COP25: Measurement and attribution of climate contribution to financiers

With the carbon costs of travel in mind, key EIT Climate-KIC COP25 session summaries are available online for those who cannot attend—and for review for those present. These summaries aim to extract important debates, dialogues, and learnings from each session.

Last week, EIT Climate-KIC’s CEO Kirsten Dunlop moderated a session during the “Measurement and Attribution of Climate Contribution to Financiers” event, which asserted: To shift from incremental improvements to transformational climate action, financiers should be incentivised to conduct green investments. This requires the measurement and attribution of their scope three climate contribution, a complex task that raises several new and challenging issues.

The event was introduced by Massamba Thioye, Manager of Regulatory Development Unit, UNFCCC.

The session, “Measurement of Financiers’ Contribution to the Climate Goals,” featured a panel consisting of: Nancy Saich, Climate Change Expert/Senior Adviser, EIB, Mike Knight, Senior Adviser, Carbon Tracker, Simon Messenger, Director, 2 Degrees Investing Initiative, Simon Connell, Head of Sustainability Strategy, Standard Chartered Bank and Dennis Pamlin, Senior Advisor, RISE Research Institute of Sweden.

When we talk about financial systems what do we mean?

Saich said, for a long time, public banks have played a dominant role in financial systems, but we’re now seeing gradual involvement of a wider range of players. With the EU’s involvement, we’re noticing a bigger focus on capital markets and investor choices. Commercial banks are forming groups to address the climate change issue, and we’re starting to see that central banks and regulators are now driven by financial risk and the reasoning that any financial system, if it’s going to be viable, needs to be sustainable. Therefore, there are tools that need to be put in place to support this new mindset.

Pamlin said so far we have been focusing on financial players engaged in transformative change. But, for a long time, people have been coming to the COP to discuss challenges instead of solutions, and innovation ecosystems have not been included in the conference. Now that they’re part of the conversation, many stakeholders could be engaged.

“Finance is a relatively low carbon activity with big carbon consequences,” said Knight. He continued, saying we need to think of investing at an international scale and not just a regional one to address climate change.

Can we map out the disconnects of financial systems and the challenges of transformation?

“Finance is a service sector and a wrapper around the real economy. People within finance can be passive or play an interventionist role and, given the fact the world is on track for three degrees, that looks necessary,” said Connell. “We need finance to look further forward in time to talk about the risks we’re not pricing in. Being aligned with the Paris Agreement and de-risking a portfolio are two different things.”

Pamlin said sectors are now rethinking their purpose; they’re asking how they can measure their real impact in society. Questions like: “How many people do we feed?” and “How many children are we educating?”

“We will see clusters of new stakeholders soon,” he concluded.

Saich said financial systems are addressing the disconnect from transformative action, but very peripherally. The EU is leading the way here and is careful to avoid greenwashing by transparently working to define what “green” means. It’s also encompassed environmental objectives in addition to climate.

She cautioned: If we’re undermining the end game with something else we’re doing, then that effort is wasted. Paying attention to this necessarily involves questioning where the money is going, which challenges the status quo of financial systems.

Knowing that financial systems aren’t currently aligned with the Paris Agreement goals, how can we intervene?

Messenger said we must start measuring climate impact. However, if you asked everyone to fully align their portfolio with the Paris Agreement targets, it would not be feasible. That’s why policy plays an important role here. He concluded: Financiers, policymakers and the public need to work in sync to make these big transformations happen.

Saich said all finance has to be compatible with the Paris Agreement goals, whether it’s climate finance or not.

“There are economic sectors we don’t need and need to be shut down, which is where the conversation around social impacts comes in,” she said. “And then there are sectors we need – food and construction materials – and we need to be focusing there. We need to ask: “Is it green?” We need transformation in those sectors.”

She continued: “We’re putting so much pressure on the green part of the market. If we required more impact reporting from other sectors, that would be more fair.”

Pamlin said current financial systems don’t foster long-term and agile solutions: “Real transformation is a threat and we need new financial systems to move forward.”

Our growth-focused economic system is wired to discount the future in favour of the present. Where do we see signals of discontinuity and alternative systems coming through?

“The EU technical leadership group leaps to mind, with experts from every possible background working to drive the climate agenda,” said Saich. “The fact you have NGOs, public banks, banks, certifiers working together is fantastic.”

She asked: “How can we drive finance towards not doing things?” For example, the most low-carbon solution is to avoid driving a vehicle at all, and to design a city for walking. But the financial sector is not designed to support that.

“Also, can we please stop thinking we can do valuable climate action with offsetting? It’s a good idea, but it’s not the solution,” she concluded.

Knight said: “I get a sense of enchantment that finance will solve the problem. But the finance community will need political backup for that to happen, and the endorsement of what we talked about today, to move towards the financial systems we want.

Dunlop concluded the session by asserting we need the right boundary conditions, operating standards, practicing assumptions and more to shift financial systems. The last element is shifting from trying to pick winners to investing in many actors working together towards a common goal.