The hidden power of sustainable finance

The Sleeping Financial Giants report published this September by a team of sustainability researchers from the Earth System Finance project highlights the hidden impact of the investment sector on key tipping points of the planetary ecosystems. The report particularly focuses on how banks, pension funds and other institutional investors can help protect Earth’s climate and forests.

While many ecosystems imperceptibly support a stable climate by removing carbon dioxide, they can also suddenly shift into a different state due to disturbances caused by humans, releasing vast amounts of carbon dioxide into the atmosphere. Thus, the sleeping giants metaphor is a way to speak about the planetary “tipping points”, describing large-scale and sudden changes within ecosystems: the Arctic losing its annual summer ice, or large parts of the Amazon rainforest turning into savanna.

Particularly dangerous are risks regarding so-called “domino effects”, when interdependent tipping points start collapsing one after another, if one of them gets crossed. And if climate change becomes more difficult to control, this risks destabilizing the global economy and politics.

The Amazon rainforest in Brazil, Russian and Canadian boreal forests, as well as other critical biomes are presented as important targets for the investment sector, since the probability that these systems may shift from large-scale absorption to fast carbon release is dependent on how those ecosystems are managed, where decisions are often made by a few key global players. Unaware of their powers, those actors are called Sleeping Financial Giants. Providing capital and holding shares within companies that produce resource-intensive commodities like timber, soy and beef, a handful of global investors (many of them public) directly undermine the resilience of those forest ecosystems.

For example, five companies control 52% of the soy export by from Brazil, while three companies represent almost 70% of the beef export value. And in Russia, four companies receive 50.5% of the revenue from the timber sector and downstream industries. Through their holdings or claims investors of those large companies can influence the resilience of ecosystems: “by taking responsibility and using power and leadership for the good of the planet and their portfolio, financial actors could contribute meaningfully to an emerging and necessary pathway towards biosphere stewardship and climate stability”. 

It is crucial to consider the novelty of the links provided for the context in question. While the financial sector has already, to some extent, mobilized resources for reducing carbon emissions, the recognition of nonlinear ecosystem dynamics within the strategies and risk scenarios that guide sustainable investment has been very limited to date.

As a prominent Canadian economist and finance expert, Mark Carney, has put it: “[o]nce climate change becomes a clear and present danger to financial stability it may already be too late to stabilize the atmosphere at two degrees”. For this to remain a warning, and not a dire truth, the message to the finance sector is clear: it’s time to start learning more about the impacts of your actions and taking serious steps beyond carbon offsetting and emission reductions so that we will all have a chance of surviving the perfect storm of climate change.