Caroline Lucas recently warned that, 10 years on from the financial crisis of 2008, of the possibility of a “climate-induced financial crisis”. With banks’ significant exposure to climate-risk, the ecological shocks of climate breakdown may translate directly to shocks to the financial system. With that system foundational to the global economy in our neoliberal age, that’s kind of a big deal.

Many banks have billions of dollars tied up in fossil fuel assets. Continuing to exploit those assets will lead only to increasingly frequent and severe weather events like the fires that ravaged California this summer – predictably hitting the poorest hardest. As densely populated areas become increasingly unliveable, extracting fossil fuels will become even more apparently untenable.

These crisis moments will inevitably command commensurate responses, but with no guarantees of justice or sustainability. If these involve a sudden restriction of supply of fossil fuels, the value of much fossil capital could fall away abruptly.

Carbon bubble

When the housing bubble popped instigating the 2008 crisis, it was the poor who bore the costs of that crisis that the rich had spent years profiting from the cultivation of. The same story would be true of a climate-finance crisis if the carbon bubble pops.

Lucas’ response is to call for central banks like the Bank of England lead the finance sector in taking bold climate action. Her suggested reforms start with disclosures of the full extent of banks’ exposure to climate risk. She then proposes adapting regulations designed to avoid another 2008 to the challenges of climate change, alongside central banks guiding credit towards decarbonisation efforts. If the Bank of England lacks to bravery to take these reforms on voluntarily, politicians should force it to do so.

Our ambitions must extend beyond those central bank though. I’ve written about the opportunity that private banks like Barclays have to show climate leadership in this moment and laid out a roadmap for them to ditch all fossil fuels. However, we cannot cannot expect private banks to do so on their own.

The allure of short-term profit is too strong. Why exclude fossil fuels when there’s still money to be made? Its the rules of the game that need rewriting to allow banks to do all they must to contribute to decarbonisation.

Policy

We need strong policy to regulate the financial sector making future financial crises impossible, whether that’s a repetition of the events preceding 2008, or further exacerbation by banks of climate breakdown pushing the carbon bubble closer to bursting. The Labour’s party’s 2017 manifesto already commits to remaking the banking system. In Government, it will protect consumers by placing a ring-fence between investment and retail banking; break up RBS into local banks; and create a more diverse banking system, backed up by legislation.

As well as building a financial system that works for the many, not the few. Labour’s next manifesto must also seek to transform banking so it works for the climate too.

Labour should make it clear to banks that they are expected to:

• Disclose their exposure to climate risk and fossil fuels;

• Publish a Paris Agreement compliant time-bound plan to exclude all fossil fuels;

• Introduce policy immediately banning any new finance for fossil fuel companies or projects;

• Direct a significant portion of its investments towards research & innovation for decarbonisation or directly into renewables projects backed and approved by the government.

Banks’ long complicity in financing climate breakdown means they have surpassed the point of deserving a ‘carrot’ to incentivise this course of action. It must be all ‘stick’. If they fail to do abide by these regulations, a Labour government should be clear that their response will be to bring the banks into public ownership without compensation (they have stolen enough from us to not deserve any more), break them up, and directly mobilise those resources to finance just transition to a zero-carbon economy.

Our ambitions for our decarbonised economy should be grand – transforming society and economies both out of ecological necessity but also for the prosperity of the many and not the few – and that won’t come cheap! Its right that responsible for inflicting the climate crisis on us – banks, fossil fuel companies, etc – should pay for the transition. Assuming they won’t do so voluntary, its urgently time that we make them.

This author

Chris Saltmarsh is co-director of climate change campaigns at People & Planet. He tweets at @chris_saltmarsh.