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Blockchain, Featured, Finance

How Will Climate Change Affect The Global Finance System?

Climate change is real, and it is better to accept it sooner than later. The implications are grave and have been documented countless times. These are not slow, minute changes that may add up to something huge- global warming and melting of polar ice caps are well known even among school students. Reducing carbon emissions is the most important remedial solution. Challenges lie in implementation and the possible impact of climate change on the existing global financial system. 

Climate Change: The Present Scenario

IPCC (Intergovernmental Panel on Climate Change) reports that human activities have already resulted in a global 1-degree Centigrade rise over the preindustrial levels. While this may not seem much, the rising frequency of catastrophic events worldwide is a grim reminder of the possible future. 

The occurrence of floods, droughts, storms, and wildfires is now frequent. Each of these events can lead to significant financial damage- both through property loss and hitting different aspects of the economy. Forecasts outline an annual $23 trillion loss of the global economy if we fail to check the temperature from surging 4 degrees centigrade over the preindustrial levels. Subsequent human activities and climate recovery measures will determine the earth’s sustenance in the upcoming days.   

Climate Change and Finance

Climate change is making an impact on investment decisions. People are more than aware, even carbon-intensive business investors. It is clear- losses are inevitable if things remain unchanged. Awareness puts pressure on institutions to mend their course of action and contribute to improvement.  

As per the International Monetary Fund (IMF), the decreasing frequency between the occurrence of natural disasters disrupts land properties and agricultural output. This has a negative impact on the industry which in turn puts pressure on financial institutions. For example, an agro-based business operating with mortgage capital may risk losing its setup facility and procurement supply in case of a flood. This leaves them helpless and vulnerable, unable to pay off their debts. 

A calamity affects the very livelihoods of businesses, partners, and associated employees. In addition, the event does not affect a single business- it affects the entire locality, city, state, or even country in extreme cases. The inability to clear debts creates problems for banks and financial institutions that target giving out loans and taking deposits. Disasters interfere with the overall capital flow bringing losses and forcing them to limit the number of loans. The Urban Land Institute reported way back in 2014- losses to the global economy surges at an annual rate of $150 billion due to drastic and frequent weather changes. 

Special Climate Change Fund: ESG Funds 

ESG stands for Environment, Social, or Government. These funds place the aforementioned features at the top of their priority list. ESG funds have become relevant in recent years, particularly after the onset of the COVID-19 pandemic. As per Deloitte estimates, over 200 fresh ESG funds have been green-lighted for 2020-2023. The amount of activity is more than double of the previous 3 year period. 

While the initiatives are noble, voices criticizing the implementation of these funds are not uncommon. A significant portion cites the lack of transparency. It is unclear what the firms are actually working on with the funds collected. In turn, this leads to the second criticism- there are no tough regulations to prevent unethical use. A regulatory board is necessary. However, ESG funds are not a comprehensive solution to the challenges climate change poses for finance as a whole.

Climate Change: Challenges of Carbon Transition in Finance

Climate change throws forward two main obstacles for the finance world. The first part- the physical aspect, has already been discussed above. Calamities and natural disasters wreak havoc on the financial system all over the world. The second challenge is the impact of transition- shifting towards an economy that is less dependent on carbon.  

A shift towards a green-based economy is the only logical foot forward for sustenance in the long run. Countries worldwide are adapting, setting long-term targets, and encouraging others to do the same. However, an abrupt transition without planning and research is a sure-shot route to setbacks, with devastating results in terms of finance. And, even firms or organizations who have already started investing in green financial options are not immune to its implications. 

  • Example of a Transition Impact

As per the IMF, the shift from high to low carbon intensity reduces the valuation of high carbon intensity industries. This forces a change in asset valuation, and if abrupt- the process is difficult for financial institutions. For example, oil production companies have not switched their business models or put emphasis on renewable energy sources. With society lowering uses of fossil fuels(gasoline, petrol, diesel)- the company stands to lose relevance and value. If such preference affects several companies, an accelerated market sell-off is not unlikely.       

A Viable Alternative for Climate Change Finance

Bitcoin and blockchain have their fair share of critics and patrons. To some, it may be a pointless way to consume energy. PoW mining requires energy-hungry ASIC computers with high computational power. While this raises concerns about fossil-fuel consumption and carbon emission- renewable bitcoin mining is getting cheaper. In fact, solar energy generation cost is now cheaper than conventional generation. On the other hand, the PoS mechanism removes the entire mining concept and functions at a much lower energy requirement. A recent UN Accord states the worldwide aim is to decarbonize and achieve zero-carbon emission from the global crypto sector within 2030. 

Experts from the United Nations are positive about blockchain and cryptocurrencies. The main benefits of the technology are immutability and transparency. Its intrinsic trait of keeping the same updated ledger copy throughout the entire network prevents fraud and data tampering- making the entire financial network much more efficient and immune to corruption. In a different scenario, blockchain can also be an excellent monitoring system- keeping timely and detailed tabs on any process, including waste recovery. 

Also Read: Renewable Bitcoin Mining: How Far until Green?

Blockchain in Climate Finance and Clean Energy Markets

A cooperative effort between UNEP, The Technical University of Denmark, and the Danish government- the UNEP DTU Partnership states blockchain is the most effective in transparency, climate finance, and clean energy markets.

Several beneficial blockchain projects are being developed worldwide. Blockchain can be easily used for collecting accurate reliable data about greenhouse gas emissions across countries where the practices are shady and non-transparent. Climate financing can be used to incentivize efforts towards slowing climate change. The CarbonX platform encourages decreasing greenhouse gas emissions with crypto rewards that can be used for trading. Upwards scaling of carbon markets will help industries in switching towards low-carbon technology. 

As explained above, renewable bitcoin mining can expedite the adoption of renewable energy sources- especially sun and wind. State-funded geothermal projects using volcanic energy are being considered in El Salvador. The decentralized trait of blockchain can expand the growth of renewable energy markets on a global scale. 

Also Read: El Salvador Welcomes New Era Of Digital Currency with 200 New Bitcoins

Final Thoughts

The global economy relies on financial institutions to a large extent. The use of public markets for financing new projects is quite common. An abrupt change into low-carbon technology can be detrimental to several industries, which in turn will lead to financial organizations failing, and subsequently on overall lapse for the global economy. Thus, balancing climate change and finance is one of the top challenges of the present day.

Blockchain is an excellent solution in multiple avenues. Its transparency, climate finance, and improving energy markets encourage stalling the climate crisis, which shifts focus on non-polluting renewable sources. Global blockchain development frontrunners HashCash Consultants have even built an AI-powered Blockchain prototype to optimize energy distribution throughout the network. Considering all things, blockchain brings forth a ray of hope and optimism in an otherwise grim reality.

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