If you want to understand the state of the world’s climate efforts, follow the money. Only about 16 per cent of climate finance needs are currently being met. To achieve net zero, a study by the Rockefeller Foundation and BCG in 2022 noted that public and private sector entities across the globe will need approximately US$ 3.8 trillion in annual investment flows through 2025. Yet, only a fraction of this capital is currently being deployed.
As it is often the case at every single COP, discussions and negotiations on climate finance are likely to be centre stage. Climate success requires that every dollar pulls in the same direction. We are not seeing this consistency.
Article 2.1(C) of the Paris Agreement calls for countries to make all “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” In other words, it calls for both private and public dollars to align with climate action. The Kunming-Montreal framework for biodiversity, moves in the same direction as Article 2.1(C) of the Paris Agreement. It calls on governments to set conditions that make sure business and finance “progressively reduce negative impacts on biodiversity, [and] increase positive impacts”.
Eight years later, a strategy that aligns global financial flows with these goals is still needed. As we must switch gear from summits to solutions, aligning with the Paris Agreement has become a business case for most financial institutions. This endeavour involves taking into consideration the upcoming risks and opportunities which underpin climate change.
Understanding of climate risk in the financial system has advanced in recent years. Significant developments have included the creation in 2017 of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) to develop common approaches on climate-related risk management; the release, also in 2017, of disclosure recommendations by the Task Force on Climate-related Financial Disclosures (TCFD); and the 2022 publication of guidance on net zero transition plans by the Glasgow Financial Alliance for Net Zero (GFANZ). Many central banks, from China to South Africa to Mexico, are developing their own climate investment guidance, along with taxonomies defining the features of net zero-consistent assets.
Financial institutions are joining a growing number of initiatives to align their lending and investment flows with the Paris Agreement goals. Individual institutions from all over the world, including Storebrand Asset Management, are measuring climate impact, and have set climate alignment targets playing an important role in driving this alignment through the tools of capital allocation and engagement.
However, voluntary actions will show initial momentum but will not be sufficient to make financial flows consistent with climate action. The challenge is to scale up funding at the speed and scale which is needed. For this to occur, effective policies and regulatory certainty in line with limiting global warming to no more than 1.5º C, are essential for accelerating and scaling up private capital flows needed for a climate resilient, net-zero transition.
We have the potential to unlock further private capital for a net zero and climate resilient world by 2050. For such capital flows to occur, clear political signals from COP 28 — and regulatory certainty — is needed. Without major reform of the current financial system, it will be impossible to adequately build new zero-carbon energy, food, and transport systems.
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Storebrand Asset Management: Building climate-resilient fixed-income portfolios
