Finance’s Responsibility to the Environment
Our Common Future
Our Common Future
Back in 1972, the United Nations (UN) held the Conference on The Human Environment. This would later be known as the first “Earth Day” and represent the first world conference where the environment was discussed as a major issue. Later in 1987 the UN published the report “Our Common Future” defining Sustainable Development as meeting the present needs without compromising future generations' ability to meet their own needs.
This concept highlights the intergenerational nature of sustainability and the impact of our actions today on future survival. Subsequently, three significant agreements shaped the global response to environmental challenges:
Rio 1992: The United Nations Framework Convention on Climate Change was established, laying the foundation for international co-operation on climate change issues.
Kyoto 1997: The Kyoto Protocol was adopted, aiming to reduce greenhouse gas emissions and combat climate change.
Paris 2015: The Paris Agreement was a landmark global climate change agreement, being the first-ever universal and legally binding treaty. Its primary goal was to limit the global average temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C. This also included the creation of the TCFD.
The Paris Agreement set ambitious targets recognising the urgent need to address climate change. To achieve the temperature goals, “net zero CO2 emissions need to be achieved globally around mid-century and net zero emissions of all greenhouse gases shortly thereafter. In the near term, global greenhouse gas emissions need to be halved by 2030” as stated by Climate Analytics”
A Brief History
It is surprising to think that over half a century has passed since the first time environmental issues were taken seriously and still we are facing a situation that will prove very challenging for the generations to come. These agreements and targets reflect the collective effort to tackle environmental challenges and work towards a sustainable future.
GHG and 1.5°C
GHG stands for Greenhouse Gases; these gases increase the temperature of the earth which has negative implications on our ecosystems and damages the planet.
The three main Greenhouse gases are Carbon Dioxide (CO2), Methane (CH4), and Nitrous Oxide (N2O). We find ourselves in the unfortunate situation where all three are the highest point for the last 800,000 years according to the EPA. Furthermore, despite all the action each country has taken, we are “off the mark” to avoid the 1.5C threshold. In an article titled “Breaching 1.5C Threshold Temporarily in Next Five Years ‘More Likely Than Not’” published by Bloomberg on May 17, 2023; there is a mention to a report from the World Meteorological Organisation (WMO) quoting there is a 66% chance that we might surpass 1.5C between 2023 and 2027.
It is important to clarify that surpassing the 1.5C in a single year will not necessarily breach the terms of the Paris Agreement as this is more focused on long-term results. However, this potential increase should serve as a warning that more actions are needed.
Finance’s Responsibility to the Environment
The Paris Agreement places a significant responsibility on finance to contribute to a more sustainable economy. Among other points, the agreement emphasises the need to align financial flows with a trajectory that supports low greenhouse gas emissions and climate-resilient development. As the financial system plays a crucial role in providing capital, financial services have a major role to play in advancing sustainability goals.
Encouragingly, there have been positive developments in this regard. Earlier this year, the S&P Global Market Intelligence reported that Global Green Bonds Issuance is expected to rebound for 2023 (after a rough 2022), and ESG Today reported that Morgan Stanley raised $500M for their Climate Solution Fund.
The Road ahead
Finance has a critical role to play in shaping a sustainable economy and mitigating climate risks. We are witnessing positive developments, such as the rebound of global green bonds issuance and the successful fundraising for climate-focused funds.
However, achieving global net-zero emissions and halving greenhouse gas emissions by 2030 requires concerted efforts from all stakeholders. While finance bears a significant responsibility, it is also a collective duty for individuals, businesses, and governments to prioritise environmental stewardship.