Net zero emissions and financial sector dilemmas

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Net zero emissions and financial sector dilemmas

Why is the fight against climate change important for the global financial sector? The reason is simple: new business opportunities for those who take up the challenge and the business opportunities it will bring them. (Shutterstock)

With the clamor for rapid implementation of net zero global emissions, pity those in the financial sector who find themselves between a rock and a hard place, having to choose between nasty actions affecting their sector. But let’s be real, because tackling climate change is not something that will be politically put away at the November 2021 COP 26 climate change meeting in Glasgow. Reaching net zero, the point where the amount of carbon released into the atmosphere is the same as the amount taken out, will reshape global economies and put pressure on the financial sector.

The financial crises of 2007-2008 illustrated the fragility of the financial sector and how far systemic risk could go. Today, the financial sector has a small window for an orderly transition to a politically low-carbon world and action must be taken from now, raising the question of whether Saudi banks are ready to meet the new regulatory environment or to continue lending in the traditional manner.

Why is the fight against climate change important for the global financial sector? The reason is simple: new business opportunities for those who take up the challenge and the business opportunities it will bring them. Does this mean the financial services industry really wants to stop climate change, or is this just lip service? The most cynical might believe this is the case, but in reality, there is now strong public pressure on governments and regulators to exert significant pressure on polluting industries. This will inexorably ensure that central banks, financial regulators and lawmakers push financial industry players to channel polluter funding into “green” solutions.

How to proceed concretely, in addition to imposing carbon taxes on polluters? The UK wants to be the first G20 country to have mandatory economy-wide disclosures in line with recommendations from the Financial Stability Board’s awkwardly named task force on climate-related financial disclosures, with a deadline. 2025 target implementation.

It’s not far off and will be watched carefully by other financial regulators. The UK’s approach is to begin mandatory disclosures for listed companies and large asset owners, including life insurers and pension providers, with new rules coming into force for these financial players on 1 January 2022.

Financial institutions that make the new transition of climate risk assessment will not only survive, but also pick up the slack from those that lag behind as their brand valuation declines.

Dr Mohamed Ramady

Capital market regulators such as the Saudi Capital Market Authority will carefully monitor the outcome of these new regulations given the importance of Saudi energy-related listed companies. How easy will it be to implement, the cynics will say? Even the UK’s Financial Conduct Authority points out that there are “challenges” in preparing climate-related financial information, given multiple and often conflicting definitional issues over precise levels of climate change pollution, difficulty in obtaining primary data and, above all, a fundamental problem of lack of internal skills of regulators and financial companies in the analysis of data.

Here again, this will be a major constraint for regulators and financial players in developing countries such as Saudi Arabia, which is politically committed to the fight against climate change. Along with the UK’s own initiative, the country is also keeping an open view on the work of the International Financial Reporting Standards Foundation, which aims to establish a global sustainability standards council.

Not to be outdone, in the United States, the Security and Exchange Commission (SEC) is considering integrating climate risk disclosure into regulatory documents, to avoid lawsuits from investors, but some say that financial institutions are indeed caught between a rock and a hard place. because they will also be prosecuted if they publish or do not publish such information on climate change.

In summary, despite recognition of the urgent need for change and calls from activists to move faster, the financial services industry will not be able to recover quickly without strong pressure from regulators and, more importantly, from their shareholders, who might be idealistic but are faced by hardline financial managers who truly believe that it will take time for renewables to replace fossil fuels.

In the meantime, between now and November’s COP 26 meeting, there will be many well-meaning announcements about what financial services firms plan to do to achieve net-zero emissions, and what they really should do as climate activists demand. Those who thought being in the financial sector was a very rewarding career with lessons learned from the past financial crisis to drive them forward will now face a new world of climate risk assessment, where they must not only understand and to implement new unknowns and the never-before-seen complexities of risk assessment, but also to educate their polluting clients if these still need to be funded. In Saudi Arabia, the change in mentality and the implementation of climate risks must begin to apply now.

Too bad then the new generation of bankers, but without these changes, global lending will shrink to avoid lawsuits, with unintended consequences of reduced economic growth. Financial institutions that make the new transition of climate risk assessment will not only survive, but also pick up the slack from those that lag behind as their brand valuation declines.


• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.

Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News

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