Financial institutions taking action on climate change

A report on how climate leadership is emerging in the finance sector - and on how public and private actors need to work together to grow leadership into a new normal.

There is a growing community of financial institutions taking action and demonstrating leadership on climate change. Some institutions are allocating capital and steering financial flows towards more low carbon, climate resilient activities. Others are taking steps to change corporate behavior, influence policy outcomes and build the data, tools and transparency required to embed climate change into how the market functions. 

This report details finance sector leadership actions and their contribution to solving the climate change challenge across the following six areas:

1. Low carbon and energy efficiency finance and investing:

• Pension fund allocation to low carbon and energy efficiency: Some pension funds are increasing their allocation to low carbon and energy efficiency assets, thereby playing a vital leadership role.

• Supporting renewable energy projects: Some institutional investors are investing in renewable projects via private equity and infrastructure opportunities. Some banks are shifting their loan books towards financing renewables projects. These actions are having a direct impact on the availability of capital for renewable energy projects.

• Partnerships in developing countries: Unique partnerships are forming between governments, development banks and financial institutions to finance and invest billions of dollars into renewable energy and energy efficiency opportunities in emerging markets.

• Growing green bond market: A flourishing green bond market exists and is growing, which is integral to providing the debt capital needed to finance the low carbon transition.

• Reducing real estate emissions and energy use: The industry is utilizing new tools, setting targets and steering portfolios and financing activities towards lower carbon, higher rated energy efficient buildings, a core pillar for achieving the energy efficiency improvements needed to avoid dangerous climate outcomes.

2. Emissions reducing finance and investing: New techniques are being implemented by financial institutions to reduce the carbon emissions of loan books and investment portfolios; an indirect but potentially powerful mechanism for reducing global emissions. In addition, new strategies and approaches are being implemented by institutional investors to manage the risks stemming from exposure to fossil fuel companies.

3. Adaptation finance and investing: Banks and insurance companies are developing financing solutions to support adaptation projects, primarily in developing countries, with significant potential for more financial institution involvement in partnership with governments, development banks and developing country agencies.

4. Measurement and transparency: The industry is collaborating to improve carbon and climate change risk/performance measurement and reporting by companies and by the finance institutions themselves, a crucial building block for managing and reducing carbon emissions.

5. Engagement with companies: Growth in proxy voting action related to climate change as well as extensive company engagement is having a direct impact on corporate reporting of carbon emissions and strategies to respond to climate change.

6. Engagement with policy makers: The industry is collaborating to engage with policy makers to influence policy and regulatory outcomes that encourage greater participation from the finance industry in the transition to a low carbon, climate resilient economy.

The formulation of international and national policy measures provide the backdrop against which some of these leadership actions have emerged. There is an opportunity to build on these actions and embed climate change into mainstream finance in the following ways.

Implementation of government policies that provide the industry with more transparency, longevity and certainty are critical. A supportive policy environment needs to include reliable and economically meaningful carbon pricing to help redirect investment commensurate with the scale of the climate change challenge. Intertwined with this is a need for strong measures to support energy efficiency and renewable energy to facilitate deployment. Removing any direct or indirect subsidies in favor of fossil fuels is of particular urgency. To encourage more private sector involvement in adaptation financing there will need to be public/private partnership strategies that are designed to deliver solid investment outcomes. Finally, a coherent policy framework should also take into account any knock-on effects that changes to financial regulations might have on low carbon transition investments.

Develop capacity of the financial industry to assess the risks and opportunities of climate change. Finance institutions are taking action on climate change and allocating capital. For these actions to become more widespread finance institutions need to build an assessment of climate change risk and opportunities into core processes, engage with companies and policy makers, measure and report exposure to carbon emissions and develop strategies to reduce emissions across financing and investment activities.

Collaborate to unlock further capital flows. A shared understanding needs to be built between policy makers and the finance sector, based on a mutual recognition of the climate change challenge as well as an understanding of the finance and capital allocation decision-making process. This will help the finance industry and governments to work more closely together to mobilize private sector capital. This report demonstrates examples of successful partnerships between finance institutions, development banks, international financial institutions and governments are useful mechanisms that could be built upon to finance both mitigation and adaptation needs, particularly in developing countries. There is an opportunity for further collaboration of this kind, to build momentum and spur more private sector investment.