Read the blog post on the August Theme – Finance
While all the focus is currently on reenergizing the COVID-19-induced economic slowdown, we may also want to keep an eye on the tidal wave of climate change right behind us.
Central banks should be worried that climate change will trigger the next global financial crisis. A proactive approach by banks should include a restructuring of our economies, incorporating scalable innovations and changes in regulations and social norms to prevent catastrophic and irreversible impacts on the global economy.
If Central Banks revisit their investment strategies, should we also review our investment portfolios to assess our personal financial stability and the potential loss from the risks of climate change?
“The need to manage emerging mega risks is as important as ever because alongside major technological, demographic and political shifts, our very world is changing with profound implications for insurance, for financial stability and for the economy … Once climate change becomes a defining issue for financial stability, it may already be too late.”Mark Carney, Governor of the Bank of England
The source for “the tragedy on the horizon” according to Mark Carney is clear: risk is a function of cumulative emission and will disrupt business and cause property loss on a massive scale. What’s the surprisingly ‘easy’ way out? Early action is less costly, Mark Carney argues.
THE BIG PICTURE
The whole finance sector has started to embrace climate action as a way to limit risks and liabilities, which also aligns with the goals of the Paris Climate Agreement to implement the Sustainable Development Goals (SDGs). Strong financial rules can be effective in properly weighing the social impact of all financing and investments and individual consumers as investors play an important role. Where we put our money matters and can contribute to meeting all 17 UN SDGs.
Is this realistic? Yes! Even countries that build their wealth and economies on fossil fuel need to face realities. The Norwegian government has ordered its $1 trillion sovereign wealth fund, with more than $13 billion in oil and gas companies including its national company Statoil, to divest and exclude holdings in fossil fuel companies and more $20 billion into renewable energy.
Qatar’s economic wealth is also entirely based on fossil fuels like oil and gas. However this is why the aspirational Qatar National Vision 2030, which states “Economic development and protection of the environment are two demands neither of which should be sacrificed for the sake of the other,” aims for a transition to a knowledge-based economy. In 2016 Qatar Stock Exchange published its ESG guidelines to educate in and encourage listed companies with implementing and incorporating ESG reporting into their existing reporting processes.
As with climate change itself, financial stability is abstract to most people, seems overwhelming, and beyond our personal control. However, we all understand – to some extent – that climate change will threaten financial resilience and long-term prosperity. So, what can we do?
IMPACT AND VALUE-BASED INVESTING
The Wall Street Journal Special Report “Investing with Purpose” [June 27, 2019] summarizes why the investment community has adopted Environmental Social Governance (ESG) as a driver for financial performance, saying: “there is fiduciary duty to consider ESG. The World is becoming too complex for old tools to address the risks like climate change.”
Strategic sustainability and ESG have become the enabling force for competitive advantages that drive value creation and shared value not only through product and service innovation but also through reduced operating expenses. Proactive companies figure out how to cash in on sustainability in the profit equation (Return on Capital Employed – ROCE).
“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”Tom Murphy, CEO Capital Cities Broadcasting
ESG VS SOCIALLY RESPONSIBLE INVESTMENT
ESG investing differs from socially responsible investment (SRI). While socially conscious funds simply screened out entire undesirable industry such as weapons, tobacco, and polluting manufacturers, ESG is based on big data that links environmental performance to financial performance as summarized on the Oxford University – Arabesque study entitled From the Stockholder to the Stakeholder on the economic effects of sustainability.
WHAT CAN WE DO?
The most straightforward way to build a resilient personal investment portfolio is to direct our spending according to our values. We can use our powers of choice and discretion to:
- invest in more efficient cars, appliances, and homes
- divest from fossil fuel – build our own ESG portfolio
- ask that company retirement and saving plans offer ESG options
- ask that your bank offer green finance products and services
- choose colleges for our children that provide not only quality education but also longevity of quality education.
- read the Qatar National Vision 2030 and the Qatar Stock Exchange, Guidance on ESG Reporting to understand how economic development and environmental protection are factoring into Qatar’s long term planning
- The Atlantic, How Climate Change Could Trigger the Next Global Financial Crisis, 1 Aug 2019
- Climate Action in Financial Institutions, “Breaking the tragedy of the horizon” speech by Mark Carney, Governor of the Bank of England, 29 Sep 2015
- Harvard Business Review, Warren Buffett: How a rowboat beat an ocean liner, 24 Feb 2013
- arabesque, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, Mar 2015
- UN Sustainable Development Goals, Accessed 5 Aug 2019
- Barron’s, How to Build Your Own ESG Portfolio, 21 Jun 2019
- United Nations, Global Compact, Accessed 5 Aug 2019
- Barron’s, Will Values-Based Investing Ever Take Off?, 21 Jun 2019
- Business Green, ‘Get ahead of these risks’: BlackRock issues climate risk warning to investors, 5 Apr 2019
- The Guardian, US insurer Chubb to stop investing in or selling policies to coal firms, 1 Jul 2019
- Financial Times, ‘Oil’ and ‘gas’ become dirty words in FTSE rebranding, 3 Jul 2019
- The Wall Street Journal, Exxon Shareholders Pressure Company on Climate Risks, 31 May 2017
- Planning and Statistics Authority, Qatar National Vision 2030, Accessed 5 Aug 2019
- Qatar Stock Exchange, GUIDANCE ON ESG REPORTING, Nov 2016
- Sustainability Defined, Green Finance with Joel Makower, Accessed 1 Aug 2020