The Effects of Regulation on Sustainable Finance
In September 2015, Mark Carney, then Governor of the Bank of England, delivered his famous speech on climate change and the financial system, titled “The Tragedy on the Horizon“. This speech highlighted the systemic risks that climate change poses to the global financial system.
Almost 10 years later, there is still much to be done, as evidenced by the exposure of Canadian banks to the fossil fuel sector. This is why regulation is evolving gradually to ensure that transition risks and physical risks are taken into account by financial institutions. The BSIF, with its Guideline B-15 and its consultation on the standardized exercise of climate scenario analysis, is exerting increasing pressure on financial institutions.
Financial Actors, Drivers of Change
This regulatory pressure is gradually spreading to all economic actors. Indeed, we observe a growing number of investors who now demand that their invested organizations meet new expectations. This includes measuring the commitment of the financial institution’s client to the climate issue. The objectives are multiple: to reduce investment risks, identify new business opportunities through innovative models with a positive impact on society, and achieve corporate decarbonization goals by favoring leaders distinguished by their eco-responsible practices.
But what to do when clients are not equipped to adopt better environmental practices? More and more financial institutions are positioning themselves as intermediaries between their clients and experts who can assist them. These institutions offer support services, but they do not always have all the expertise necessary to advise on decarbonization or climate resilience plans. They therefore call upon external experts, such as CCG. We indeed observe an increase in the number of financial institutions contacting us to connect their clients with our experts.
At the same time, advisors are equipping themselves with analysis tools, whether in decarbonization or climate resilience. Their goal is to initiate initial discussions with their clients to gather relevant information and raise awareness. Indeed, in Quebec, many companies (about 50%) have not yet embarked on a decarbonization process, and even more do not have a climate resilience strategy (75%), according to a study by Léger.
Thus, although the financial sector still has much to accomplish to align with a trajectory compatible with the Paris Agreement, it is beginning to exert a significant influence on other businesses. We can hope that this lever will intensify in the future and that companies engaged in proactive climate action will be favored in their search for financing, as well as by insurers.