Financing 1.5°C: Five Trends to Watch in Climate-Aligned Finance in 2022

Financing 1.5°C: Five Trends to Watch in Climate-Aligned Finance in 2022
Written by Publishing Team

by Elizabeth Harnett & Shravan Bhatt

When RMI launched the Climate Finance Center in 2020, the concept of climate finance was in its infancy. In 2021, it matured rapidly as net zero pledges became the new norm in the financial sector, particularly in the West. As 2022 begins, we’re looking forward to some of the key themes likely to emerge this year.

1. Financial institutions will demonstrate their climate commitments:

In 2021, many financial institutions have made zero net commitments, and we expect companies to provide more detail and ambition this year. Those who haven’t already will face pressure to set interim targets for 2025 and 2030 on the journey to net zero emissions by 2050.

We also expect many companies to expand their target setting coverage; Many of the banks in the Net-Zero Banking Alliance should set interim targets (2030 or sooner) for the most emission-intensive sectors this year. There is plenty of room for growth in portfolio coverage in particular. For example, signatories to the Net Zero Asset Managers initiative said that only 35 percent of their total assets under management are currently covered by net zero goals.

2. Transitional plans will be published and evaluated:

From shareholders to governments to civil society, stakeholders expect to see more detail in 2022 on how companies plan to meet their zero net commitments. This means exceeding the set target. Ambitious transition plans, for both financial institutions and industrial companies, will become a key requirement for climate credibility and will be crucial in fighting accusations of greenwashing. This pressure can increase the number of shareholder decisions requesting transition plans and votes on their credibility.

The center, along with public and private sector groups, is working hard in 2022 to define what “credible” transition plans will look like. Monitor the UK Government’s Transition Plan Task Force and GFANZ working groups on real economic and financial transformation plans and validation methodologies such as the ACT Initiative and CTP Accreditation.

3. Financial institutions will be held accountable for objectives associated with the “real economy” impact:

As the ‘decisive decade’ continues, financial institutions will need to proactively fund the transformation in the real world, rather than achieving portfolio alignment only on paper. We expect to see a record year for the launch of new green investment products, such as green bonds, sustainability-linked loans, and green ETFs, as well as increased corporate participation. However, showing action should not come at the expense of impact. Portfolio alignment measures will not always reduce emissions in the real economy; Divestment from a steel mill may not result in building less polluting steel mills. Supporting adaptation and sustainable development in emerging and developing markets will be another key piece of the decarbonization puzzle.

Companies will need to adopt strategies with high potential for high impact, doing the most important things first and avoiding greenwashing. To help with this, the center will soon launch a set of impact-oriented climate alignment principles to guide financial institutions as they implement their commitments.

What is climate finance?

Climate alignment is the process of bringing greenhouse gas emissions into the global economy in line with 1.5°C temperature targets. For private financial institutions, climate alignment means using leverage levers To move the real economy towards net zero emissions.

4. Better forward-looking statements, more forward-looking metrics:

Investors need asset-level data and metrics that can support the company or sectoral transition plans and that can be integrated into existing investment models. Much of the data that financial institutions use today focuses on what has happened in the past (for example, climate impacts, company performance or consumer demand), but it is no longer a good indicator of what will happen in an unprecedented environment — or what needs to happen to avoid one.

Forward-looking metrics can help assess investment risks and opportunities with a transition to net zero, such as evaluating how individual companies or assets are performing in the transition. The Center’s Climate AIR Toolbox explains which data and metric tools are forward-looking. For example, investors in regulated facilities in the United States can use the forward-looking emissions scenarios in RMI’s Utility Transition Hub to make investment decisions. today. Similar metrics should be provided across other geographies and sectors as well. The identified and prioritized defaulters should be targeted by committed financial institutions, which can offer incentives and penalties to encourage action.

Expect exciting efforts to improve data availability and quality, such as the development of upcoming SEC rules and tools like OS-Climate. However, in the meantime, a lack of data is not an excuse for inaction: companies don’t need perfect data or international standards to start using their customer leverage tools.

5. Focus on high emission sectors will broaden and deepen:

To implement their 2050 net commitments, large private financial institutions (along with their clients in heavy industry and transportation) are drafting and implementing climate-compliant sectoral financing agreements. The first such agreement was the Poseidon Shipping Principles, which was launched in 2019 for lenders and expanded in December 2021 to include insurance companies.

In the first quarter of 2022 we will see the launch of a similar agreement for the global steel sector. Bank-led working groups will also begin compiling agreements for sectors such as aviation, aluminium, cement, concrete and real estate. Stay informed of progress across these hard-to-mitigate sectors with our Sectoral Alignment Assessment.

From those financial institutions that have already laid the foundations for climate alignment within their companies and through industry-wide initiatives, we look forward to swift and bold action to help keep global warming below 1.5theA – Reaction to the financial sector’s comments at COP26 in Glasgow was mixed. The announced initiatives and commitments were necessary but not sufficient. For the financial sector to succeed at COP27 in Egypt in November, it must begin to deliver on its promises and show a tangible impact in driving the real economy to decarbonise. 2022 is the year of walking.

© Rocky Mountain Institute 2021. Published with permission. Originally published on RMI Outlet.

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