Money makes the world go round. When addressing the climate crisis, the financial sector must play its part. Within the recently published United Nations report on climate change mitigation, one of the chapters specifically deals with “Investment and Finance” (Chapter 15) and shows how finance is an enabler of climate change mitigation. In the last three years, I was fully involved in the role as Chapter Scientist and collaborated with a team of climate finance experts from 21 countries in assessing evidence on the relation between finance and climate change. For this opportunity, I am grateful for the German IPCC focal point and their outstanding support.
In this blogpost, I reflect on the development of the IPCC finance chapter from an insider perspective and briefly discuss key messages, incl. section and page references for further details.
The chapter team assessed numerous scientific contributions, discussed countless controversial reports and kept track of the fast developments of public and private initiatives over the last years. Our work capturing full assessment of relevant climate finance literature, handling investment requirements from IPCC modelled scenarios and other sources, calculating and tracking finance flows across regions, sectors, and segments, and carefully assessing the massive amount of new publications on COVID-19 and climate finance. After multiple formal review rounds, the chapter received over 2,000 expert and government comments from almost 200 different experts from 39 countries. During the process, all comments have been addressed – accepted, noted, or rejected. Finally, more than 1,000 different references built the scientific foundation for the chapters’ role in providing finance-related evidence on the pressing questions of climate change. In April 2022, the full report was approved during a 2-weeks plenary meeting with participants from most of the 195 member states.
By fact, to stay on a Paris-aligned pathway in this ongoing and extremely crucial decade, average annual mitigation investments until the 2030s must increase from current levels by a factor of three to six to almost $5 trillion globally (see Section 15.5, p.40). Notably, the investment gap is much more significant in less developed regions (e.g., Africa and Southern Asia) than in others (e.g., Europe and North America), highlighting a dire need to close the financing gap in these regions. Today, in developed and emerging economies, there are still more investments in fossil fuel generation (e.g., 870 billion USD p.a.) and twice the amount of energy subsidies (e.g., 340 billion USD p.a.) than for low carbon options. Thus, the misalignment of existing private and public investments in fossil fuel extraction and subsidised public support for fossil fuel energy is currently consistent with a 4°C pathway in 2100 (see Section 15.3, p.26).
Various challenges within and outside the financial sector are identified in the chapter to redirect and mobilize required investments (see e.g., Section 15.5, p.38). Inadequate assessment of climate-related future risks within the financial sector is widely acknowledged, and the greatly underestimation of those risks limits capital reallocation (see Section 15.6, p.47). Yet there are approaches to reduce the current under-pricing, including market-correcting methods, such as developing innovative de-risking instruments (e.g., guarantees), establishing transparency measures (e.g., climate risk assessments), and creating new financial business models. Barriers located outside the financial sector also impede investment decisions by public authorities, including but not limited to (see e.g., Section 15.2, p.55; 15.3, p.61): absence or inconsistency of clear signals (e.g., via regulatory instruments), missing or weak regulatory environments and limited capacity; or lack of investment opportunities. Additionally, the chapter assessed fiscal policy measures (e.g. carbon pricing mechanisms) and monetary policy measures (e.g., examining implications of disruptive risks) with long-term catalytic benefits for an inclusive and coordinated financial sector in the era of a broad economic transformation.
The report shows, that we can halve emissions by 2030. However, ignoring climate finance science and delayed investments will lead to tighter concerns about financial stability and result in significant carbon lock-ins, stranded assets, and other additional costs (especially impacting urban infrastructure and the energy and transport sectors). Thus, the financial sector is a critical and enabling factor for required the climate finance at scale. Now, its up to policy-makers around the world. If we want to remain on a 2°C or below pathway, it is crucial to immediately translate funding needs into concrete investment opportunities for low carbon project deployment.
For further IPCC-related requests don’t hesitate to get in touch directly (email@example.com). Also have a look at our FS-UNEP Centre website for an excerpt of current research and project portfolio and further information.
The International Panel on Climate Change (IPCC) assesses comprehensive, objective, open, and transparent scientific, technical, and socio-economic information relevant to understanding the risk of human-induced climate change, its potential impacts, and options for adaptation and mitigation. IPCC reports should be neutral concerning policy, although they may need to deal objectively with scientific, technical, and socio-economic factors relevant to policies. Drafting an IPCC report is a unique process. For the lasted IPCC report – Assessment Report Six (AR6) – a team of more than 270 scientists from 65 countries assessed the literature of climate change mitigation in 17 Chapters. All lead authors are engaged on a voluntarily basis.
Coordinating Lead Authors: Silvia Kreibiehl (Germany / tbc), Tae Yong Jung (Republic of Korea / Graduate School of International Studies, Yonsei University) Lead Authors: Stefano Battiston (Italy / University of Zurich), Pablo Esteban Carvajal (Ecuador / International Renewable Energy Agency), Christa Clapp (Norway/the United States of America / CICERO Shades of Green), Dipak Dasgupta (India / The Energy and Resources Institute), Nokuthula Dube (Zimbabwe/United Kingdom / tbc), Raphaël Jachnik (France / OECD), Kanako Morita (Japan / Forestry and Forest Products Research Institute), Nahla Samargandi (Saudi Arabia / King Abdulaziz University), Mariama Williams, Jamaica/the United States of America / Integrated Policy Research Institute) Chapter Scientists: Michael König (Germany / FS-UNEP Centre), Jongwoo Moon (Republic of Korea / Yonsei University), Justice Issah Surugu Musah (Ghana / United Nations University), Amjad Abdulla (Maldives / IPCC Working Group III Vice-Chair), María José López (Spain / Gauss International S.L.) Further contributing authors to the chapter: Myriam Bechtoldt (Germany / EBS Universität), Christoph Bertram (Germany / Potsdam Institute for Climate Impact Research), Lilia Caiado Couto (Brazil / Institute for Sustainable Resources, University, College London), Jean-François Mercure (United Kingdom / World Bank), Sanusi Mohamed Ohiare (Nigeria / Rural Electrification Agency), Mahesti Okitasari (Japan/Indonesia / United Nations University Institute for the Advanced Study of Sustainability), Tamiksha Singh (India / Energy and Resources Institute), Kazi Sohag (the Russian Federation / Ural Federal University), Mohamed Youba Sokona (Mali / African Development Bank), Doreen Stabinsky (the United States of America / College of the Atlantic)