While investor expectations remain centred around value creation, growing awareness of climate risk factors has ensured that investors are now willing to pay a 10 per cent premium for companies with positive ESG records, carbon accounting engine Normative reveals in its latest whitepaper.
Despite an increasingly positive attitude towards environmentally friendly options, the financial services industry still sits at a crossroads when it comes to transitioning to net-zero emissions. Furthermore, the number of financial institutions setting science-based climate targets quadrupled in 2022 – over 40 institutions have now submitted their targets.
Normative revealed that financial actors now have a choice to make: whether to take a reactive or proactive approach to how they move forward with their sustainability commitments, in its report titled ‘How the Financial Services Industry can Lead the Net-Zero Transition‘.
The way they choose to progress will drastically impact their ability to deliver on existing commitments and could play a significant role in determining the success of the transition to net-zero emissions globally.
“Large companies and banks have so much power to help businesses across the UK transition towards the low carbon economy,” explained Elena Pérez Celis, head of policy and public affairs at Bankers for Net Zero.
Put simply, Normative’s report explains that taking a proactive approach to net zero could create long-term resilience and encourage greater levels of growth for financial institutions – making it the “most viable” option to ensure a sustainable transition.
The whitepaper also harbours an important warning: if financial institutions and other actors in the industry are more reactive, important investments in technologies and organisations that are essential for the transition will be delayed – or potentially not undertaken at all.
Role of the regulators
To propel the global net-zero transition, regulators have developed a range of regulations and frameworks for the financial sector. These not only drive the sector towards more sustainable practices, but also inform and protect investors, consumers, and other stakeholders from the risks emerging from a changing climate.
This includes physical risks from extreme weather events and transition risks emerging from policy and technology changes, as well as changes in consumer and investor expectations. Accordingly, comprehensive and transparent climate disclosures have become crucial for both navigating the regulatory landscape and for reducing risk.
Kristian Rönn, CEO and co-founder of Normative, explained the potential of not making sustainability practises a priority: “According to the World Meteorological Organization, there is a 66 per cent probability of breaching the 1.5-degree Celsius threshold for average global temperature increases – crossing this line would risk irreversible changes to the climate.
“Financial organisations can make a huge contribution to tackling this challenge by taking steps to hedge against climate-related risks, planning to support increasingly granular regulatory requirements and making investments in new opportunities in the transition to a net-zero economy.
“There is a huge chance for the sector to play a leading role and capture the business opportunity of selecting the proactive pathway.”