European Investment Bank stops fossil funding; Bank of Canada acknowledges the dangers of stranded assets

european investment bank energy_lending_policy_enThe long-awaited decision came on November 13, when the European Investment Bank (EIB) issued a press release announcing that “ We will stop financing fossil fuels and we will launch the most ambitious climate investment strategy of any public financial institution anywhere.”  Also, “…..The EIB will work closely with the European Commission to support investment by a Just Transition Fund. The EIB will be able to finance up to 75% of the eligible project cost for new energy investment in these countries. These projects will also benefit from both advisory and financial support from the EIB.”  The Guardian summarizes the policy here ; details are in the full document, EIB Energy Lending Policy: Supporting the energy transformation.

The decision ends a long and contentious review process which received more than 149 written submissions and petitions signed by more than 30,000 people.  National members of the EU negotiated and compromised – the German government had been expected to abstain from the vote but ended by supporting the measure.  A press release from WWF-Europe  is generally supportive, stating “All public and private banks must urgently follow suit” – while pointing out that the decision postpones the end of financing for gas projects until 2021, and allows for further financing for any gas infrastructure that could potentially transport so-called “green gas”. A summary in Clean Energy Wire quotes Claudia Kemfert, climate economist at the German Institute for Economic Research, who calls the EIB decision “a game changer”, and says, “Even if there’s still a backdoor for fossil gas included, this is an important and necessary step in the right direction.”

Bank of Canada acknowledges climate change risks to the economy

On November 19, the Bank of Canada published its most complete statement to date about the transitions and risks which climate change will bring, in Researching the Economic Effects of Climate Change , a report prepared by Miguel Molico, senior research director at the bank’s Financial Stability Department.  On November 21, the Governor of the Bank of Canada followed up on this by raising the issue of climate change and the risk of stranded assets during an address to the Ontario Securities Commission .  The National Observer summarizes the development in “Bank of Canada warns of stranded assets and an abrupt transition to clean economy” (Nov. 23).

Also in Canada, on November 19, the Institute for Sustainable Finance was launched Housed at the Smith School of Business at Queen’s University, Kingston Ontario : “ The Institute for Sustainable Finance (ISF) is the first-ever cross-cutting and collaborative hub in Canada that fuses academia, the private sector, and government with the singular focus of increasing Canada’s sustainable finance capacity.” A more formal statement comes in the Institute’s launch report:  Green Finance: New Directions in Sustainable Finance Research & Policy  which states: “the Institute will span a continuum of expertise from across varying disciplines, including finance, economics, environmental studies, political science and others, in order to foster innovative research, education, external collaborations and partnerships. The Institute’s mandate is threefold:

  •  Generate innovative and relevant research on sustainable finance and effectively communicate this research to all pertinent stakeholders.
  • Serve as a platform for collaboration between government, academia and industry.
  • Provide educational opportunities and develop capacity in the field of sustainable finance.”

The Green Finance report summarizes the discussions by financial experts at a conference by the same name, held on June 14-15, 2019, following the release of the Report of the government’s Expert Panel on Sustainable Finance – Mobilizing Finance for Sustainable Growth.  To help readers who are not financial experts,  the Institute website offers useful “primers” to explain some fundamental concepts in sustainable finance, including  Climate-Related Financial Disclosures, Divestment, and Transition Bonds. Not to be confused with Just Transition funding, the primer explains that “Transition Bonds” are corporate financing tools, and the companies who issue them must use the proceeds to fund a business transition towards a reduced environmental impact or reduction in carbon emissions. ( The example given is that a coal-mining company could issue a  transition bond to finance efforts to capture and store carbon.)

Institute for sustainable financeAs one of its first actions, the ISF established the Canadian Sustainable Finance Network (CSFN)  an independent formal research and educational network for academia, industry and government to bring together a talented network of university faculty members and relevant members from industry, government and civil society.  A list of members, here , includes multiple faculty from twelve Canadian universities, one from Yale in the U.S., and other individual academics from universities which are not institutional members (including UBC, HEC Montreal, and Memorial University).

 

Bank of Canada sees risks of climate change; Insurers urge end to fossil fuel subsidies

On March 2, in a speech in Montreal, the Deputy Governor of the Bank of Canada weighed in on the economic and financial risks of climate change, and the role of the Bank (BoC) .  In Thermometer Rising—Climate Change and Canada’s Economic Future , the Deputy Governor drew on 2011 estimates from the National Round Table on the Environment and the Economy (NRTEE) when he acknowledged that in Canada alone, “ in the absence of action to address global warming, we would face annual costs of between $21 billion and $43 billion by the 2050s”.   Touching on the role of carbon pricing and green finance such as green bonds, he also states: “enhanced transparency and analytical tools are also needed”  to enable investors to exploit green investment opportunities. However,   “In contrast to some other central banks, the Bank of Canada is not directly responsible for regulating banks, insurance companies and similar financial institutions. …. We do not regulate financial markets and thus do not have the mandate to establish standards of transparency and disclosure in support of green finance…. We do, however, have a broader set of responsibilities to support financial stability, including identifying, analyzing and assessing both imminent and emerging systemic risks. We bring this risk assessment into our discussions with other agencies that control the relevant policy levers.”

Private financial institutions and companies are trying to influence those policy levers – specifically, about fossil fuel subsidies. In a Public Statement addressed to the governments of G20 countries,  a group of 16  investment  and insurance companies managing more than  USD $2.8 trillion in assets states: “Subsidies and public finance supporting the production and consumption of fossil fuels are a key concern to the finance sector. They increase the risk of stranded fossil fuel assets, decrease the competitiveness of key industries, including low‐carbon businesses, and negate the carbon price signals many of us have been calling for. They are also notoriously inefficient from and economics standpoint. They create a significant burden on government budgets, perpetuate income inequality by benefiting the richest consumers while failing to meet the energy needs of those lacking energy access, and damage public health by increasing air pollution.”  The Statement then calls on the G20 governments to commit to “a clear timeline for the full and equitable phase-out by all G20 members of all fossil fuel subsidies by 2020, starting with the elimination of all subsidies for fossil fuel exploration and coal production.”

What would be the  impact of removing fossil fuel subsidies?  The most recent estimate comes from the Overseas Development Institute and the International Institute for Sustainable Development (IISD) Global Subsidies Initiative in   Zombie Energy: Climate Benefits of Ending Subsidies to Fossil Fuel Production. It concludes that if  subsidies to fossil fuel production were removed across the globe, the world’s GhG emissions would be reduced by 37 Gt of carbon dioxide  by 2050.  The authors call this “ likely a low-end estimate”, partly because it relies on what they say is  a “conservative estimate of global production subsidies in G20 countries” : $70 billion U.S. annually.   For more on this longstanding issue,  see the Global Subsidies Initiative webpage on fossil fuel subsidies.