The Role of Sustainable Finance in the Transition to a Low Carbon Economy

Mar 21, 2023 | Blog

Here’s how US-based financial institutions can comply with and stay ahead of regulation

In 2005, the US hit peak carbon emission levels of 6 billion tons per year. Emissions were increasing yearly, facing a problem that looked pretty insurmountable at scale. However, after seeing a noticeable decline in the coming decade, a glimpse of climate optimism was born. Fast forward to 2022, greenhouse gas emissions of the US once again grew by 1.3% – a real setback on the journey to Net Zero emissions. 

In response to the changing climate, both theoretically and practically, governments and organizations are being forced to take action. We have no choice but to move faster than ever before.

The financial sector won’t solve the problem by itself but it can surely play a massive role in solving it. In this article, we explore the role of sustainable finance in the transition to a low carbon economy and how recent climate change legislation may help lead the way.

America, meet The Climate Bill!

In 2022, President Joe Biden signed the historic US climate bill named “The Inflation Reduction Act of 2022 (IRA)”. The bill includes a $370 billion investment into the green economy – legislation that is estimated to cut US greenhouse gas emissions by about 30–40% below 2005 levels by 2030. The bill’s purpose is to help turn the United States into an industrial centre of the clean technology revolution. 

Between 2009 and 2017, the US spent around $20 billion per year on fighting climate change. In the next ten years, the government will be spending $80 billion per year. By giving businesses and individuals financial incentives worth billions of dollars collectively (largely through a system of tax credits), the bill aims to jumpstart investment in clean technologies, reward domestic supply chains, lower healthcare costs and incentivise low-carbon consumer choices.

Incentives for consumers: An estimated $43 billion budget will be allocated towards consumer-based tax credits focusing on emission reduction initiatives such as rooftop solar panels, geothermal heating, energy-efficient appliances, electric vehicles and home batteries in an effort to make these shifts more affordable. This budget is meant to drive consumer demand for renewable and energy-efficient products and thus speed up the transition to a low-carbon economy.

Incentives for private investors: The majority of the climate and energy funding will come in the form of tax credits, with corporations being the biggest recipients receiving an estimated $216 billion. These are designed to catalyse private investment in clean energy, transport and manufacturing. 

“There is a direct correlation between being more sustainable and being more financially responsible. Whether it’s through investing, spending or getting subsidies, new legislation will drive both consumers and businesses into making more conscious choices,” said Alexander Lempka, Co-Founder and CEO at Connect Earth. 

The bill is set to transform where and how people spend and invest their money, something that is expected to have a direct impact on financial institutions and their day-to-day operations.

 

The SEC regulation and mandatory climate-related financial disclosure

2022 was an eventful year when it comes to climate action. Earlier in the year, the U.S. Securities and Exchange Commission (SEC) proposed a new set of rules to enhance and standardise climate-related disclosures for investors. The rules require businesses to disclose information regarding a company’s climate-related risks and greenhouse gas emissions. Such climate-related financial metrics will be mandatory in a registrant’s audited financial statements. 

The upcoming SEC climate disclosure rules are set to bring urgency to ESG data strategy planning where companies face the challenge of managing climate-related data from their supply chains. The 490-page SEC proposal was initially expected to have a deadline of October 2022 but due to complexities around scope 3 emissions reporting, it’s been pushed back. However, considering that most investors support its core principles, many expect the rules to be finalised this year. In preparation for when that happens, many companies that lack reliable reporting frameworks, have plenty of work to do. Gone are the days where ESG reporting is a ‘nice to have’.

Climate risk is a financial risk

Climate change legislation is set to transform the landscape of sustainable finance. By just looking at financial institutions today, there is an enormous opportunity to help drive transformative societal change.

“It’s no longer just about being climate friendly – it’s about reducing financial risk. Banks are now incentivised to measure emissions and failing to do so becomes a real financial risk. This is precisely what is required to drive real change and action,” said Alexander Lempka.

In the financial sector, financed emissions are 700 times greater than a bank’s direct emissions. By funding and investing in thousands of other businesses, indirect emissions become attributable to the financial institution.

With the new climate-related legislation, the spotlight is on this industry. Investment banks are expected to shift portfolios into cleantech businesses, meaning the entire sector will be required to audit their customers, and consider climate-related risks like never before. Many institutions lack the know-how which poses new risks to day-to-day operations and financial performance. It’s safe to say that supporting technologies are needed.

Don’t worry. We help take commitments beyond empty promises  

The very essence of Connect Earth’s mission is to educate consumers and businesses on how to bridge the gap between intent, knowledge and action. 

With Connect Report, we help banks, insurers and asset managers understand their customers’ emissions through carbon accounting which helps organisations comply with SEC’s new rules around climate-related disclosures.

With Connect Insights, on the other hand, we convert financial transaction data into carbon footprint estimates and help banks support their retail banking customers measure and reduce their carbon footprint. 

In essence, we help financial institutions in funding ambitious transition pathways. FinTech solutions can play a pivotal role in helping financial institutions comply with the legislation. It’s time to get to work. Reach out if you think Connect Earth can help your business.

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About Connect Earth:

Founded in 2021, Connect Earth is a London-based environmental data company that democratises easy access to sustainability data. With its carbon tracking API technology, Connect Earth is on a mission to empower consumers and SMEs to make sustainable choices and bridge the gap between intent, knowledge and action. Connect Earth supports financial institutions in offering their customers transparent insight into the climate impact of their spending. 

 

 

 

 

 

 

 

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