Financial Markets and Accounting
The social and environmental costs of climate change are regarded as externalities. Global economic systems and financial markets have not systematically included these in accounting processes.
Effects and impacts are difficult and contentious to value or monetise. Risk is difficult to price because of uncertainty around climate impact. Where clear metrics exist, they are not widely adopted. Significant impacts are already locked in – but not enough investment is going to adaptation and resilience.
The Decision Metrics and Finance team supports projects that aim to shift financial flows by supporting corporate disclosure of climate risk, and advancing the metrics, standards and instruments that enable transparent, true-cost and benefit accounting for a well-below 2-degree pathway.
- We advance financial decision-making tools and financial instruments that enable transparent, true cost and benefit accounting.
- With the lack of an accepted price for carbon, we develop novel metrics and ratings that can be integrated into existing corporate and financial investment decision-making.
- We create benchmarks in the form of standards and targets for the financial markets against which performance towards well below 2 degrees are created.
- We innovate with new investment vehicles and novel financial instruments that also channel financial flows to pro-climate bankable assets in sectors of the real economy, for example, in land use and production systems.
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Low Carbon City Lab (LoCaL)
In Europe alone, between €0.36 and €1 trillion per annum of incremental investment is needed over the next 15 years to set cities on a low-carbon and resilient development path to meet climate targets, build resilience and cope with booming urban populations.
Climate-KIC’s Low Carbon City Lab (LoCaL) is a global innovation hub and flagship programme within the Decision Metrics and Finance theme that aims to unlock climate finance for cities, identifying options to raise capital, and facilitating investment in fundamental mitigation and adaptation projects.
- The demands of a booming urban population, globally, pose challenges for infrastructure, buildings, energy, water systems and drainage, sanitation, waste management, housing and mobility.
- Cities need to be resilient, and able to deal with climate risk and impact.
- Barriers to transition include high transaction costs, uncertainty in national and international frameworks, a lack of resources in making green and sustainable projects attractive to investors, and gaps in knowledge about available finance options and mechanisms.
- LoCaL has three main work components: training and capacity building, project preparation, and investment mechanisms.
Climate Risk Information (CRI)
Understanding physical risk is the first part of adequate adaptation planning and allocation of financing to adaptive measures.
Models that assess the severity and probability of loss from climate-related risk are often proprietary to the insurance industry, but such models and data are needed aid informed planning and risk reduction activities, as well as appropriate risk transfer products, by city governments, energy modelers, commodity traders, infrastructure investors and engineers, health systems planners and a range of supply-chain dependent businesses.
Climate Risk Information (CRI) is a flagship programme within the Decision Metrics and Finance theme that aims to enhance access to risk information through capacity-building and a ten-fold expansion of the climate services market.
- An expansion of this market demand means a wide variety of stakeholders and end-users (including and beyond insurance) will have an improved understanding of climate risk through access to transparent and standardised analytics, which can facilitate pro-resilience investment, planning and risk transfer decisions.
- A key leverage point is expanding the availability of data, models and tools, including coverage of available data.
- Supporting new users for maximum uptake at project and market-scale, including capacity building.
- Mainstreaming standardisation and transparency in risk models and tools (including assumptions around uncertainty) in key market segments is important.
The ‘Decision Metrics and Finance’ team at EIT Climate-KIC works with our community of partners to develop the metrics and financial mechanisms to redirect and mobilise the finance at this scale to drive the necessary structural and behavioural changes.
Yet for finance to enable the necessary scale and pace of change to reach the world’s climate emission targets, we will need to completely rewire our financial system, integrating climate into mainstream financial markets so that the impacts and effects of climate change become a necessary and accounted cost in the economy; creating strong, financial incentives to do something to reduce emissions; and rethinking market design and value economics in terms of circularity and planetary boundaries.
Launched at the Climate Innovation Summit 2018 in Dublin, the Mission Finance campaign aims to align the players and influencers in order to unlock opportunities for climate finance.