The backdrop for the financial system to address sustainability goals is moving fast. In 2019, civil society campaigning cemented awareness on the urgency to act on climate change, the financial sector progressed initiatives to assess climate risk1, policy makers provided more guidance on categorising sustainable finance2, and governments stepped up the narrative on delivering net zero carbon3. As the climate talks move to Glasgow for COP 26 in November, we expect 2020 to be a year of raising ambition on climate action across the key low-carbon transition enablers of finance, industry and policy. We think five themes will play out to support this aim.

    Transition finance: Transparency about uses of capital provides a key signal for how quickly low-carbon transition will take place. This is important because it shows whether governments and corporates are creating the right platforms to deliver climate pledges. So far green labelling in bond markets and capturing environmental, social and governance factors in equities have been the main focus. In 2020 we expect more transition labelled financing that supports decarbonisation in high energy use industrial sectors. This is relevant for raising ambition because it provides a channel for leading corporates and governments to showcase climate action.

    Industry aspiration: A key corporate consideration is to identify a climate approach that takes both operational environmental impact and future resilience to climate factors into account. Many companies have already set out individual climate actions, but in 2020 we see industry collaboration providing a bigger voice to collectively support climate and sustainability solutions, creating an environment that celebrates high ambition action.

    Climate governance: As the urgency to address the gap4 between business as usual emissions and emissions consistent with a 1.5°C world intensifies, we expect more scrutiny from civil society and investors on whether corporates and governments are meeting climate goals. In addition, financial regulators are exploring how to stress test for climate risks5. The use of technology to monitor ecosystems, biodiversity, and sources of greenhouse gases will likely become more prevalent in 2020, offering a stronger toolkit to showcase avoided CO2 emissions, better assess potential climate risk and create circular economy solution systems.

    Infrastructure investment: Clean power provides the foundation of a low-carbon economy, and in 2018, renewables represented just 26 per cent of global electricity generation6. In addition, transmission, transport and building networks are also critical for delivering a fully integrated sustainable economy. Sustainable infrastructure, as well as direct renewables investment, is a key area where countries can support increased ambition in climate pledges. Country approaches for increased ambition will likely be disclosed from March onwards as they submit plans ahead of the COP 26 talks in Scotland. We also think there will be continued demand for renewables from corporates in order to meet operational sustainability goals.

    Net-zero carbon roadmaps: Creating an economy where sources of emissions are offset by carbon sinks is the clear climate goal. The majority of countries have a plan for reducing emission sources but many have not yet disclosed plans for carbon sink scale up. Throughout 2020 more comprehensive country approaches to man-made and natural carbon sinks will likely be published in preparation for the UN biodiversity conference hosted in Kunming, China in October 2020.

     

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    1 Network for Greening the Financial System: A call for action, April 2019. Available to download from https://www.sustainablefinance.hsbc.com/reports/climate-change-as-a-source-of-financial-risk

    2 Council of the European Union: European Proposal for a regulation of the European Parliament and of the council on the establishment of a framework to facilitate sustainable investment, December 2019

    3 International Institute for Sustainable Development SDG Knowledge Hub: https://sdg.iisd.org/news/77-countries-100-cities-commit-to-net-zero-carbon-emissions-by-2050-at-climate-summit/

    4 United Nations Environment Programme (2019). Emissions Gap Report 2019. UNEP, Nairobi

    5 Bank of England discussion paper: The 2021 biennial exploratory scenario on the financial risks from climate change, December 2019

    6 International Energy Agency, Tracking Power, May 2019