Nov 18, 2021

What does the $130tn climate pledge actually mean?

One of the announcements made at COP26 that raised the most eyebrows came from Mark Carney, former governor of the Bank of England. As leader of the Glasgow Financial Alliance for Net Zero (GFANZ), a group of banks, fund managers and insurers, he declared that $130tn of capital would be ‘committed to net zero’. For most people, this is an incomprehensibly large amount of money - it is approximately 40% of global financial system assets and 6 times larger than the USA’s GDP. There had been real pressure for business to step-up to the challenge of net zero, but this promise was so colossal that it was widely met with disbelief. 

The first problem was that what he specifically announced was not immediately clear. Many misunderstood the announcement, and assumed it meant that there was a $130tn fund backed by business that would be spent on climate friendly projects. On realising that it was about Assets under Management (total market value of the investments that are managed on behalf of clients), some expected the full $130tn to be directed to green investments, when in fact it is the total assets managed by all groups signed up to GFANZ. In a way, it is the power behind the statement that these 450 GFANZ firms have declared their intention to reach net zero by 2050.

In order to achieve net zero, each firm's Assets under Management will need to balance. They will still be able to hold fossil fuel investments, but these will need to be balanced by green investments. Other assets included in this total, such as home mortgages, may be seen as relatively climate neutral. Ben Caldecott, director of the Oxford Sustainable Finance Group, called the announcement ‘an important development’ but stressed that ‘we need to communicate responsibly’.1 It is expected that approximately a third of the $130tn will ultimately be dedicated to green investments. GFANZ states that firms will be required to publish their net zero transition plans, to establish how this will be achieved. Commitments will be scaled up through 5-yearly plans from 2030 to 2050, with annual reporting to monitor whether firms are meeting their commitments.2 

Another concern raised is that banks, backing half the fund, have a tendency to count the same asset multiple times due to the complicated chains of lending.3 The other half of the fund is backed by asset managers that have a similar issue due to subcontracting specialist fund management. The value of the unique (single counted) contributions to the fund is unclear, though GFANZ say that they have tried to take this into account in their calculations though admitted there would still be some overlap. 

Putting aside the misunderstandings around Mark Carney’s original announcement, this is a significant  improvement. Before Britain and Italy assumed the presidency of COP26 the value of Assets under Management committed to reaching net zero stood at $5tn - we now have a 25-fold increase. Even a fraction of that total being targeted to green investments opens up a world of possibilities that wasn’t there before.  Investment at these levels could make possible a wide variety of exciting projects from the many green start-ups now entering the market.

References:

1 https://www.ft.com/content/87690ee9-c9b1-44b6-881b-368139560295

2.https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/

3 https://www.ft.com/content/036f6253-ea40-4cde-868a-db8c5f3b245a