Report on Climate Action Financing
The Global Sustainable Investment Alliance (GSIA) releases a report on climate action financing, aimed at analyzing the current challenges facing climate action financing and proposing solutions.
The GSIA believes that different regions face different challenges and opportunities in achieving global climate goals, and therefore different measures need to be taken to increase climate action financing based on market conditions and regulatory environments.
Related Post: World Trade Organization Releases Global Climate Action Report
Climate Action Financing Dilemma
In 2015, 196 countries signed the Paris Agreement, calling on major participants such as governments, businesses, and society to jointly address climate change. However, climate action by both public and private sectors is still insufficient, and Nationally Determined Contributions are not enough to achieve the 1.5-degree Celsius warming target. Although the global climate financing growth rate doubled from 2011 to 2020, climate financing still needs to continue to grow sevenfold by the end of this century, with the scale of climate financing in emerging markets and developing economies needing to increase from 40% of current total financing to 90% by 2030.
The GSIA believes that there is a policymaker investment dilemma in current climate action financing, where incentive structures, policy certainty, and transaction availability have a negative impact. Both investors and policy makers need to take action to increase climate financing.
Climate Action Financing Framework
The GSIA has developed the PIVOT framework to summarize the barriers related to climate financing, which includes:
- Policy: Lack of proactive policies to encourage climate financing may reduce capital flows.
- Interest: Investors may overlook long-term sustainable goals due to their focus on short-term financial returns.
- Valuation: Traditional financial models pay less attention to environmental and social factors, neglecting implicit costs.
- Ownership: Some investment management agencies do not use active engagement to contact the investees.
- Transition: Some investees have conflicting business models and industry characteristics with their transformation goals.
The obstacles involved in the PIVOT framework are often interconnected and can lead to insufficient climate financing. Identifying and addressing these obstacles can redirect funds towards long-term climate action and sustainable development goals.
How to Increase Climate Action Financing
The GSIA proposes methods to address climate action financing barriers based on the PIVOT framework:
- Policy: Regulators can implement clear policies, develop National Transition Plans, guide market climate financing, and actively communicate net zero emission targets. The government can issue sovereign bonds related to transition plans to increase climate investment and can also develop taxonomies related to climate financing to provide a standardized framework for the market. Companies can develop transition plans in stages to align their decarbonization with international climate goals.
- Benefits: Regulators can advocate for the financial industry to incorporate long-term climate goals into existing incentive mechanisms, establish carbon pricing mechanisms, and provide stable decarbonization expectations. Financial institutions can disclose climate related financial information, use models that include long-term sustainable risks and opportunities, incorporate sustainability into investment decisions, and link compensation structures to climate goals. Financial institutions can also consider cooperation and active engagements.
- Assessment: Regulators can develop standardized climate related frameworks, incorporate climate risks and opportunities into financial valuation models, and develop assessments of climate change to address systemic financial risks. Investors can incorporate carbon pricing and physical climate risk into valuation models, use forward-looking climate models, and apply high-quality climate data.
- Ownership: Regulators can modify the entrusted responsibility to include sustainable factors such as climate action in the entrusted responsibility. Investors can adjust their investment strategies, set long-term investment goals, and actively manage the investees.
- Transformation: Regulators can implement fiscal incentives to encourage companies to take decarbonization actions. Investors can collaborate with companies in high carbon emission industries to support their transition strategies, develop comprehensive and fair transition strategies, and expand the scale of mixed financing.
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