11 October 2018
The financial sector must play a critical enabling role to limit global warming to below 1.5 degrees. Investors need to quickly overhaul their strategies for climate change to be halted in just over a decade, and there are already tools and solutions available to help investors align with this goal, finds Environmental Finance.
This week's report by the Intergovernmental Panel on Climate Change (IPCC) makes clear that "rapid, far-reaching and unprecedented changes in all aspects of society" must happen to ensure temperature rises don't exceed 1.5C above pre-industrial levels.
A key part of this transformation will be to reshape the financial system to accelerate investments in technologies, solutions and partnerships needed to decarbonise the economy and promote behavioural change. Enormous investment is required – for example, the IPCC estimates that around USD 2.4 trillion or roughly 2.5% of global GDP annually needs to be invested in the energy system between 2016 and 2035. While the IPCC report is an alarming warning it also reconfirms the unprecedented investment opportunity that can be unlocked if sustainable finance is mainstreamed.
"The IPCC 1.5C special report is a catalyst for a shift away from incremental improvements in existing systems to a greater focus on disruptive solutions across systems," says Kirsten Dunlop, CEO of EIT Climate-KIC.
The journey to mainstream climate action in the financial system is not starting from scratch. For investors looking to align their actions with the 1.5 goal, a raft of initiatives are underway to identify and accelerate investment in solutions compatible with the target.
"The best thing for financial institutions to do now is to get their fingers dirty and explore what they can do," says David Lunsford, Co-Founder and Head of Development at Carbon Delta. The Switzerland-based company, which is supported by EIT Climate-KIC, has developed an evaluation tool identifying how much a company's value is affected by climate change. The Climate Change Value at Risk (Climate VaR) model analyses risks and related costs for companies if emissions limits are implemented globally to meet a 1.5C, 2C or 3C goal. "Early next year we'll have an online tool for investors where portfolio analysis can be done and clients can upload portfolios and download the results of different scenario analysis," Lunsford says.
To make the 1.5C target a reality, portfolio analysis and investment strategies will need to be overhauled – and not just by individual investors. Importantly, collaborative action and systems-level innovation are needed to move from setting goals to achieving an actual major rise in capital deployed to low- and zero-carbon solutions. "We have to tackle climate and sustainability in all areas of finance, and we really have to work together – some isolated activity isn't enough," says Nico Fettes, Project Lead Fund Ratings, CDP Europe. "We're far away from reaching the 1.5 target, but the financial sector is huge and has massive influence, so [focusing on] finance is a great way to reach out to many people and EIT Climate-KIC is a [catalyst] for collective action for finance," he adds.
CDP and ISS-Ethix Climate Solutions last year launched Climetrics, an independent fund rating tool financed by EIT Climate-KIC which enables investors to integrate climate impact into their investment decisions. Effectively, it helps indicate how funds are aligned with the transition to a low-carbon economy. Fettes says other ESG ratings were also launched last year and "collectively we're trying to create this market – you really have to push the information into the market to create demand".
Collective action is key, agrees Dennis Pamlin of Mission Innovation which this month, alongside EIT Climate-KIC and other partners, launched an investor framework compatible with 1.5C scenarios. Clusters and groups of investors need to take action, hopefully in combination with future regulation putting the financial system on a pathway towards 1.5C, he says.
The EU is at the forefront of developing policies and frameworks to help support a rapid and significant transition towards a zero-carbon economy. "We can't just talk about targets and timetables - we need to talk about how to shift capital," says Sandrine Dixson-Decleve, a member of EIT Climate-KIC's advisory board and senior associate of E3G, explaining that this is exactly what the EU Sustainable Finance Action Plan is trying to achieve. Dixson-Decleve is a member of the Technical Expert Group set up by the Commission to develop a classification system for sustainable finance activities, among other things. This system can play a role in meeting the 1.5C target as it will help investors adapt the way they look at their assets and allocate future capital, she explains, and the work done on an EU-level already attracting significant global attention.
"In my history of working on EU policy it's the first time we've seen all finance ministers give their 'OK' for something that's very much environmentally focused," she says. "Traditionally all things dealing with finance and the environment were always promoted by environment and climate ministers – I think it's a real transition and that's what we wanted in order to mainstream environmental issues."
"The IPCC report does not pull its punches," says Scott Williams, Director of Decision Metrics and Finance at EIT Climate-KIC. "By one reading of scenarios presented in the report to stay below 1.5 C of warming, we only have until 2035 to achieve net-zero emissions globally."
"It's a goal that nations who have an ambition to light the way will need to consider," he adds. That's essentially tomorrow when we're talking about the pace of change required in a complex, dynamic system like the financial system. The Climate Innovation Summit hosted by EIT Climate-KIC in Dublin next month is an opportunity to get stuck in and seize the opportunity".