OECD highlights need for rethinking financial sector as part of climate action strategy

Most nations in the world have subscribed to the goal of limiting global warming and reining in climate change but the financial long-term strategy often does not match this ambition yet, a new report by economic cooperation body OECD and supported by Germany’s environment ministry (BMU) on financing climate-friendly infrastructure has found. “There is no precedent for the scale of systemic change that is prescribed by the (UN climate change panel) IPCC report,” said OECD Deputy Secretary General Masamichi Kono at the report’s presentation on the fringes of the Petersberg Climate Dialogue in Berlin, adding that this significant challenge could only be mastered by taking long-term decisions now. Kono said that so far only a fraction of signatories to the Paris Climate Agreement had made strategic climate financing decisions, but this would be at their own peril since a strategy to adapt finance to climate action was the only way to ensure long-term fiscal stability, as traditional sources of state income are set to dry up if fossil fuels are gradually phased out. Amongst other things, a globally consistent taxonomy that defines how investments and other financial operations can be adapted to climate action and other sustainability goals should rank high up the list of priorities of international policymaking, the OECD official said. Kristina Jeromin, head of sustainability at the German stock exchange Deutsche Börse and managing director of the Green & Sustainable Finance Cluster Germany, said governments must not wait until there is a common taxonomy, neither inbe it for the EU or globally. “We have to act in the meantime, too.” Jeromin argued that there was no lack of regulation but rather a lack of clarification how it can be translated into workable guidelines, for instance by establishing new listing criteria along sustainability aspects for companies entering the stock market. “This may have a relatively small negative impact on the returns side but a significant positive impact in terms of proper risk assessment,” she said.

The OECD report comes at a time when Germany strives to improve its standing as a location for green and sustainable finance on a broad scale.  A German State Secretaries’ Committee for Sustainable Development in February agreed that the country should develop a tight-knit institutional network for sustainable finance and promote its principles both to other governments and the private sector. The EU is working on a taxonomy for finding a common definition of sustainability in the financial sector, which is intended to make ESG (environmental, social, governance) criteria more binding for banks and insurance companies when making investment decisions.