Fossil fuel lending is a clear and present threat to financial stability, argues Finance Watch’s Senior Advisor in this article in Environmental Finance.
The oil majors have seen their market values halve over the last 12 months, wiping out over €160 billion of investor equity. Yet banks have lent over US $2.7 trillion to the oil and gas industry since the 2015 Paris agreement. Rapid progress in the renewable energy sector and the accelerating transition away from fossil fuels means potential impairment of these loans could endanger financial stability.
The main response of financial regulators to climate change has been to improve climate risk transparency and to conduct climate stress tests of financial institutions. However, Ford argues these stress tests fail to incorporate the indirect risks from climate disruption to economies in general. Such risks could be much larger and are extremely difficult to model.
Financial regulators’ efforts to intervene directly have become bogged down in legal and mathematical discussions that could take years to resolve, says Ford. “This delay is grounded in a paradox: policymakers recognise the near-impossibility of modelling climate-related risks, but say that they need such modelling to be done before intervening,” he says, calling for “less modelling and more action”.
This page was last updated April 22, 2021
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