The commitment of the global financial services sector to playing its part in tackling climate change was highlighted during Cop26 with the emergence of the Glasgow Financial Alliance for Net Zero group, led by former Bank of England chief Mark Carney and Michael Bloomberg.
The group comprises more than 450 firms representing $130 trillion of assets, which have collectively committed to using science-based guidelines to reach net zero carbon emissions by 2050 with interim goals set for 2030.
"We are seeing very high levels of participation by the financial services sector in the climate agenda," says Mazars Ireland managing partner Mark Kennedy. "We saw that at Cop26. There is now a much greater understanding of the impact of climate change not only on economies but societies as well. Attitudes have changed profoundly over the past five to six years."
Of course, there are business opportunities to be grasped as well.
"It would be naive to think that any business is not looking out for and taking opportunities that come its way," says Kennedy. "But there is also a genuine desire to make a difference. There is a recognition of the need to reset economically to address the ESG and sustainability agendas.
“Of course, financial services businesses are looking at business opportunities but there has been a profound change in executive and board level views of the issues. It is very complex, and we have to acknowledge that few of us really understand what is involved.
“It’s very easy to talk about 1.5 degrees and so on and five years ago we were struggling to understand how we could even measure it.”
Walking the walk
That change in view has been driven by sound business reasons as well as environmental considerations, according to Kennedy. “There is now a general understanding that if you want to hire good people, connect well with both corporate customers and consumers, you need to be visibly walking the walk.
“There is also a very real understanding of the role financial services can play in addressing climate change. Banks understand the importance of credit in relation to it while insurance companies understand very well the impact of events like fires and floods and so on.”
The role of the banks and other financiers cannot be overstated, he says. "Without credit and investment, the transition can't happen. That's why finance is at the centre of the European Green Deal. "
Numerous sectors like agriculture and energy will be impacted and will require significant investment to make the transition. “The whole education side needs to be funded as well, as does the just transition,” Kennedy points out. “That’s all going to require a mix of public and private finance.”
Catastrophe bonds
The role the insurance sector can play can be overlooked, he adds. "Insurance as a risk-management activity for sustainability is very important. We will see increased use of catastrophe bonds and Ireland can be a major global centre for them."
These are not new, according to Kennedy. "They've been around since the 1990s and offer a means of diversifying risk for insurers. If you have underwritten projects in California where there is a big fire catastrophe risk you can issue catastrophe bonds to transfer that risk to other market participants.
“In the main, it involves selling the bonds to other insurance companies. The proceeds are put into a locked-box safe investment and the bonds pay out high returns relative to the market.”
Losses are borne by the proceeds of the bond and, consequently, the bond holders. “That’s why there is a higher return on it. They are very sophisticated and not for retail investors. What’s interesting is the increased proliferation of catastrophic events. The industry will look again at how to assess this trend and share the risk.”
He emphasises the importance of the social and governance aspects of the ESG agenda.
"They bring us back to the wider UN Sustainable Development Goals and feed into historic corporate social responsibility activities which are deeply embedded in many Irish companies. We are starting to see Irish banks talking about social bonds which will probably be used in areas like housing initially.
“Very large corporates are a little bit ahead and they are conscious of things like anti-slavery and corruption provisions when managing very large and complex supply chains. There is growing awareness of the social aspects among companies of all sizes and sectors.”
And that includes his own firm. “We have set targets for ourselves both here in Ireland and at group level. Like a lot of businesses, we thought we were doing very well but when you look at these things properly, you realise how much more you can do. We now have targets and KPIs in place and are investing in our people and working very hard to achieve them as quickly as we can.”