In the context of the UNSG Climate Action Summit, Member States and financial institutions are invited to sign on to pledge to assess and monitor the climate impact and the alignment of their financial flows with the 1.5°C temperature goal of the Paris Agreement.
Interested parties are invited to indicate their – even preliminary - interest in joining the pledge by writing to [email protected]; [email protected]; [email protected]; [email protected] by 12 August 2019.
The joint initiative proposed by The Kingdom of the Netherlands and Switzerland seeks to accelerate the implementation of this objective.
Why Climate Action in the financial sector is needed
We know that public resources alone cannot finance the commitments that countries have made under the Paris Agreement, let alone the commitments that are needed to ensure that we maintain global temperature rise to 1.5 degrees. The Summit provides an opportunity to get the financial sector activated and get broader international support for their important role.
There is no global standard available to assess the climate impact of investment and financing decisions and alignment with the Paris Agreement of financial institutions. However, different methods have been developed and tested, which are complementary in nature and which have the potential to be scaled up globally. These methods currently focus on measuring the GHG emissions of lending and investments, allowing comparison with carbon budgets for limiting global warming to under 2 degrees or 1.5 degrees, or measuring the extent to 3 which investments are aligned with scenario-based transitions in technology required to limit global warming to under 2 degrees or 1.5 degrees.
Enhancing transparency is key to understanding a financial institution’s current contribution to climate change through its loans and investments. It is also a precondition for alignment. Knowledge on the climate impact as well as the extent to which financial institutions are exposed towards transition risks, will provide financial institutions with a clearer incentive to develop new climate-related activities. Financial institutions that invest responsibly and acknowledge their role in helping households and companies towards a low-carbon transition will be a catalyst for change.
Interested parties commit to take action to:
1. Enhance transparency on the climate impact, by increasing the number of financial institutions that:
- Measure and report their climate impact.
- Measure and disclose the extent to which portfolios of loans and investments are aligned with the Paris Agreement.
- Identify and disclose risks associated with climate change and the transition to a low-carbon economy.
2. Align financial flows with Paris, by increasing the number of financial institutions that develop strategies to lower climate impact, including by inter alia:
- Setting science-based and scenario-based targets to achieve climate-goal alignment over time;
- Increasing loans and investments that actively support the transition towards a low green-house gas emission economy;
- Engaging and/or divesting from emission-intensive activities or technologies.
3. Facilitate the actions by financial institutions, e.g. by:
- Enhancing data disclosure by all economic sectors to the financial sector.
What interested parties benefit from:
Should interested parties wish to suggest other methodologies than the ones included in the toolkit, they are more than welcome to do so.
How progress will be tracked:
- Monitoring the number of governments or supervisory authorities, including of the largest financial hubs in the world, that have committed to assess or supervise financial institutions’ climate impact and the alignment of their financial flows with the objectives of the Paris Agreement.
- Monitoring the number of financial institutions that on a voluntary basis will apply methodologies to measure their climate impact and the extent to which portfolios of loans and investments are aligned with Paris.
- Monitoring the amount of financial assets under management that have been assessed; and how well they are aligned with the 1.5°C temperature goal.
Synergies within the finance track and with other tracks for the Climate Action Summit
Design better regulatory policies
- Greater transparency in financial sectors on the climate impact of financial institutions and the transition risks they are exposed to with comparable methods and therefore results, allows governments to design more effective regulatory policies to green their financial sector, promote sustainable finance and reduce the exposure to transition risks.
- Use of clear, transparent, comparable and understandable methodologies enables supervisory authorities to develop and refine climate stress tests and ensure greater consistency and comparability in the monitoring of transition risks.
Facilitate greater ambition
- With large investment gaps, equipping financial institutions with the understanding of the climate impact of their investment and financing decisions will enable them to redirect investments and loans to real economy activities with a positive impact on the climate.
- Multilateral development banks with a deeper understanding of the climate impact and the risks that financial institutions in their client countries are exposed to can engage in a more informed dialogue on how to reorient flows and direct capital to investments with a greater positive impact.
- Bilateral development finance institutions can lead the change, both in developed and developing countries, setting an example how to account for their climate impact and align investments with the Paris Agreement.
***
For more information, please contact:
Interested parties are invited to indicate their – even preliminary - interest in joining the pledge by writing to [email protected]; [email protected]; [email protected]; [email protected] by 12 August 2019.
Kim SolbergKim Solberg