The global financial sector is facing growing climate-related risks as significant physical and transition impacts materialise across investment, lending, and insurance portfolios. To reduce the risk of huge losses in value and achieve global net-zero goals for a safer, more stable global economy, it is estimated that up to US $8.5 trillion in investment is needed annually between now and 2030.
It is against this backdrop that financial sector (FS) board directors grapple with the impacts of climate change on their companies.
Given the sector's deep connections to businesses and households, its actions will largely drive wider economic and societal resilience. It is therefore essential that financial sector boards are equipped and feel motivated to lead on climate from the boardroom.
To better understand the barriers, enablers and opportunities for the financial sector to act, The Climate Governance Initiative (CGI) and Chapter Zero hosted a dinner with non-executive directors (NEDs) and industry leaders from the FS community at the end of 2024. The discussions were rich and wide-ranging, drawing on perspectives from across the FS community both in the UK and internationally. What emerged from those conversations are three main routes to unlocking the transition for the sector:
Financial
Barriers
- While participants acknowledged the growing focus on climate risks and opportunities across the sector, there was a feeling that most organisations had not yet moved beyond the ‘easy to do’ actions.
- Firmly entrenched corporate finance norms, including in areas such as valuation methodologies, investment and performance evaluation horizons, and remuneration practices, remained critical barriers to scaling finance for the transition.
- Definitional, classification and integrity concerns were also holding back transition finance. Some organisations were reluctant to be the ‘first movers'.
Enablers
- Many participants saw universal asset owners as candidates to lead change, with their significant decision-making agency, and whole-of-economy financial exposure over inherently long horizons.
- But recognised that additional stakeholders such as private equity firms, public financial institutions and blended finance structures are important catalysts for change.
- NEDs in financial institutions could therefore play an important role in accelerating change and challenging the executive to be bold.
Opportunities
A stronger focus on “real world” scenarios - i.e., scenarios that better capture cascading socioeconomic, political, business and financial risks as the planet warms – could help such organisations to maximise the opportunities and mitigate the risks over the longer term.
Behavioural
Barriers
- Many participants highlighted the often overlooked cultural and relational dimension of acting on climate change, particularly between the executive and the board.
- It was observed that individuals often find it difficult to visualise and engage with different possible futures, resulting in a bias towards incremental rather than transformational change.
Enablers
However, it was argued that NEDs have an opportunity to lead from the front in this regard due to the duties around long-term strategy and resilience.
Opportunities
- NEDs can embed a transformation mindset within their organisations and build the courage and knowledge to challenge the status quo.
- They can also work with the executive to adopt effective governance, risk, audit, remuneration structures and cultural approaches, cultivate strong decision-making, critical judgement and influencing skills within the organisation. This will help institutions and individuals navigate the increasingly difficult influences and trade-offs that many organisations are entering as we move from plans to implementation.
Systemic
Barriers
The discussion often returned to the lack of a systemic perspective. All parts of the chain need to be pulling in the same direction. Where it is not, there are effective strategic, stewardship and governance tools available for boards and financial institutions to engage at a system level.
Enablers
A supportive policy environment, along with effective mechanisms for engagement, collaboration and partnership across the ecosystem, both domestically and internationally. Government, business, finance and civil society need to be able to come together in a trusted, constructive, conflict-free way that generates value for both shareholders and wider society. For instance, in the UK context, the Transition Finance Market Review recommended the Transition Finance Council as a vehicle for such collaboration.
Opportunities
- NEDs can help to instil a systemic mindset within their organisations, challenging executives on how they are leveraging their agency within the ecosystem.
- There are countless opportunities for the financial sector to support and benefit from the transition to net zero; even while it navigates a range of complex climate-related risks and the ways a successful transition will manifest across global markets, regional economies and sectors.
Informed by the Chapter network and individual non-executive directors in financial institutions, the CGI’s new Financial Sector Programme is enabling vital opportunities for knowledge exchange to equip FS NEDs and trustees with the knowledge and tools needed to navigate these risks and opportunities.
Launched with the support of Generation Foundation and guided by the high-level CGI Financial Sector steering committee made up of several global experts, this new programme will provide practical guidance that is actionable and geographically relevant to accelerate progress towards net-zero, in financial boardrooms globally.