(Credit: Pixabay)When looking at net-zero transitions, financial institutions face risks from two areas – physical impacts, such as damaging natural events, and effects of making sustainable transitions, such as the costs of new policies, according to a report from S&P Global Ratings.
Those risks can result in slower economic growth and more inflation, according to S&P Global Ratings, 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.
These risks must be analyzed carefully because if the financial system is weakened by threats such as natural events, then it will be tough to stabilize, especially if those physical impacts become more frequent or severe, the report finds. Additionally, if moves are made to adjust too quickly, such as with carbon pricing or strict regulations, it could result in fluctuations in production or significant price increases with a lack of time for businesses and institutions to adjust.
That said, the report says that a net-zero transition could spark “green” innovation and advancements. That also could encourage rapid productivity gains.
Large investments are needed in order to reach net zero and the report says central banks see governments as the most important piece for a successful transition. There needs to be infrastructure resilient to natural events, and increased taxes and regulations can provide incentives for companies to make changes in their operations.
The report finds that even with risks, delays in transitions will have economic consequences. It says that making transitions to net zero by 2050 could have a positive impact on the GDP, but delayed transitions can result in a drop of nearly 5% by that year. Staying with current policies will result in significant declines over the next several decades.
As central banks work to find a middle ground on sustainable transitions, there are now more than 100 members of the Network for Greening the Financial System, including some of the largest central banks in the world. That is an indication that financial institutions are taking net-zero transitions seriously, S&P Global Ratings says.
Currently, central banks are taking steps to integrate sustainable transitions into their assessments, and primarily they are currently focusing on research and administration, according to the report. A second step would be implementing more active policies, such as green lending.
Although there is some concern there because although some regulatory benchmarks exist, such as the EU Green Taxonomy, there is no global standard. Also, corporate bonds, even as sustainable debt reached record highs last year, are a small part of overall business.
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