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Building on their inaugural edition in 2016 and recent international developments in the field of climate-related reporting, the International Awards for Climate-Related Financial Disclosures offer the opportunity for financial institutions to showcase leading practices, share common challenges, and recognize climate-reporting leadership in the sector. They are jointly organized by ADEME (French Environment & Energy Management Agency) and the French Ministry for the Ecological and Inclusive Transition (CGDD). The French Government’s support for this initiative is in line with its pioneering work in the field of climate reporting, starting with the adoption of Article 173 (the first climate financial regulation in Europe) in 2015.
While sustainable finance is a growing field, standards for measuring, reporting, and other frameworks are still in their infancy. Without agreed-upon standards, investing and financing activities related to climate change run the risk of “green-washing,” leaving investors and regulators with little information about the impact of their activities.
ISO (International Standards Organization) Standard 14097 was proposed by the French national standardization body, AFNOR, and approved by ballot in January 2017. The conveners are Stanislas Dupré, CEO of 2°ii, and Massamba Thoiye, Manager of the Sustainable Development Mechanism Program of the UN Framework Convention on Climate Change (UNFCCC). Its objective is to create a standard for measuring and reporting financing and investment activities related to climate change, including:
One of the key recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) focuses on the need for investors to perform scenario analysis, to understand the risks of different climate-related scenarios on their business. However, this recommendation is not being applied consistently, notably by companies in the energy and transportation sectors.
To raise the consistent implementation of this recommendation, 2°ii launched the Company Reports project in 2019. The project targets companies in the utility and automotive sectors that form part of the Climate Action 100+ (CA100+) target group, an investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
2°ii will provide these companies’ climate scenario analysis results to shareholders willing to engage on this topic. This approach will investors to:
Launched in 2018, the Science-Based Targets Initiative for Financial Institutions (SBTI FI) is the first and only initiative in the world developing science-based target setting methodologies, tools, and implementation guidelines for key asset classes covering financial institutions’ main business activities. Targeting banks, pension funds, insurance companies and public financial institutions, the initiative seeks to ensure that the targets set support the transition to a low-carbon economy. As knowledge partner of the initiative, 2°ii is leading the methodology development together with Navigant Consulting. The World Resources Institute (WRI) is the managing partner of the project.
The Japan Energy Transition Initiative (JETI) is a collaboration of global and Japanese knowledge providers dedicated to accelerating the energy transition among business, finance and policy makers in Japan. JETI will address key global climate and energy issues relevant to Japan in a manner that is ahead of the curve and focused on specific outcomes leading to accelerated decarbonisation.
JETI will work with Japanese and global partners to curate cutting edge events and knowledge transfers and facilitate relevant research streams. Its secretariat will be based within the Institute for Global Environmental Strategies (IGES) in Tokyo, will be fully multilingual and supported by a strong global network of partners.
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 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.
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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.