Over the next few years, banks and pension companies might be facing more stringent regulation forcing business to take responsibility for mitigating climate change, says PKA Chief Executive Jon Johnsen. 

The CEO adds that he thinks it would be good idea for policymakers to set demands on limiting climate damage tied to loans and investments.

”This is a very effective way to change the world,” Johnsen asserts:

”All companies in need of credit facilities must engage a bank to loan money, or they can also go to a pension firm able to provide credit through corporate bonds. So, if the financial sector becomes more regulated on [climate], I believe a lot change can be accomplished.”

The EU is already well underway with tightening such rules. New demands filing under the [Sustainable Finance Disclosure Regulation (SFDR)] forces financial companies to report on the climate impacts of their financial activities.

Most banks and pension companies find regulation highly frustrating, but Johnsen says EU lawmakers ought to clecnh regulation even further a few years from now after settling aspects of uncertainties regarding financial reporting.

”I think what we’re seeing now [with the SFDR] is the first step toward stricter climate regulation. Now start off by disclosing emissions volumes associated to our portfolios. When we have done so for a few years and data have become more consistent, then the thumbs screws will start to turn. I’m convinced of as much,” he relays.

Huge transformational process

Johnsen is candid in supporting stricter climate rules.

”I want it. It’s a huge transformational process that must be phased in gradually. Although I think this is the right way to go.”

Johnsen knows what he talking about. He is one of the highest ranking persons in the Danish financial sector’s international network regarding sustainability.

As the sole Danish national present, he has a seat in the international group Glasgow Financial Alliance for Net Zero (GFANZ), flanked by CEOs from, for instance, BlackRock, Citi, Bank of America and HSBC.

GFANZ is an initiative launched by the UN as a part of efforts to get major financial players to render support for the green transition. Such prominence notwithstanding, the initiative has been facing headwinds as of late, and some of the organization’s smaller members have withdrawn.

Such circumstances have prompted GFANZ CEO Nigel Topping to urge more regulation because he thinks the principle of voluntarism on the matter won’t accomplish very much. 

CEO Søren Lockwood from Denmark’s third largest pension firm, Danica, is far from pleased with Johnsen’s proposal. Though he agrees that the financial sector holds the key for kickstarting the green transition, he points out that at the core of things, non-financial companies have to be convinced to transition, too.

”I agree with Jon Johnsen that there has to be some restrictions. A carrot is good but the stick is also needed. I just believe it would be wrong to punish the financial sector. That would mean we circumvent the companies that are the problem, and then we’re just as far as when we began,” Lockwood says.

EU regulation not enough

The financial sector is global, states Lockwood, meaning that European-centered requirements won’t help. In that case, climate-damaging companies would merely find financing elsewhere across the globe.

A carbon tax designed to impact company economies more directly is the better solution, opines the Danica CEO.

Johnson’s harsher climate regulation proposal also fails to garner support from Finans Danmark, a Danish financial trade association.

”Perhaps we could just give these financial companies the chance to work on this themselves. Our biggest members are already underway with formulating reduction targets across their loan portfolios. As reporting becomes better and better, more banks and mortgage credit institutes will set targets to bring down the CO₂ burden of loan business,” says CEO at Finans Danmark Ulrik Nødgaard.

”The danger of regulation is that it often becomes a one-size-fits-all solution that doesn’t fit individual banks’ loan portfolios, and which adds a lot of red tape on top. That’s why we think that we should let banks themselves show what they can do in this area,” adds Nødgaard.

Consulting firm Accenture’s Kristina Øgaard, a specialist in the financial sector’s work with sustainability, explains that the EU has already debated the possibility of increasing banks’ funding requirements when financing companies that are particularly damaging to the climate. In other words, Jonhson’s idea hasn’t been grasped out of thin air.

Transparency an effective tool

However, she still thinks it would pose a challenge to draw up regulation that only affects the European financial sector.

It is therefore natural that the EU start by focusing on getting financial companies to make their climate footprints available for public scrutiny – which Øgaard expects in itself could prove an effective tool for directing money flows toward sustainable companies.

”Banks and pension firms must first become more transparent and then the market can assess whether that is adequate. If the EU then assesses that the market isn’t transitioning fast enough, further regulation at a late point could become relevant,” says Øgaard.

Johnson understands that there are challenges with regulating financial companies’ climate footprints, and he acknowledges that a CO₂ tax is, in a lot of ways, a more effective tool. But the problem is, he says, that such a tax has to be global, which makes it incredibly difficult to negotiate politically.

”That’s why it could be a good start to regulate financial companies first, and then follow up with a CO₂ tax later,” Johnsen says.

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