Carbonsink - The role of finance in accelerating climate action

Financial institutions can act as accelerators of global climate action, shaping a new investment landscape that is aligned to climate global goals and that mitigates climate-related risks.

Carbonsink, 27 Giu 2023 - 09:30

Climate change is one of the biggest challenges of our century. Even if governments deliver on their commitments under the Paris Agreement, the Intergovernmental Panel on Climate Change and the global scientific community expect that the emission cuts will miss the 1.5°C target by a large margin. Current levels of climate investment need to increase by at least sevenfold by the end of this decade: governments cannot achieve this alone. The real economy transition to a low carbon future will require trillions of dollars redirected towards decarbonising solutions, which only the finance sector can facilitate and provide. Steering global financial flows through their investment portfolios,financial institutions’ potential to accelerate climate action is exponential, as recognised by the Paris Agreement.

An evolving landscape

CDP data show that financial institutions’ portfolio emissions are over 700x larger than direct emissions. Today, climate impact disclosure and portfolio decarbonisation are key priorities as national and international guidelines are becoming increasingly stringent on the path to net-zero. Just to name a few, the Partnership for Carbon Accounting Financials (PCAF) standard is now equipping financial institutions with robust methods to measure financed emissions, whilst the Science Based Target initiative has developed new methodologies for banks and financial institutions to develop and monitor decarbonisation targets. Furthermore, the EU Corporate Sustainability Reporting Directive will require companies in the financial sector - as well as other sectors - to submit their plans to transition to a low-carbon economy.

By reducing financed emissions and redirecting funds towards climate solutions, financial institutions can act as accelerators and amplifiers of global climate action, shaping a new investment landscape that is aligned to climate global goals whilst at the same time mitigating climate-related risks. Carbon Trackers analysis shows that “around a quarter of equity markets are linked to the fossil fuel system”. The transition to a low-carbon economy could directly impact fossil fuel valuation, as well as indirectly undermine the financial stability of fossil fuel-heavy financial portfolios and entities that have other exposure to risks associated with stranded assets. As global priorities shift towards climate mitigation, deep decarbonisation across every sector is not only a moral imperative, but makes business sense.

Meeting stakeholders’ values

The pressure to monitor climate-related risks and decarbonise financial portfolios comes from stakeholders too, who are increasingly aware of the environmental impact of financial institutions and their investments. New research by Cogo shows that in the UK 71% of customers support their bank reducing its environmental impact in their operations and investing in low-impact companies, whilst 60% of customers want their bank to provide information on the carbon footprint of their transactions. Additionally, media scrutiny and stricter advertising regulations are also pushing financial institutions to be more accountable and transparent with regards to their links to the fossil fuel system when communicating with their stakeholders.

Just as any other sector, financial institutions must urgently decarbonize and disclose progress transparently, set science-based targets and align all financing activity with the Paris Agreement. By doing so, the finance sector can really move the dial on climate finance. The opportunity financial institutions have ahead is clear, as well as the risks of inaction.