1. The Finance Industry Transition to Sustainability: Climate Science, Societal Issues, Regulation & Accounting
Section I – The Scientific Background to Sustainable Finance & Paris Agreement
1.1 Shumpeter’s Creative Destruction and Net zero
degree warming potential
SBTI: Science Based Targets Initiative
Lawrence Fink has gone from being somewhat indifferent to climate-change risks, to ‘coming out’ as a believer in the need for the finance industry to adapt rapidly if not to save the planet, then at least to save the finance industry.
‘stranded assets’ i.e. assets with little or no economic value.
Kondratiev Cycle
The Sun delivers more energy to Earth in an hour than we use in a year from fossil, nuclear and all renewable sources combined.
It is partly stored in the atmosphere, partly in the oceans. Much is also stored in limestone (CACO3) , , but this is released in large quantities when calcium carbonate (limestone) is converted to cement for BUILDING purposes.
The CO2 emissions absorbed by the ocean (around 25% of fossil fuel emissions) results in acidificatio
The CO2 emissions absorbed by the ocean (around 25% of fossil fuel emissions) results in acidification of the ocean which is now 30% more acidic than before the industrial revolution.
Earth does not suffer the temperature extremes of the moon (-173˚ at night to 127˚ during the day11) because the blanket of atmosphere around it creates the Natural Greenhouse Effect. T
incoming solar energy (light) on average across the earth’s surface is 340 watts per square metre or 1/3rd of a kilowatt
- 29% reflected back to space
- 23% absorbed by water vapor, dust, and ozone,
- 48% passes through the atmosphere and is absorbed by the surface.
Temperature changes can be caused by changes in the sun’s energy emission sometimes related to ‘sun spots’, to changes in the amount of snow cover or cloud cover resulting in a higher albedo14 (whiteness or reflective coefficient) . This can lead to FEEDBACK EFFECTS.
. It is generally believed that the CO2 emissions from burning coal, oil and natural gas and the methane (CH4) emissions from leaks of natural gas from exploration, production and pipeline transmission, are the main cause of this temperature rise in contrast to earlier periods on earth.
While water vapour comprises the major part of greenhouse gases it is not the direct cause of warming.
It is carbon dioxide (CO2) and methane (CH4) which causes what is known by scientists as “Radiative Forcing” or Climate Forcing.
This is the difference between sunlight absorbed by the Earth and energy radiated back to space.
Milankovitch cycles
1.5 Radiative Forcing and its Impact on Earth
2011, an additional 2.29 watts per m2 of Earth’s surface was being absorbed by land and ocean
Representative Concentration Pathways, or RCPs
= amount of radiative forcing (RF) in 2100 relative to 1750 and are determined by the parts per million of CO2 in the atmosphere
(RCPs) shown above were developed in 2014 by the Intergovernmental Panel on Climate Change (IPCC) and are a key part of their Fifth Assessment Report (AR5).
“tipping points”, i.e. things that accelerate climate change and are irreversible
GtCO2e. ‘e’ means ‘equivalent’ which is gigatons of CO2 plus other
greenhouse gas emissions converted to their CO2 equivalent
Land Use Change ( LUC ) emissions account in fact, according to the report from which this graphic was abstracted, for around 11 per cent of the global total GHG emissions.
The problem that peat presents is that if peat bogs are drained as they are when peat is being harvested or a peat bog catches fire as they often do, then the CO2 is released. T
, warming must be limited to 1.5 °C. This requires an emergency response.
In the absence of corrective action, global warming is expected to reach 4.1°C-4.8°C above pre-industrial levels by the end of this century.
Under current policies, moderate estimates suggest that we are still likely
to emit more than double the levels required to achieve a 1.5°C scenario by 2030
Integrated Assessment Models (IAMs) are unable to account for the
tail risksi.e. the risks resulting from tipping points and cascades which lead to much more dramatic climate change that is envisaged in IAMs
Global Climate Models (GCMs) that we looked at above are driven by the fundamental physics of the atmosphere, the oceans and the Earth’s land surface
They were later enhanced in so-called the Earth
System Models (ESMs) which considered in more detail, the complex interactions between the atmosphere, the oceans and the land surface.
Later still, so-called Integrated Assessment Models (IAMs) were developed. “IAMs are an interdisciplinary research platform, which constitutes a consistent scientific framework in which interactions between human and natural Earth systems can be examined.
model inputs which are assumptions about how the world works, how populations will grow or decline and how the behaviour of societies may change
outputs including economic outcomes, land-use changes, GHG emissions and energy pathways.
To go from inputs to outputs, the inputs are passed through modules representing the important systems – the economy, the energy system, the land system and the climate system.
Shared Socioeconomic Pathways” (SSPs)
IAMs use what are known as ‘general equilibrium models’ based on ‘neoclassical’ economics assumptions.
Many would consider these assumptions about how capital markets function as UNREALISTIC and in particular the use of the rational expectations hypothesis.
Newer models allow for ‘cascade effects’:
- allow for non-linearities may in future be able to provide better predictions.
- demonstrate the high probability of much more severe outcomes than general equilibrium models
s there is a tendency in such models to DELAY action today in favour of hoped for technology in the future particularly given the very high cost of carbon capture, transport and storage.
The fact of uncertainty about the severity of outcomes from greenhouse gas emissions, rather than being a reason to slow down action, is in fact a reason to speed up inter-governmental action given the high probability of ‘tail’ outcomes resulting from, for example, further loss of Amazon forest or Antarctic ice sheet.
n. Socio economic models cannot easily predict human behaviour in response to price changes, diets, need for transportation etc. Indeed, some would argue that we are in a situation of “RADICAL UNCERTAINTY” (see Chapter 6) where it is not possible to ‘scientifically’ calculate probabilities of damage from physical or transition risk. I
PRECAUTIONARY POLICY where the focus must be on avoiding tipping points and building resilience into systems.
e implications of climate change –
in particular on the implications of migrations from south of the globe to the north of the globe
newly resurgent Russia on the back of its increasingly cultivatable land area as global warming leads to the tundra melting and increasing crop yields over larger areas of land at the same time as US crop yields are declining due to the same warming climate.
Russia would benefit from an ice-free Northeast passage for ships between Europe and Asia along the north coast of Russia
high temperatures and forest fires in the north-west US and in western Canada in July 2021 have made people ever more aware