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The Climate Finance Product Scanner for retail investors and banks (KliFin-Scanner) is developing a questionnaire on non-financial objectives for retail investors. The questionnaire will enable retail investors to create an investment profile based on their individual extra-financial objectives. This can then be matched to financial products. The questionnaire and matching software will be integrated in a website available to all retail investors in Germany. It will be open-source and available as a white label solution that can be integrated into banks’ infrastructure. The project runtime is from 1 January 2018 to 30 June 2020.
The Aiming for Impact project, funded by the KR Foundation and the French environmental agency ADEME, places the impact of investment-related climate actions on the agenda. So far, most actions have focused on requesting better disclosure of company activities, and are likely to have only marginal impact on investment plans.
2016 saw the launch of the SEI Metrics Projects, which provides a free and open-source portfolio test for listed equity portfolios. Over 200 institutional investors around the world have signed up to test their portfolios, including large asset managers, pension funds, insurance companies, banks, and sovereign wealth funds. Since its launch, over 2,000 portfolios have been tested for 2°C alignment with over $3 trillion in assets under management.
A key challenge to assessing long-term and climate-related risks involves what Mark Carney, the Governor of the Bank of England, called “the tragedy of the horizon”. Long-term liabilities and assets face a ‘valley of death’ in terms of the time horizons underlying capital allocation decisions in financial markets. As a response, we have initiated the ‘Tragedy of the Horizon’ research program to quantify time horizons in the investment chain and elevate long-term risk assessments in financial markets.
2016 saw the official launch of the Energy Transition Risk project (ET Risk), a EUR2.2 million project involving S&P Market Intelligence, S&P Dow Jones Indices, Oxford University, Kepler-Cheuvreux, CO-Firm, I4CE, and the Carbon Tracker Initiative. The project seeks to develop the toolbox of energy transition risk assessment – reference scenarios for financial analysis including a 2°C scenario analysis, ET risk data, as well as financial models. The project is funded by the European Commission H2020 programme.
The International Award on Investor Climate-related Disclosures (2° Invest Award) is an initiative organized by the French Ministry of Environment, Energy and the Sea, the Ministry of Finance and Economy and the 2° Investing Initiative. The award is designed to enable the fostering of innovation and promotion of existing best-practices in climate disclosure aligned with the requirements of Article 173-VI of the Energy Transition for Green Growth Law. […]
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With its Action Plan on Financing Sustainable Growth, the European Commission set the ambitious goal of “reorienting capital flows toward sustainable investment”. This objective seems ideally aligned with the strong momentum of impact-related concerns as to financial products among retail investors and numerous financial institutions. Concurrently, the evolution of several financial regulations at the EU level appears to support this movement. In this context, however, the recent EU Ecolabel Technical Report issued by the EC’s JRC has raised serious concerns as to its consistency with such trends. This papers shows that the approach developed in the Ecolabels Report is technically inaccurate, as it is based on flawed assumptions regarding impact in the context of finance, and does not comply with the EU’s own regulations as regards to Ecolabels. As such, the proposed approach appears to be a dead end, generating potential financial and legal risks, especially from a consumer protection perspective, and undermining the overall environmental objectives of the EU. This paper suggests an alternate approach, consistent with the state of scientific research and compliant with existing rules on the Ecolabel and consumer protection, which centers on implementing an Environmental Management System to design and execute the investment strategy.
In the context of the EU Action Plan on Sustainable Finance, the European Commission plans to explore the introduction of a Green Supporting Factor (GSF) under capital requirement frameworks, that would incentivize banks to lend to ‘green’ activities. This takes capital requirement frameworks away from their risk-based origins and this move is widely contested, including by many financial supervisors. This paper suggests an alternative pathway that satisfies both the objective of aligning capital requirements as a way to shift capital towards sustainability, while preserving their core role of supporting risk management in the financial system and avoiding the drawbacks of a GSF. The paper introduces the concept of Sustainability Improvement Loans (SILs), which could merit lower capital charges as they are lower risk. We define SILs and how they could incentivize sustainability practices and reduce risk. The potential pathway to policy application and its estimated effects on banks’ capital and profitability is then discussed, as well as the extent to which the policy is aligned with the financial stability prerogative of financial supervisors.
From shifting the trillions to addressing the billions. There is a growing narrative and traction among investors around contributing to financing the transition to a low-carbon economy. While partly motivated by questions around financial risk, this narrative is driving a number of commitments around investing in the low-carbon economy. This narrative has focused equally on divesting from high-carbon assets and on mobilizing the “clean trillion”.
Largely missing from the debate, however, has been the role of investors in financing and scaling new zero carbon innovation technologies. Such investment in innovation requires much lower overall levels of financing – billions rather than trillions.
This report addresses the missing role of investors and policymakers in this debate, and how they can contribute to solving the climate innovation puzzle.
This report provides guidelines for building an adverse climate scenario that can be used by financial supervisors as inputs into either traditional or climate-specific stress-tests of regulated entities. The report has been designed to cover the key metrics and indicators found in traditional stress-tests, integrating both risks associated with the transition to a low-carbon economy as well as physical risks in a +4°C / +6°C world. The report provides both insights into key indicators needed in the context of climate stress-tests or scenario analysis, the values they would take in the context of transition risk and physical risk analysis based on the existing literature, options for modelling these indicators in the future, and example applications developed by the 2° Investing Initiative.
Financial market participants have been increasingly in the spotlight when it comes to climate change. After years of pressure by divestment campaigns, as well as being targeted by regulators and building internal capacity, the investment community has embarked upon stronger efforts to address climate change with their investments.
There is, however, still some confusion when investors talk about “decarbonization”. Some refer to decarbonizing their portfolios and mean de-risking them against the regulatory and physical effects of climate change. Others refer to decarbonizing the real economy and mean the impact that their investments can have on the climate.
This paper is addressing the latter: How investors can have an impact on the climate across different asset classes. This will be discussed for multiple forms of equity investment instruments, such as listed equity, private equity, venture capital and real asset investments. It will also cover debt investment instruments such as bonds and loans.
Bond markets–representing the largest asset class in capital markets –are critical in the context of achieving the Paris Agreement.
The global bond market is roughly $100 trillion globally–roughly three times the size of the EU and United States GDP combined –and it’s been growing by a factor of ten since the early 1990s. Bond markets are a critical source of capital for governments, companies, and financial institutions. Their advantage lies in the relatively long-term tenor of the debt instrument, as well as the market’s liquidity, reducing financing costs. For securitized instruments, they help institutional investors be exposed to household credit (e.g. through mortgage-backed securities) and banks refinance themselves in the context of providing this credit. In its role as a core pillar of capital markets, bond markets can also play a key role in financing the transition to a low-carbon economy.
Despite their importance, the discussion of bond markets has largely focused on the green bond space, which currently represents a marginal share(<0.5%)of outstanding bonds. This paper focuses on creating a broader understanding of the interface between climate goals and bonds.