Why We Shouldn’t Place Our Hopes in Green Finance

SG Climate Rally has consistently called for systemic climate action to reject the dogma of endless profit at the expense of our well-being and our planet’s ecological limits. As world leaders are forced to respond to the urgency of the climate crisis, there have been calls for massive investment in climate solutions.

What is concerning is the assumption that financial markets are best placed to steer these investments. This approach cannot deliver the rapid, sustained, and just transition away from the carbon-intensive economy that is required. Instead, we need a transparent, equitable, and democratic public investment programme in a regenerative economy.

The finance industry can no longer ignore their significant contribution to carbon emissions through their loan books and investment portfolios - also known as financed emissions.

In this commentary, we unpack claims about the role of sustainable finance in the climate transition by asking two questions: Does sustainable finance actually succeed on its own terms? And, more fundamentally, are financial markets best placed to decide what economic activities societies should collectively pursue?

Green Projects or Green Washing?

First, how is sustainable finance supposed to work? The idea is to channel funds towards projects that address climate change and other “sustainable development” goals. The labels “green” or “social” are attached to projects that are deemed to have net positive environmental and social benefits. These labels, in turn, help to attract funds from responsible investors.

A key challenge is that there are currently no common and binding definitions for “green” or “social”. Investors have thus raised concerns over greenwashing, where companies give a misleading or false impression of the degree to which their products are environmentally sustainable.

In January 2021, the Association of Banks Singapore (ABS) published the draft SG Taxonomy for public consultation. The Taxonomy classifies economic activities according to whether they are consistent with certain environmental goals and is part of the Green Finance Action Plan announced by the Monetary Authority of Singapore (MAS) announced in 2019. By providing standard definitions of what can be labeled “green”, the hope is that investors will have greater trust in green finance products and thus enable the growth of Singapore’s green finance sector.

That is why we strongly urged ABS in our consultation response to clearly identify environmentally harmful “brown” activities and “transition” activities, in addition to “green” projects. This would serve to remind the financial industry that it cannot continue investing in environmentally damaging projects.

We were especially concerned by the draft Taxonomy’s suggestion to include “abated natural gas” as green projects. This refers to a process where the carbon content is removed from fossil gas, which remains costly and uncommon. Some experts believe that focusing on abated natural gas may delay the transition to renewable clean energy. Hence, we suggested additional controls to ensure that firms make significant steps towards replacing more pollutive fuels and eventually phasing out fossil fuels, including fossil gas. While there may be strategic reasons for why Singapore has chosen to invest heavily in fossil gas, the existential threat of the climate crisis is surely just as important strategically, if not more.

Can We Trust the Finance Industry to Save Us?

As the SG Taxonomy will be voluntary, we also examine the track record of the financial industry’s investments in green projects when it is left to its own devices. While financing green projects have been growing in recent years, fossil fuel financing has dwarfed green projects by three times since 2015, when the Paris Agreement was signed. Banks have provided US$3.8 trillion to fossil fuel companies in the past six years.

Even now, banks still refuse to make policy commitments to ensuring clients end fossil fuel expansion. It remains to be seen whether green projects will outpace fossil fuels, especially once a post-COVID-19 economic recovery is underway. Clearly, the financial industry is far from phasing out financial support for fossil fuels.

More fundamentally, should markets be the dominant force to decide which green activities we should collectively pursue? A study has shown that financial institutions are not accurately assessing or reporting the risks of climate change to their own portfolios, underreporting almost US$1 trillion of potential financial impact. This reality is at odds with the mainstream portrayal of rational financial markets that know how to allocate capital best.

Where is the justice in financial firms and billionaires profiting during ecological breakdown, while things get bad for workers and ordinary people in the most affected areas?

Additionally, financial markets do not account for the negative impacts they pose to our ecosystems and societies. BlackRock, the largest asset manager in the world, only looks at the impact of climate change to companies’ financial performance when assessing climate risks to their portfolio. They refuse to consider the impact that companies will have on the environment. Under this approach, an oil and gas company protecting their extraction assets from the impact of flooding, and thus being able to continue polluting, may be deemed to have addressed climate risk.

Under the capitalist system, firms will not voluntarily phase out fossil fuel production, nor will they stop advertising and lobbying to drive fossil fuel demand as long as profits can be made. Where is the justice in financial firms and billionaires profiting during ecological breakdown, while things get bad for workers and ordinary people in the most affected areas?

Power to the People; Power to Democracy

In the low-carbon transition, states are ceding ever more space and power to the financial industry. Financial firms invest for profit but expect our public money to absorb their risks. As ordinary people who will feel the effects of climate breakdown, we currently have very little say in the low-carbon transition. If our societies are unequal and undemocratic, climate policies such as carbon taxes will only shift the burden onto the poor.

It doesn’t have to be this way. Some have proposed phasing in public financing for the low-carbon transition based on principles of democratic accountability and transparency. Green finance can drive the just transition when it is integrated with participatory democratic processes and institutions where the most affected have a say in the low-carbon transition.

Is it possible? Citizen assemblies have shown that when ordinary people were given information and space for free and fair debate, they could come to an agreement on more ambitious and fairer climate policies than their governments’ commitments. SG Climate Rally echoes this call to embrace democracy in all aspects of climate policy. Financing the just transition is no exception.