Vienna University of Economics and Business

Proponiamo un estratto del saggio “Financial regulators and sustainable development” di Emanuele Campiglio, direttore dell’area di ricerca in “Climate Economics and Finance” presso la Vienna University of Economics and Business, dal Rapporto di ricerca Rules of Utopia.

Di fronte alle minacce del cambiamento climatico e le conseguenze non soltanto ambientali, ma anche sociali ed economiche, diventa necessario agire per modificare il nostro modello di società. Dentro questa cornice di cambiamenti è cruciale, come segnala Campiglio, la transizione verso un modello sostenibile grazie a tecnologie a basse emissioni che, tuttavia, rimangono ancora marginali nella nostra società. La sostituzione, infatti, del vecchio sistema economico-industriale fondato sui combustibili fossili è lontana nella maggioranza dei settori e gli operatori economici non sembrano intenzionati a scommettere sulle nuove tecnologie a basse emissioni. Le cause, secondo l’autore, sono molteplici: una prospettiva a corto raggio tipica del mercato, mancanza di impegno politico e linee-guida a livello normativo, analisi macroeconomiche incomplete sulle conseguenze dei rischi dovuti al cambiamento climatico per le imprese. Una serie di ostacoli, dunque, che renderanno necessario, secondo Campiglio, l’intervento pubblico per una trasformazione tecnologica su larga scala.


We need to consider the possibility that low-carbon and sustainable activities may never become less risky and more profitable than their high-carbon, polluting and material-intensive counterparts; or, alternatively, that this might not happen rapidly enough to fit within the time horizon of a low-carbon transition capable of avoiding disruptive climate change effects. The technological development of certain types of low-carbon technologies, like the production of electricity from renewable sources, has made marvellous advancements, but it is still not ready to replace fossil-based generation. Similarly, e-mobility is not yet ready to replace combustion engine vehicles, and far worse is the situation in other manufacturing or transportation sectors. In other words, we need to adapt to the idea that the low-carbon transition might be inherently different and historically unprecedented. Past major technological revolutions have all been driven by markets, with private actors shifting to more productive, more profitable technologies becoming available. This seem not to be the case for the transition to low-carbon technologies, due to a variety of factors, including: the deep socio-technological lock-in of the current economic system into technologies based on fossil fuels; the current (and possibly longer-term) lack of a strong market-driven push in the direction of low-carbon technologies; and the existence of unprecedentedly large and dynamic financial systems. The result is that private market players are reluctant to bet on the expansion of low-carbon and sustainable sectors, due to their unattractive risk-return profile, the uncertainty of policy commitment, the lack of precise rules and guidelines, and the endemic tendency of financial systems towards the short-term. As legitimate profit-seeking institutions, businesses and financial institutions tend to prefer high-carbon assets, which historically offer higher returns, in the shorter term and with lower risks than their low-carbon alternatives. If this is the case, a large-scale publicly-supported technological transformation will be necessary. However, with the exception of a handful of countries, governments have yet to introduce fiscal mitigation policies in line with the Paris Agreement objectives (see an international comparison of carbon pricing initiatives in World Bank, 2018). Most of them, especially in Europe, are also currently severely constrained in their spending capacities for low-carbon public infrastructure. Policy reversals such as the retroactive cuts of feed-in tariffs in some European countries, the repeal of the carbon tax in Australia, or the US announcement to leave the Paris agreement, have created serious long-term damages to the effort of creating a stable low-carbon investment environment. Therefore, in this context, an excessive focus on risk as the central driver for action by financial regulators, while sensible, might end up representing a serious obstacle to a harmonised and convinced public strategy to support markets in their transition towards sustainability.



Knowledge and tools

Another factor limiting the potential for action of financial regulators is represented by the current lack of comprehensive and reliable methodologies to assess the exposure to environment-related risks. This is particularly true for climate-related financial risks. Most of the companies and investors interested in exploring environmental dimensions focus on variables such as their greenhouse gas emissions or their use of energy, water, materials and other natural resources. However, even when calculated correctly (which is not always the case), these variables alone are not enough to understand the exposure to either physical or transition risks. In order to do this properly, investors need forward-looking scenario analysis, linking possible climate dynamics, on one side, and possible transition dynamics, on the other, to the operations of businesses. This exercise would force them to look into the longer-term future and develop strategies to cope with potentially disruptive scenarios. A few initiatives are being developed in this direction (see for instance: HSBC, 2019; Mercer, 2019; UNEP Finance Initiative, 2019). However, while extremely promising and useful for individual financial institutions interested in analysing their portfolios, even these approaches may not be enough for regulators concerned about systemic financial risks. Over-imposing certain transition dynamics, for instance, only gives a partial understanding of the type of impacts that would affect a business or an investor. To have a complete picture, one would need a reliable comprehensive macroeconomic dynamic modelling framework, incorporating both the financial and the transition dimensions. Unfortunately, we currently have nothing of the sort. Transition modelling frameworks, like the ones used by the IPCC, traditionally abstract from the macro-financial dimension. They do not explain how decarbonisation pathways would be financed, or they might affect financial stability. For instance, what would be the implications of large fossil firm defaulting on their bank loans? At the moment, we have no way to know. Likewise, macro-financial models have essentially ignored the biophysical basis of the economy in recent decades. In addition, the ontological foundations of the standard macroeconomic and monetary modelling frameworks – based on rational choice and forward-looking utility maximization within a context of perfect information, and relying on the introduction of ‘shocks’ to perturb an otherwise stable economic system – make them unsuited to study processes of structural change potentially riddled with endogenous financial disruptions and complex dynamic feedbacks such as the low-carbon transition. Alternative modelling techniques exist – such as network analysis, stock-flow consistent models and agent-based models – which treat the macroeconomy as a complex adaptive system. Battiston et al. (2017), for instance, put forward a methodology rooted in network analysis to look at first and second round effects of fossil-related financial shocks. Cahen-Fourot et al. (2019) develop a similar analysis of the production network, showing how moving away from fossil inputs would have large implications in a number of industrial and downstream service sectors in terms of reduction of capital stock capacity utilization. Dafermos et al. (2018) present a stock-flow consistent model capable of studying the macro-financial effects of climate-related financial policies. However, much work remains to be done to create an organic framework linking financial systems and sustainability transitions. Therefore, another crucial role for financial regulators would be to support and actively contribute to the development of solid methodologies to assess the exposure to climate-related financial risks.

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