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After watching the Back & Forth of COP 26, we can safely conclude that the fight against climate change is going to continue to be a convoluted drawn out challenge on many fronts. Beyond agreeing to targets, there are divides between nations on fundamentals such as whether coal should be Phased Out or Phased Down and many scientists claim that even if countries do meet their 2030 targets, global temperatures will still rise above 2.4C pre-industrial levels.
"Tremendous effort to be at COP26 but we're now reflecting on whether it was all worthwhile"
Statement from Antigua & Barbuda Representative
To complicate matters further, some Banking Regulators (UK, Singapore) have seized the COP frenzied moment to publicly pressure financial institutions to address Greenwashing ("the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound")|DEFINED.
In addition to sorting through Greenwashing, banks will need to undergo Stress Tests (this has not been defined) and manage risks (these have not been identified) relating to environmental issues (no scope has been disclosed) as early as next year (so much unfastened now has a timeline).
MAS Media Release LINK
I don't doubt that going green is a worthy exercise to entertain or that sustaining the planet's climate isn't necessary for our combined survival, but demanding bankers become the police officers of something they are generally unqualified and unauthorized to assess could make for challenging times. This is the new compliance obstacle that is not so dissimilar to the Anti-Money Laundering regiment that has plagued bankers with costs and poor control effectiveness for decades.
Even before we follow these requirements to their end, regulators are already insinuating that banks shouldn't finance companies that pollute in the same way that they mustn't transact with businesses that engage in terrorism or tax evasion.
This is all a noble undertaking but it is also a tad naïve on many levels, let's just explore why a little further.
THE ECONOMICS OF POLLUTING
The global economy of Polluters and Greensters is not two separate communities of people in conflict but interlinked entities that see polluters often being the main investors in Green Projects. Hard to believe I know, and as much as the politically correct would like to eradicate all things from a carbon positive source, the world as we know it would collapse without Carboniferous resource tapping.
MAS Media Release PAIA
The Carbon Offsetting System has plenty of quirks that will take time to iron out, and that makes for a complicated territory for banks to govern. More so, many polluters invest into green projects through a diverse Supply Chain of onshore / offshore firms that have a fungibility structure that isn't transparent to bankers and even when such models are disclosed, the assurance around due diligence efforts to attest everything is appropriate is completely unchartered at present.
Now I am not saying we won't end up with an additional compliance process layer for polluters needing finance, but to expect bankers to have a full operating solution within twelve months doesn't take the complexity of ESG seriously and as such, this optimism is misplaced.
So, where does all of this novel ESG compliance interest leave bankers?
In a precarious position of having unworkable mandates bestowed upon them in the near future and my advice is that they proactively get involved now rather than adopt a wait and see approach. In that, risk and compliance teams should look to establish a project that researches how to report carbon offsetting and the outcomes from Capital Infused Carbon Footprints, an innovative concept with little academic or real life experience — there is a lot of work to do.