Today, it is crucial for companies and the (re)insurance market to incorporate climate change into business considerations as investors, ratings agencies and financial regulators apply pressure on firms. If European companies do no more to reduce carbon dioxide emissions than they have currently promised, Earth’s temperature will be on track to rise 2.7 degrees Celsius by 2100. That’s well above the Paris Agreement’s target increase of no more than 1.5 C and higher than the 2-degree C tipping point at which life-threatening climate changes will be triggered. This was the conclusion of the latest report from CDP Europe, a climate monitoring group, and Oliver Wyman, on the progress of Europe’s efforts to combat global warming, as described by David Knipe, Partner, Oliver Wyman, and James Davis, Partner of Financial Services, Oliver Wyman.
It’s concerning, to say the least. But according to the report, it doesn’t have to turn out this way. On the hopeful side is the fact that the financial system seems willing to mobilize at a scale that could produce real change. An impressive 95 percent of the bank lending to corporates in Europe is from institutions that have committed to align their portfolios with the Paris climate accord targets. But at the moment, there is the potential for a EUR 4 trillion (USD 4.8 trillion) gap to develop between Paris-aligned lending and Paris-aligned borrowing, with far more supply than demand. For European banks to adjust portfolios to reflect Paris targets, they will have to find many more industrial companies — and large industrials — that have not only committed to the targets but have developed a viable road to get there. The alternative would be to stop lending to them, which isn’t good for banks, companies or economies.