01/22/2023 | Press release | Distributed by Public on 01/22/2023 09:08
The Paris Agreement, adopted at COP21, aims to limit the global average temperature increase to 1.5°C. To achieve the climate goal set out by the Paris Agreement, institutional investors need to embark on a long-term investment journey, which requires investment in low-carbon and energy-efficient solutions and aligning the financial sector with carbon reduction objectives.
The carbon reduction movement has mainly been notable in international policy and the corporate sector, with little movement in the financial sector. Although it is expected that the financial sector will follow the rest of the market, substantial participation by institutional investors in the decarbonisation of the economy is required to achieve global climate goals.
The Task Force on Climate-Related Financial Disclosure (TCFD) was created in 2017 by the Financial Stability Board as a response to a lack of transparency from institutions regarding climate-risk-related assets. The TCFD's framework of recommendations focuses on improving and increasing the reporting of climate-related financial information and stresses the importance of climate-related financial disclosure. The Carbon Disclosure Project (CDP), created by prominent investors in 2002 as a global environmental impact disclosure system, is now the largest TCFD-aligned environmental database in the world.
Whilst transparency on climate-related financial information and risks is key for sound financial governance, it is not a sufficient market response to the challenges of financial climate change reform. Scaled investment is needed to achieve the Paris Agreement targets and broader Sustainable Development Goals (SDG).
Transformative actions and initiatives by the financial sector are called for to step-up sustainable carbon-efficient investment beyond clean energy into projects such as reforestation and responsible land use.
Climate Action 100+is an investor-led initiative (with 700 investors on board in 2022 managing trillions of Euros in investments) established in 2017 following the Paris Agreement adoption. The initiative was launched to ensure that the most significant corporate carbon emitters take action on climate change.
The goal of these initiatives is that transparency and scrutiny on climate-related financial information and risks will drive investors to steer clear of carbon-intensive assets and move towards low-carbon opportunities.
While some investors are hesitant to enter the low-carbon market, citing the need for a clear and stable policy framework as a market entry barrier, most realize the critical role institutional investors play and could play in shaping and developing carbon markets into a fundamental climate-action driver.
The impact that institutional investors can effect on compliance carbon markets and voluntary carbon markets (VCM) is supported by the pure volume of capital under management by such investors.
Investors committed to measuring, disclosing, and, most importantly, reducing their carbon portfolio could therefore mitigate their risk exposure whilst securing sustainable returns for their stakeholders.
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Investors who move to decarbonise their portfolios thus sets a clear pathway to net-zero carbon emissions in line with the aim of the Paris Agreement, and they convey a prime message that carbon efficiency is now paramount.
In striving towards green finance, institutional investors should accordingly consider how they will incorporate carbon-efficient products and carbon markets into their portfolios and the benefits of such inclusion. Moreover, whether their targets are aligned with the inherent purpose of carbon markets: to reduce emissions.
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