Climate change is one of the significant points of discussion throughout the world for policymakers. The Finance Day of COP26 focused on how the financial sector of the global economy can play a role in helping manage climate change and reach the goals many countries have set to lower emission levels and pollution.

The ideas put forward at COP26 and previous similar conferences present the financial perspective on climate change.

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Mark Carney, who is the UN Special Envoy for Climate Action and Finance talked about how the financial sector will influence businesses to become greener. He said “It is about client focus, going to where the emissions are to help get them down. So, companies that have plans in place to reduce the emissions, will find the capital, those who don’t won’t. So highly recommend getting those plans in place.”

Benefits, Not Penalties

The pragmatic approach global financial leaders take when it comes to climate change shows why the financial sector will have a significant role to play across the world. The financial industry is focusing on practical solutions that benefit not just the climate but also the current players in the global economy.

There are investment groups that are focusing on investing in greener businesses, new credit lines being opened up to help businesses transition to using better equipment and infrastructure, policy announcements that make it easier for businesses to reduce waste, and much more.

Regulatory Changes Expected

The speeches at COP26, policy announcements from multiple global financial institutions, as well as policy proposals from many different governments all point towards major regulatory changes. According to a report by the Financial Stability Board (PDF link), more than 75% of financial authorities across the world are considering adding climate risks to their financial stability assessments of businesses.

The Center for American Progress has published a detailed guide to some of the changes that can be expected from regulatory institutions and macroeconomic policymakers over the next decade. They list 5 main changes that can be expected: capital risk adjustments based on transition risks, capital surcharges, climate stress tests, reworking capital risk weights, and ensuring that climate risks are also tracked throughout the shadow banking sector.

The pragmatic approach global financial leaders take when it comes to climate change shows why the financial sector will have a significant role to play across the world. Share on X

There has been a lot of discussion on how to promote greener businesses, and many different approaches have been tried. One method that seems to be becoming popular is to add the cost of negative externalities to the assessment of a business. Instead of purely judging businesses on their financials, financial institutions and investment banks may also start looking at the business’s emissions, pollution, and overall environmental impact. This approach is meant to drive investments towards greener businesses without punishing existing businesses with penalties.A report published by McKinsey contains a timeline for different regulatory changes that are planned – these changes focus on ESG in risk, compliance, and regulatory changes.

Regulatory Change Management Challenges

Regulatory changes will create a challenge for teams managing regulatory changes throughout their organizations. There will be a need to reassess all the existing policies and processes in light of regulatory changes.

Regulatory Compliance Challenges

Regulatory compliance teams across the country will need to ensure that appropriate personnel are trained according to the latest regulations. They will also need to ensure that corporate goals can be achieved in light of new regulations. Ensuring corporate goal achievement will entail working with each department within the organization to understand how regulatory changes will affect their standard operating procedures.

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