If last week’s Intergovernmental Panel on Climate Change (IPCC) Working Group III report on climate and mitigation communicated anything it was “this is what critical looks like for life on Earth”.
For the investment community, the IPCC report coordinating lead author, Silvie Kreibiehl, said this means there is no time to wait for the perfect regulatory environment before scaling up climate finance.
Written by 278 authors from 65 countries, the near-3,000-page document took an impressive two weeks of negotiations to get signed off. Kreibiehl said she hoped, after all that, policymakers would use the report wisely. Policymakers are the ultimate target audience of the IPCC papers, but speaking to ESG Clarity after the publication of the report Kreibiehl said she had a message for financial services too: “Understand the report as a call for urgent action and to use every single opportunity to contribute to this transition.”
Barriers to climate finance
Despite the need for unprecedented levels of investment in mitigation and adaptation, the sustainable finance expert acknowledged it was not always straightforward and there are barriers private finance needs to overcome.
“It’s not that easy to invest in something relatively new. There needs to be the regulatory environment, there needs to be market access. There needs to be a pipeline that is ready for investments [and] safeguards in place to ensure that investors will go in.
“And the regulatory environment, by the way, needs to be in line with the ambition level. It’s easy to say that financial institutions should invest only into mechanisms that are compatible with 1.5°C but we haven’t created those opportunities.”
Flows still far too low
To date, Kreibiehl noted, flows for climate finance on the whole have not succeeded in getting past these barriers – commitments have far exceeded the required investments.
“Tracked financial flows fall short of the levels needed to achieve mitigation goals across all sectors and regions,” the report summary for policymakers observed.
“We see commitments, we see this all the momentum and many announcements from financial institutions. But actually, not so much has happened when it comes to the flows. This is important. And if we are serious about a 1.5°C or 2°C pathway, this means that much more needs to happen, much faster,” commented Kreibiehl.
One of the headlines to come out of the report was that current global financial flows into climate change mitigation are three to six times lower than levels needed by 2030 to limit warming to 2°C. Kreibiehl was pleased this statistic had been picked up by the press but pointed out the figure is narrow in scope and in reality even greater levels of investment will be needed. Current flows being three to six times lower than what is needed only applies to technology deployment and does not include any investments upstream in the supply chain such as production facilities. “For example, new investments in electric vehicle battery production is not included here,” she said.
New kinds of cooperation
This is why, in the face of the barriers private finance faces, Kreibiehl asserted investments need to be made at the same time as the rules are being made.
“This… shows how significantly decision-making processes will have to change because we won’t have the time to wait until there is a proven regulatory environment and trust has been built, and then we can start to deploy funds at scale.
“No, we have to invest in parallel. And this requires a completely new kind of cooperation between public and private sector and the financial sector. There needs to be trust, there needs to be transparency and credibility, also on the part of governments, of course.”
IPCC report authors are not permitted to make specific recommendations but Kreibiehl’s appeal to start thinking outside the box was clear.
Apart from the size and pace of flows, the IPCC is also concerned about barriers to climate finance reaching developing countries.
Developing countries’ access to capital
The report looked at how climate investment flows are dispersed across developed, developing and least developed countries and found the widest gaps for developing and least developed countries.
“This factor of three to six actually comes in significantly higher for developing countries. And then if you add the channel of infrastructure investment needs, losses and damages, adaptation as well as investment, it will be even higher. And they do not have the access to capital markets we [in developed countries] have,” said Kreibiehl.
On top of this there is the bias that exists whereby investors preferring to put money into their home markets, Kreibiehl noted. And finally, she said, although it is positive that country credit ratings are starting to take the physical risks of climate change – such as an increased chance of extreme weather events – into account, this is now another factor exacerbating the climate finance inequities, with developing countries finding their access to capital markets even more restricted.
Calculating physical climate risk
The IPCC author expressed some frustration about how slow investors have been when it comes to accurately factoring the physical risks of climate change into their investment decisions.
“Physical risks are completely underestimated… in corporates but also the financial industry,” she said.
“The big misunderstanding is when people talk about business, they believe extreme weather events will remain at the levels they are right now.
“We have not yet got across that even in a 1.5°C world, the impact of extreme weather events will be much, much bigger than nowadays.”
This is yet to be reflected in corporate strategies and therefore, yet to be reflected in risk assessments in finance, according to Kreibiehl.
She said she hears misguided arguments about how Europe is sheltered from significant physical climate risk: “The disruption will happen throughout the supply chain and the supply chain will affect us. In a globalised world, of course we will be hit by those effects.”
