The finance risks and opportunities of decarbonization

If financial markets become more long-term oriented, they could potentially become a catalyst for action on sustainability. In 2018, IIASA scientists collaborated with international banks and researchers from other institutions to assess the financial implications of deep decarbonization strategies.

Researchers from the institute collaborated with a consortium of 16 leading banks from four continents convened by the UN Environment Program Finance Initiative (UNEP FI) to publish a jointly developed methodology to increase banks’ understanding of how climate change and climate action could impact their business. This understanding is fundamental to enabling banks to be more transparent about their exposure to climate-related risks and opportunities in line with the Task Force on Climate related Financial Disclosures (TCFD). It will also inform banks’ strategies to contribute to and benefit from low-carbon economic transition, and help them engage and support their customers to that effect. This is important because the climate-related risks and opportunities that banks face arise primarily from their services to clients.

The IIASA team contributed to the methodology development and provided detailed scenario data from the MESSAGEix-GLOBIOM integrated assessment model, which formed the basis of the report, together with the Potsdam Institute for Climate Impact Research’s REMIND-MAgPIE model. The team developed risk factor pathways for individual economic sectors in different world regions. Three scenarios were used in the project: a baseline, and deep decarbonization pathways consistent with 2°C and 1.5°C warming. These scenarios were developed within the context of the ongoing European Commission Horizon 2020 research project CD-LINKS, which is coordinated by IIASA.

In another project, IIASA scientists led an international consortium that analyzed the required investments for meeting the targets of the Paris Agreement. The study [1] found that a fundamental transformation of the global energy system can be achieved with a comparatively modest increase in overall investments. However, a radical shift of investments away from fossil fuels and toward renewables and energy efficiency is needed (Figure 1) along with dedicated investments into measures to achieve the UN Sustainable Development Goals (SDGs).

To keep global temperature rise to 1.5°C or 2°C, investments in low carbon energy and energy efficiency will likely need to overtake investments in fossil fuels as early as 2025 and then grow far higher. The low carbon and energy efficiency “investment gaps” calculated by the researchers are striking. To meet countries’ nationally determined contributions (NDCs), an additional US$130 billion of investment will be needed by 2030, while to achieve the 2°C target the gap is $320 billion, and for 1.5°C, it is $480 billion. These investment figures represent more than a quarter of total energy investments foreseen in the baseline scenario, and up to half in some economies such as China and India.

In addition to the above efforts, IIASA scientists also participated in the Scientific Advisory Group of the Science Based Targets initiative, contributed to the Integrated Assessment Modeling Consortium (IAMC) Working Group on Climate Finance, and participated in several workshops with the financial sector.