opened by considering the impact of energy crisis on the continued adoption of renewable technologies, and the role that the newfound important of energy independence will play in future energy policy.

As the sector has matured, there are growing concerns about whether ESG departments are overstretched. As most of the panellists emphasised, experienced sustainable finance professionals are in high demand within their organisations, which can lead to burnout: Amanda Young suggested a need to "Make Sustainable InvestingFun Again".

With all this, there is a risk of watering down boundaries, a risk highlighted by the number of funds around the world downgraded in response to more stringent regulations, though interestingly not to any great extent in Scotland's fund management community.

Some on the panel argued that there is a need to ensure the E, S and G are considered together, possibly by emphasising the actual problems that finance seeks to solve, rather than the broad categories into which those problems fall. For example, rather than using environment, specify climate change, or biodiversity.

Finally, the panel suggested their 1 thing to focus on for the coming year:
Amanda Young: Make Sustainable Investing Fun Again
Thom Kenrick:
steer the economy through the cost of living crisis
Dr Sarah Ivory:
focus on professional skills in finance
David Pitt-Watson:
every company must consider how they contribute to climate change in generating profit

Finance Day at COP15

Today is Finance Day at COP15, the nature summit taking place in Montréal.

The core goal of COP15 is "30x30", the mission to protect at least 30% of the world's land and sea by 2030, but midway into the summit fears are growing of a lack of binding commitments. Read WWF's explainer for the summit.

Over half of global GDP depends on nature, making clear the need to finance its protection and restoration. Click below for some of the key finance-focused events taking place later today:

To learn more about nature financing, click the links below for a selection of videos and reports on nature finance:

Wrapping up 2022 and unwrapping 2023 | Ethical Finance Round Table

Our final event of 2022 will be our traditional year-end Ethical Finance Round Table. This returns as an in-person event on Tuesday, 13 December at 10:30-12:00pm at RBS Accelerator, 36 Saint Andrew Square, Edinburgh.

Our speakers will reflect on 2022 and look ahead to 2023. They will dissect the impact Ukraine, COP27 and the cost of living crisis have had on finance, before turning their thoughts to the coming year, including COP28 in Dubai, with time for networking after the formal proceedings.

The speakers will be:

  • David Pitt-Watson, Visiting Fellow, Cambridge Judge Business School
  • Amanda Young, Chief Sustainability Officer, abrdn
  • Thom Kenrick, Head of Social Strategy and Impact, NatWest Group
  • Dr Sarah Ivory, Senior Lecturer in Climate Change and Business Strategy, University of Edinburgh Business

Click here to sign up now.

Adam Smith, climate, COP and natural capital | David Pitt-Watson | The Radical Old Idea

Watch our Radical Old Idea interview on Adam Smith with David Pitt-Watson, responsible investing pioneer and Cambridge Judge Business School. As COP27 came to a close, our researcher Sam Wheldon-Bayes spoke to David about Smith, the climate crisis, COP and natural capital.

In the interview, filmed at Adam Smith's Panmure House, where the Enlightenment scholar once lived, David discusses what Smith would have thought about climate, COP and natural capital, applying these lessons to some of the big questions facing modern policymakers. The discussion draws on the Wealth of Nations in the 21st Century essay series, which he contributed to.

As David argues, some of Smith's modern devotees dramatically misunderstand his beliefs. In the face of a collective challenge such as climate change, it is unlikely Smith would have proposed a free-market, low-regulation approach, but rather advocated effective regulation.

Click here to watch now.

The ingredients for climate-related capital requirements

This article was authored by Martina Menegat.

Climate-differentiated capital requirements for financial institutions have been proposed as a method for ‘crowding in’ green investment by making it either cheaper to finance climate-friendly activity, or more expensive to finance harmful activity. The debate has been polarised between these two options: a ‘green-supporting’ factor or a ‘brown-penalising’ factor. Yet, things are not always simply green or brown, and the range of policy options is far more varied than this binary choice.

Capital requirements are cushions of capital that banks are required to hold in order to absorb losses, expressed as a percentage of deposits – with a reserve ratio of 20%, banks would need to keep 20% of all their deposits on hand to guard against losses. Adjusting the right amount of capital requirements is a delicate exercise. With a capital ratio fixed at 100%, banks would simply be piggy-banks, able to take in deposits but barred from lending money and investing in the economy. With undercapitalized banks, the risk is insolvency, which triggers expensive recovery interventions. Currently, under the Basel framework, banks  hold a minimum capital ratio of 8% based on their risk-weighted exposures.

The main argument for introducing climate-differentiation capital requirements is that climate change poses relevant, uncosted, risks for the financial system.

Central banks are increasingly committed to identifying, measuring, and assessing climate-related financial risks (CRFRs). The Governor of the Bank of England, Andrew Bailey, believes that stress tests and scenario analysis are the best tools to evaluate CRFRs. Yet, so far they have been incapable to help banks in adjusting their exposures to climate risks.

The main obstacle to accurate pricing of CRFRs is their ‘radical uncertainty’: even if we are pretty sure that a combination of CRFRs will materialise in the next future, there are no advanced methods for calculation. CRFRs are also endogenous to the financial system: the misalignment between the global financial system and Paris climate targets exacerbates the same risks that central banks are trying to measure.

According to Greenpeace UK and WWF UK, UK financial institutions have exposure to high-emitting companies for 1.8 times the country’s domestically produced emissions. Advocates of short-term action argue that patchy data are better than nothing. Hard rules on banks are thought to correct the ‘feedback loop’ between finance and climate, in turn reducing systemic climate risks.

Regulators are showing increasing interest in this topic. While the European Banking Authority is expected to publish its advice to the European Commission on the integration of sustainability in capital requirements by 2023, in the Canadian parliament there is already a proposed law to adjust capital requirements to climate risks generated by exposures to high-emitters.

However, proposals to change banks’ capital requirements have been harshly opposed by the financial industry and so regulators prefer to be cautious. The Bank of England has already examined the possibility to introduce a brown penalising factor, but identified a series of obstacles. Most notably, heightening capital requirements for profitable companies that are conducting brown businesses could destabilise the financial system. Conversely, easing requirements for green companies (the so-called green supporting factor) without accurately calculating their risk profile could create a green bubble.

Climate-related capital requirements need not be reduced to green-supporting or brown-penalising factors. The energy put into the debate is much wider. Academics and civil society organisations have formulated three proposals that are of particular interest.

First, economists have suggested combining a green-supporting and a brown-penalising factors. The simultaneous adoption of such factors will have positive effects on reducing global warming, and thus diminish physical risks for financial institutions. Yet, the same research found that, for example, combining a brown-penalising factor with green fiscal policies will be more apt in addressing financial stability concerns.

Second, other experts argue in favour of a climate systemic risk buffer. A buffer is an additional cushion of a bank’s capital that can be introduced to address exposure to systemic risks. Supervisors can apply a climate buffer on all banks that are particularly vulnerable to CRFR or on all assets that face high risk to be stranded.

Third, a coalition of NGO and CSO organisations has proposed to introduce a one-to-one capital or a 1250% risk weight rule on banks. In this case, banks would be required to hold an amount of capital at least equal to their exposures every time they finance new fossil fuel projects – which are at higher risks of becoming stranded assets in the light of national transition plans.

No single policy is a silver bullet. If introduced, climate-differentiated capital requirements will produce a small contribution to reducing the pace of global warming. It is also unlikely that a slight increase in capital requirements for high-emitter companies will disturb massively the financial system.

Opponents of climate-differentiation capital requirements are right in a sense: they are not the perfect instrument to deal with climate change. However, the perfect instrument simply does not exist. Instead, we have a toolkit of regulatory instruments at our disposal. We need creativity and debate to face the climate crisis.

COP27: finance day preview

COP27 is upon us. The first day saw UN Secretary General Antonio Guterres warn the world that "we are fighting for our lives and we are losing... we are on a way to climate hell", setting out the stakes of these talks, in addition to raising the pressing loss and damage issue.

Finance day is taking place tomorrow, on Wednesday 9th November. As accredited observers, GEFI have been working with our partners to curate events in the Blue Zone featuring our co-founder Omar Shaikh, who is out in Sharm El-Sheikh. As most of our audience will be tuning in online, we have given times in GMT. Local time (EET) is GMT+02.

Here is a selection events and programmes highlighting the best of finance at COP27.

We recently launched our Path to COP28 campaign. Join the campaign to get an early start on next year's key summit, and deliver finance for climate action. Find out more now.


"Channel your inner 3-year-old" | The Radical Old Idea with Dr Katherine Trebeck, on the Economics of Arrival

Why is it necessary to "channel your inner 3-year-old" to reshape the economy?

At our Radical Old Idea event, Dr. Katherine Trebeck explained the basics of her recent book the Economics of Arrival to Kaisie Rayner. For Dr Trebeck, economics should be focused not on growing indefinitely, but instead on point of "arrival": a destination that, once reached, allows us to "make ourselves at home". To get here we must channel that inner 3-year-old, to constantly ask "why?".

Why do we need more growth?

Why do we need to work 40-hour-weeks?

Why can someone work a full-time job and still be in poverty?

This focuses the mind on the point of arrival. The lack of an endpoint leaves our economies directionless, focusing too much "helping people and planet cope", remedying social aches and pains without treating their root causes.

As she explained, growth up to a point is good, providing us with the means to live a decent life. In particular, growing the incomes of the poorest in society delivers results. However, beyond a certain point, it ceases to increase happiness (in development economics, this is often known as the 'Easterlin paradox'). Just like eating ice-cream, the first few mouthfuls are incredible, but after a while, each extra spoon provides less joy than the previous one.

Building on the food metaphor, she pointed out that growth should be a means to an end. Growth for growth's sake is akin to walking into a restaurant and shouting "more!". It's far more important to know what it is that you want more of, such as looking after citizens, providing food, health services, and a decent material standard of living.

Some examples of economies that have arrived, or have the potential to arrive, include Japan and Costa Rica. Japan has a high standard of living, and relatively low inequality without extensive redistrubution. However, without a clear endpoint, the country suffers from high worker stress, when in fact it could "take its foot off the pedal" and lead a better life by slowing down.

Another exaple is that of Costa Rica, which is a middle income country that has thrived in terms of health, social and nature outcomes, because it has focused on outcomes rather than economic growth for its own sake.

The event concluded with a lively audience discussion which looked at how to practically ditch GDP, whether the focus on predistribution over redistribution was viable, the role of elites and more.

Find the Economics of Arrival at https://policy.bristoluniversitypress.co.uk/the-economics-of-arrival


GEFI launch Path to COP28 campaign

Leading financial institutions came together in Dubai this week for the launch of our ‘Path to COP28’ campaign to finance a greener global economy. The campaign features a number of partners, including the Dubai International Financial Centre (DIFC), which hosted the event. The COP28 summit in Dubai will be key to the  success of Glasgow’s COP26

The launch explored the role of the finance sector in the transition to a low-carbon and climate-resilient economy in the run-up to the global climate change summit in Dubai in November 2023. It saw the presentation of a new report into green sukuk, an Islamic finance product analogous to bonds, our new SDG Insight Series, and the Tayyib framework, designed to integrate impact with Islamic finance. Find out how to join the campaign.

While COP27 in Sharm El-Sheikh is just a month away, COP28 will see many financial institutions make major progress reports on and updates to the commitments they made at COP26 last year. At the Glasgow summit, many signed up to the GFANZ agreement led by former Bank of England Governor Mark Carney and made individual net zero commitments.

Our campaign is designed to encourage banks, asset management firms and other financial companies to demonstrate their commitment to the climate agenda, building upon the success of its  Path to COP26 campaign. It will consist of a series of activities and events, including a report on the challenge public sector pensions face in achieving net zero.

According to the United Nations Environment Programme Finance Initiative, the climate transition will require additional investment of at least $60 trillion from now until 2050 – around $2 trillion every year – meaning private sector commitments are vital to tackling the climate crisis.

And bold climate action could deliver at least US$26 trillion in economic benefits through to 2030, compared with business-as-usual, a report from the Global Commission on the Economy and Climate found.

David Pitt-Watson, Visiting Fellow at Cambridge Judge Business School and former President of United Nations Environment Programme Finance Initiative (UNEP FI) said that “As part of the Glasgow Financial Alliance for Net Zero (GFANZ), the finance industry set big aspirations. At COP26 in Glasgow, $130 trillion of invested assets signed up to the GFANZ, enough to fund the transition. COP28 in Dubai is where we find out how far these financial institutions have been able to deliver.”

He added that “finance, indeed our entire economic system, depends on climate stability. From COP21 in Paris in 2015, investors have urged policy makers not to delay in taking tough action. Together with global political leaders, the finance industry must play its part in creating and funding sustainable commerce. If it can, the future can be bright. If not, the alternative is catastrophic for us all.”

Graham Burnside, Senior Advisor to the Global Ethical Finance Initiative explained that “our Path to COP28 campaign seeks to encourage and support financial institutions in transitioning from commitment to actual implementation, measurement and reporting”, going on to point out that “finance can be a force for positive change” and asking for “organisations from across the globe to sign up to our Path to COP28 campaign to help us assist the financial sector to commit to practical efforts to tackle climate change.”

Arif Amiri, Chief Executive Officer of Path to COP28 host partner DIFC Authority said “DIFC and GEFI are delighted that the financial services sector is the first industry to launch a programme that aligns with the UAE government’s COP28 agenda.”

He added that “DIFC is perfectly placed to be host financial centre for the Path to COP28 programme given the progress we have already made and will continue to make on climate related matters with our clients. We are looking forward to working with GEFI and senior members of the local, regional, and international finance community to embrace this initiative and truly make a difference.”