Yahoo Finance Climate investment is 3-6 times 'lower than levels needed,' UN report finds
Climate financing has not yet risen to the task of blunting global warming, according to a new report from the United Nations' (UN) Intergovernmental Panel on Climate Change (IPCC).
Investment in climate mitigation and adaptation is currently three to six times lower than where it needs to be to reach the goal of limiting global warming 1.5 degrees Celsius. In order to avert the worst impacts from climate change, the world needs to peak greenhouse gas emissions in just a few years and reduce emissions by 43% by 2050.
The report, which was written by hundreds of scientists and experts around the world, revealed economically viable solutions that would put the world on track for decarbonizing every sector. However, capital allocation is a key lever needed to deploy those solutions.
“We are definitely not on track to limit warming to 1.5 degrees Celsius," Jim Skea, a co-chair of the IPCC Working Group III, said at a press conference. "But there is increased evidence of climate action.”
“Despite this progress," he added, "our assessment concludes that unless there are immediate and deep emission reductions across all sectors, limiting warming to 1.5 degrees will be beyond reach.”
The good news is that there already is enough global capital and liquidity available to reverse global warming. However, while financial flows into climate-related projects increased by up to 60% between 2013 and 2020, the average annual growth has since stalled.
The pace of investment particularly needs to be stepped up in developing countries, where significant challenges lie ahead in ensuring human well-being in less carbon-intensive ways than were seen in the development of high-income nations. One area of focus has been to compensate for an apparently unfulfilled pledge made in 2009 by wealthier nations to mobilize $100 billion annually by 2020 to help vulnerable nations deal with climate change.
On this front, António Guterres, the Secretary-General of the United Nations, did not mince words.
"We are on a fast track to climate disaster,” he stated at the press conference. “Some government and business leaders are doing one thing but saying another. Simply put: They are lying.”
'A major shift' for governments and banks
Stemming the tide of climate disaster requires no less than a complete transformation of every sector in every region. The cost of doing so would shave 1-2% off global GDP, which is expected to double, by 2050, the report found.
However, that figure does not take into account the cost of increased climate damage nor additional economic co-benefits that occur from building new green industries. In most of the literature the authors reviewed, the benefits of limiting warming to 2 degrees outweigh the costs.
The global transition to low emission economies "is a major shift, and that goes for the government, but it certainly also goes for banking," Inger Andersen, the executive director of the United Nations Environment Programme, said. “It is easy to make the claim and harder to deliver on this claim, whether it's on the government side or on the banking side."
While the markets for sustainable investment products and green bonds, often labeled ESG, have grown in recent decades, the UN report stressed the need for increased integrity around these assets. Regulatory regimes that promote accountability are critical for correctly pricing climate risks, which the report said are currently underpriced.
Mechanisms for aligning investment with the Paris Agreement include "de-risking investments, robust ‘green’ labelling and disclosure schemes, in addition to a regulatory focus on transparency and reforming international monetary system financial sector regulations,” the authors wrote.
"What this report makes absolutely clear is that unless we [finance the green transition], we will not be having the security of the investments that people have made for the proverbial day after tomorrow,” Andersen said. "The call, therefore, is on individual investors but also on institutions to lean in and make this happen.”
Another area the IPCC report focused on was the need to stop burning fossil fuels and instead finance new coal, oil, and gas projects. Should unabated fossil fuel infrastructure continue to be installed, it would "lock-in" emissions that would cause the world to overshoot its carbon budget.
This would mean an immediate change to allocations as public and private investment into fossil fuels are still greater than those for climate adaptation and mitigation.
Additionally, the report asserted that if the energy sector does not move in line with other transitioning industries, $1-4 trillion worth of fossil fuel infrastructure could be stranded from 2015 to 2050. That amount would be higher if the world adopts the pathway to limit warming to 1.5 degrees.
“Investing in new fossil fuel infrastructure is moral and economic madness,” Guterres said. “Such investments will soon be stranded assets, a blot on the landscape, and a blight on investment portfolios.”
There is one silver lining that IPCC highlighted: the success of renewable energy in the last decade, particularly when it comes to falling costs.
"From 2010–2019, there have been sustained decreases in the unit costs of solar energy (85%), wind energy (55%), and lithium-ion batteries (85%), and large increases in their deployment," it stated. "The mix of policy instruments which reduced costs and stimulated adoption includes public R&D, funding for demonstration and pilot projects, and demand pull instruments such as deployment subsidies to attain scale."
As with efforts to reduce emissions in other sectors, the report noted that effective policymaking could send an important signal to markets when it comes to climate change, and that it already has.
“Choices made by countries now will make or break the commitment to 1.5 degrees,” Guterres said.
Grace is an assistant editor for Yahoo Finance.
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