By Stacy Swann, Alan Miller, and Darius Nassiry

Earlier this week, the Intergovernmental Panel on Climate Change (IPCC) released its report “Climate Change 2021: The Physical Science Basis.”  The report was based on over 14,000 studies by hundreds of scientists from 66 countries and represents a significant update to the last major report eight years ago. Recent extreme weather events, including wildfires in California, Greece, Turkey, and Russia, and flooding in China and northern Europe, underscored the risks of extreme weather amplified by climate change.

The reaction in the press was dire: ­ “Code red for humanity” and “the starkest warning yet that human behavior is alarmingly accelerating global warming.” Scientists observe increasing weather and climate extremes in every region around the world. According to the IPCC, global warming is projected to exceed the 1.5°C goal agreed to in the Paris Agreement by as early as 2040. Moreover, the intensity and frequency of extreme weather, including heatwaves, rainfall, and regional droughts, and further thawing of permafrost and snow ice, land ice and Arctic sea ice, may accelerate. Some extreme sea-level events that are currently expected only once every 100 years will likely occur annually by the end of the century. 

The warming that is already baked-in means we will confront the consequences and risks from a warmer planet no matter what we do from here on out. How bad such effects become depends on how effectively the world responds. As one IPCC lead author put it, “Things are going to change for the worse.  But they can change less for the worse than they would have, if we are able to limit our footprint now.”

 There have been two large barriers to meaningful action to date: politics and finance.

As negotiators prepare for COP26 in Glasgow, many observers hope the new IPCC report will help drive demands for greater ambition in the next round of climate pledges (Nationally Determined Contributions or NDCs in UN terms). But many pledges have struggled to gain traction due to domestic political dynamics, and in many countries, progress on meeting even 2015 commitments has fallen short. Previous NDCs and a few updated revisions from the largest emitters remain inadequate to achieve Paris goals.

Finance has been the other significant barrier. For decades, the debate about addressing climate change has been mired in politics about who will pay, how much it will cost, and when the “bill” may come due. Compensation for damages has proven even more contentious. How much finance is needed to address climate change will be addressed in a future IPCC report expected in March 2022. At the Copenhagen COP in 2009, developed countries agreed “to a goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries” – the key word being “mobilize,” implying funds beyond public resources. The USD 100 billion figure will likely be a major negotiating point at COP26 as well.

Many countries will point to the new IPCC report to re-emphasize how essential it remains to help the poorest populations who are most vulnerable and expected to bear the biggest brunt of climate impacts. Maintaining financial flows to many of the least-resourced countries will be critical to their future, particularly as they now bear the additional burden of the pandemic. They are also likely to face increased borrowing costs as their climate vulnerabilities result in increased investment risks.

On a warming planet, however, issues of justice and equity are no longer only the remit of development policy. Questions about how to ensure less wealthy, more vulnerable communities can invest in climate mitigation and resilience will arise in all countries. Money will drive the outcomes, and the investments needed far exceed the capacity of public balance sheets.

The money must be more than incremental. All finance, both public and private, must be climate-aligned to face the risks underscored in the new IPCC report ­– not only to address climate change, but also because of climate change.  Climate-aligned finance will need to accelerate the drawdown of emissions to net-zero and ensure that investments integrate climate resilience as a core characteristic.

Because of climate change, continued global warming will bring significant risk to investments of all types. Awareness of this fact is ever-present for policymakers supporting the international climate agreements, but it is also accelerating in the broader financial community. The parts of the financial system that help investors better understand and price risk are integrating climate considerations into their offerings. The major credit-rating agencies now have teams of climate analysts, and climate-related risks are starting to emerge in financial assessments. Given these risks, it seems clear that all private finance would be well-served to align fully with the Paris goals.

Furthermore, the Task Force on Climate-related Financial Disclosures (TCFD) and recent policies around sustainability disclosure in Europe that push corporations and financial institutions to show how they manage climate-related financial risks have resulted in new momentum in the financial community around climate risk management. Increasingly, companies are scrutinized for their alignment with the Paris Agreement’s goals. Major financial institutions have announced tools to start assessing, monitoring, and reporting net-zero and climate-resilient investment progress. Many investors are also now integrating climate considerations into investment decisions; some major investors have even signaled their intent to increase climate-aligned investment, including investment in climate resilience and the net-zero transition. Some corporates and financial institutions are also under outside pressure, as evidenced by the election of three new members to the ExxonMobil board due to shareholder pressure.

Public finance also needs to align fully with the Paris goals. In some parts of the world, governments are integrating climate considerations across public spending. For example, Jamaica – with the help of the Inter-American Development Bank (IDB) – revised its procurement policies for public-private infrastructure (PPPs) to include climate-risk assessments in all government-supported PPPs. In the U.S., the Biden administration issued an executive order mandating the assessment of climate-related financial risk across the Federal government with an eye towards further action to safeguard assets and financial markets. At the subnational level, California formed an advisory group on climate risk disclosure. These efforts are important, but more will be needed across all public spending to ensure that taxpayer dollars are invested in ways that reduce emissions and enhance resilience to a warmer climate.

Within the financial community, the IPCC report should be seen as a wake-up call and reality check that climate-related impacts and financial risks are not a distant specter on the horizon; rather, they are on our doorstep. Without both the political consensus and the public and private investment in net-zero and resilient economies, it is nearly impossible to keep warming below 2°C. While many uncertainties remain, one thing has become abundantly clear: soon, every dollar, euro, pound, yen, rand, and yuan invested by every type of investor will need to be climate-aligned.