Financial Institutions Facing Net-Zero Transition Risks

Published on: 18 June 2022 05:08 PM
by KnowESG
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According to a report from S&P Global Ratings, financial institutions face risks from two areas when considering net-zero transitions: physical impacts, such as catastrophic natural disasters, and implications of achieving sustainable transitions, such as the cost of new regulations.

According to S&P Global Ratings, those risks can result in slower economic growth and more inflation, and as a result, central banks have taken steps to monitor and incorporate climate impacts into their assessments. Still, as banks work to ease sustainability transitions in financial markets, the report says governments should play a large role in making changes.

According to the report, these risks must be carefully assessed because if the financial system is undermined by threats such as natural disasters, it will be difficult to stabilise — especially if those physical impacts grow more frequent or severe.

Furthermore, if adjustments are made too rapidly, such as with carbon pricing or severe restrictions, they may result in production swings or major price increases with insufficient time for businesses and institutions to respond.

However, according to the report, a net-zero transition might promote "green" innovation and breakthroughs. This could also stimulate quick productivity growth.

According to the report, large investments are required to attain net-zero, and central banks are viewed as the most crucial component for a successful transition. Infrastructure must be resilient to natural disasters, and increasing taxes and regulations can create incentives for businesses to modify their operations.

Even with risks, the report concludes, transition delays will have economic effects. It says that transitioning to net zero emissions by 2050 might have a beneficial influence on GDP, but that delaying the shift could result in a reduction of roughly 5% by that year. If current policies are maintained, severe decreases will occur over the next several decades.

As central banks attempt to find common ground on sustainable transitions, the Network for Greening the Financial System has grown to include more than 100 members, including some of the world's top central banks. According to S&P Global Ratings, this indicates that financial institutions are taking net-zero transitions seriously.

According to the report, central banks are taking steps to incorporate sustainable transitions into their assessments, with a primary focus on research and administration. The implementation of more active measures, such as green lending, would be the next stage.

However, there is some concern because, while there are regulatory benchmarks, such as the EU Green Taxonomy, there is no global standard. Furthermore, corporate bonds, despite reaching historic highs in sustainable debt last year, remain a small component of the overall business.

Source: Environmental Leader

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