Posted on Apr 7, 2016

The Relationship between Climate Change and Financial Institutions

One of the most common complaints leveled at those who want to put a stop to the onward march of the global climate shift is

that it will cost far too much money to do so. While dealing with climate change will probably cost more than a bottle of milk, the reality of the situation is that failing to take action will cost us far more, not only economically but on a human scale as well. We hold human life sacred, and believe that its value cannot be overstated. The change in our climate threatens not only the environment, but millions of people who will be displaced by rising waters and environmental disasters. Economically speaking, re-homing climate refugees will have taken a toll on global finances, exacerbating inequality and having numerous knock-on effects around the world. We already see the consequences of wealth disparity in countries like the United States, where those who can’t afford tertiary education don’t get high-paying jobs and thus have a compromised ability to contribute to the economy than those who inherit large sums of wealth.

How This Affects Financial Institutions

Changes in the global climate are bound to affect every single aspect of the financial industry. For example, changes in weather will have a drastic effect on agriculture, particularly in arid areas such as Australia and the central United States. The Great Depression was triggered in part by a dry spell lasting years that destroyed the United States’ staple crops across Oklahoma and other farming communities in the Midwest. This had a disastrous, far-reaching effect on the global economy. Although agriculture has long been considered a safe investment for financial institutions, the changes currently experienced on a global scale will affect that industry and those investing their money in it. Agriculture is vital to food supply and the various industries that depend on food supply to remain afloat, so it is imperative that financial institutions with an investment in sustaining the agriculture industry get on top of climate change before it is too late.

Plenty of Fish in the Sea?

Related to agriculture, and similarly affected by government policy and investment patterns, is the global fisheries industry. Changes in the acidity of the ocean, water temperature, and sea levels are affecting the migration habits and capacity of sea life to thrive in our planet’s oceans. Many fish have an extremely low tolerance for changes to their environment, particularly the prey fish that make up so much of the global fishing industry’s product. The marine ecosystem is infinitely complex, and changes to one aspect of the ecosystem can have consequences on the far side of the world. For example, changes in water acidity induced by the increased level of carbon gas in the atmosphere affect the coral polyps that form vast, intricate limestone structures called coral reefs. The organisms that depend on coral reefs for a habitat die out in a phenomenon known as reef bleaching, which prevents predatory fish from finding adequate food, damaging the fishing industry as a whole. This in turn affects populations of predatory animals all the way up the food chain throughout the world. It’s vital that financial institutions, to protect their own investments, avoid investing in fisheries that overfish or damage coral reefs, as this will have disastrous consequences not only for the planet as a whole, but for the bottom line of the fishing industry and those who invest their money in it.

How Climate Action Can Be Profitable

The massive shift in our global climate will have an effect on all sectors of the world’s economy. As a result, financial institutions and investors are coming up with contingency plans and making predictions about how it will affect them and their consumer base. It’s worth noting that any change in government policy—on a national or international scale—can either be a risk or an opportunity for those in the financial sector. Climate policy is no different. For example, there is a lot of money invested in coal and other finite resources, which are contributing massively to the greenhouse gas levels in the atmosphere. Since these resources are finite and we depend on them to provide our energy and fuel, their value keeps going up. Just look at the meteoric rise in the price of gas! However, investment in renewable energy can prove to be rather lucrative if you use a little patience. Consider wind power, for example. While there are start-up costs associated with using wind power, the return on that investment is infinite. Wind is a resource that we can’t possibly exhaust, so those who invest in wind power stand to make money from their investment for eternity. Imagine putting that in your portfolio. What’s more, investment in solar and geothermal energy provides similar results. For investors who are clever enough to look into the future and exercise some patience, renewable energy provides a safe, guaranteed return on your investment. People will always need, and therefore always use, power and electricity. Renewable energy also creates jobs in science, engineering, and, of course, the energy sector, which in turn stimulates the economy far more than non-renewable oil and coal will. Once the mines are exhausted, all those jobs will disappear. Investing in the fuel of the future is just one move that financial institutions can make to halt the advance of climate change and make a profit in the process.

Fossil Fuel Divestment

The reverse is also true. One movement that is currently gaining a lot of traction around the world is the divestment movement. Universities and banks on a global scale are withdrawing their investments from planet-polluting companies, particularly in Australia, where the big banks are heavily invested in the country’s mining industry. When financial institutions and wealth holders divest from fossil fuels, they create a trend in the market that smaller firms and even individuals can follow. Like the butterfly flapping its wings and inadvertently causing a gale, the simple act of divestment is a great way for financial institutions to encourage action on climate change, particularly at the government level. When governments see that non-renewable energy and fossil fuels are not as profitable as they once were, they withdraw their subsidies and instead invest in renewable energy, as outlined in the previous paragraph.

Related: Credit Cards and Climate Change

Sources: http://www.iigcc.org/publications/publication/climate-change-implications-for-investors-and-financial-institutions http://europeanclimate.org/climate-change-implications-for-investors-and-financial-institutions/

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