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  • Writer's pictureCharlotte Gardes

Weekly News: our selection of recent analysis on sustainable finance and climate change

Every week, Policy Shift will share a selection of recent articles and publications focused on public policy and innovation. This week's theme deals with proposals and evolutions in the sustainable finance field – notably in light of the Covid-19 crisis – and in climate change economic policy.

On Sustainable Finance

A policy report (in French) about climate-related scenario analysis and corporate communication

By the Institute for Climate Economics (I4CE), this report deals with forward-looking methodologies used by companies to inform their strategic thinking as part of the planning of their decarbonation processes, in line with the recommendations issued by the TCFD on climate-related risks. However, the widespread application of these methodologies presents a series of difficulties, given that scenario analysis requires in-depth knowledge of the company and the exploration of the dynamics of its changing environment linked to the low-carbon transition. There are indeed uncertainties about the timing, magnitude and exact nature of the low-carbon transition in the future. Even so, scenario analysis remains beneficial to relations between a company and its financial partners, who need to understand the climate-related exposure of companies in their portfolio and their capacity to implement a resilient strategy (i.e. in line with increasing financial regulations on these topics). I4CE’s report therefore suggests a five-step process to conduct a scenario analysis: (i) framing the process and defining governance; (ii) exploring the issues of the low-carbon transition from the company’s perspective; (iii) identifying the most important variables external to the company; (iv) building scenarios (defining contrasting stories around plausible and consistent changes in key variables external to the company, on the basis of existing scenarios (IEA; IPCC); and (v) assessing the risks and opportunities for the company in each of the scenarios so to build strategic response options, a monitoring system and an adequate disclosure of this process to the company’s stakeholders.

A policy paper (in English) about the role of securities regulators in dealing with climate-related issues

By the International Organization of Securities Commissions (IOSCO), this report is based on a survey of existing practices by securities regulators as well as of frameworks and standards used by financial market participants and companies as part of ESG-related initiatives. While, as securities regulators, IOSCO members share the core objectives of protecting investors, maintaining fair, efficient and transparent markets and reducing systemic risk – they do not have an explicit mandate to promote sustainability issues or specific types of investments. However, given that sustainability issues, and climate-related issues in particular, pose important challenges in meeting their core objectives, these topics have become increasingly relevant from a regulatory perspective. The report therefore proposes that IOSCO members develop decision-useful disclosure categories for investors; conduct case studies on transparency, methods and governance issues among ESG data providers, credit-rating agencies and ESG rating agencies; and evaluate risks of greenwashing for sustainable investment products.

A policy report (in French) about the state of sustainable finance and the way forward at the European level

By the French Institute of International Relations (IFRI), this report argues that although the development of sustainable finance is currently exponential, particularly within the European Union, several challenges remain in order to generalize the effective integration of ESG factors in the coming years. The report argues that in the absence of a common energy and environmental policy, both within the EU and globally, the lack of an international classification of the "sustainability" of an investment makes it difficult to allocate capital towards the low-carbon transition. At the very least, given the territorial differences in the progress of the transition, common principles and a "lowest common denominator" for sustainable (low-carbon and transition) economic sectors could be established, for example within the G20. In addition, it is crucial to take into consideration the “two legs” of carbon neutrality (i.e. reducing greenhouse gas emissions and preserving and enhancing carbon sinks), as well as the planetary boundaries in financial and regulatory decision-making. Achieving a sufficient level and quality of transparency by financial and non-financial companies is also a prerequisite for greening the financial sector. It is important that actions related to sustainable finance take a comprehensive view of the functioning of the financial system, in the sense that the role of sustainable finance is twofold: integrating ESG factors to ensure the resilience of the financial system to climate change risks; and supporting the redirection of capital flows towards financing the low-carbon transition. Therefore, in order to move away from a niche approach, practices that fully integrate ESG aspects into the entire sector and its operations need to be implemented. Such practices may include renewed trading, securitization and passive management practices, and a revised role for market infrastructures. Companies themselves should also integrate the appropriate governance models and practices as well as an appropriate role for financial and accounting standards.

On Climate change and environmental economic policies

A report (in English) about the evolutions of economic ideas in global climate policy

By Jonas Meckling and Bentley B. Allan for the Nature review, this article draws on a dataset of policy reports to show the extent to which economic ideas have influenced climate policy advice by major international organizations (including the World Bank, OECD, UNEP, UNDP, UNFCCC and G7/G8) from 1990 to 2017, or, in other words, since the start of global climate policy. Their study shows that economic thought on the environment has progressively diversified, thanks to a growing complementarity between environmental protection and economic growth, based on the adaptation of Schumpeterian and Keynesian economics identifying drivers of growth in energy innovation and infrastructure investments.. In addition, they illustrate that a more interventionist role of the state in climate policy helps to drive sustainable economic transformation. This argument contrasts with the 1990s, market-based ideas that used to dominate the set of available policy solutions (e.g. Kyoto Protocol, the rise of emissions trading). Furthermore,economic ideas underlying climate policy were mostly based on a coherent neoclassical paradigm. The 2008 financial crisis drove change in that it reflected the renaissance of Keynesianism in crisis-era economic policymaking (UNEP published a report in 2009 untitled “A Global Green New Deal”, 10 years before the Green Deal published by the European Commission in December 2019), whereas a discourse on the limits to growth persisted in the margins (since the Club of Rome’s 1972 report Limits to Growth). Concepts such as the Anthropocene and planetary boundaries (explained in Policy Shift’s article here) still remain largely absent from international organizations’ policy reports.

As a conclusion, such study bears two policy developments: first, the frame of climate economic policy progressively changed from a zero-sum to a win-win logic with collective and private benefits. Second, sustainable innovation and industrial policies are legitimate options for state action on climate policy – beyond carbon pricing only.

A report (in English) about the assessment of Europe’s environmental footprints in relation to planetary boundaries

By the European Environmental Agency (EEA), this report aims to apply the globally defined planetary boundaries (see Policy Shift’s article here) to Europe, on the basis of the definition of Europe’s shares of the “global safe operating space”. The EEA thus applies “allocation principles” (equality, needs, right to development, sovereignty, capability) to Europe, as well as offers a calculation of Europe’s environmental footprints within European limits in order to assess whether European States live within the limits of our planet. In particular, in the planetary boundary framework, climate change and biodiversity integrity are two core boundaries for the Earth system. The EEA’s report shows that the European Union should prioritize these key challenges, while also taking into account the overextension of other planetary boundaries (biogeochemical cycles, land system change and freshwater use), given their negative impact on climate change and biodiversity integrity. That is why the European Union’s Green Deal provides a policy opportunity to better operationalize the meaning of “living well, within the limits of our planet”. By capturing the systemic nature and interlinkages of planetary boundaries, and their materialization in Europe, such materialization could therefore happen in terms of food-related policies, industrial policies, energy and mobility policies, and financial policy. The report insists on the food system in particular given that it drives changes in the nitrogen cycle, the phosphorus cycle, land system change and freshwater use, i.e. four of the nine planetary boundaries.

A scientific paper (in English) about strategies to respond to countries’ potential losses due to lack of climate action in order to facilitate global climate governance

By Nature, this report builds on the fact that current efforts by states to meet the warming targets set by the Paris Agreement are insufficient, given that recent COPs have revealed very limited progress. According to the latest IPCC report on the impact of global warming of 1.5°C, global temperatures are likely to reach 1.5°C between 2030 and 2052 causing dramatic damage. This is why several studies have attempted to allocate global optimal emissions consistent with the 1.5°C goal to countries or regions following an equity principle approach. This type of approach considers mitigation costs and benefits of mitigation (i.e. the development of low-carbon technologies – carbon capture and storage, renewable energy use, and negative emission technologies). This study therefore aims to quantify a distribution of mitigation effort whereby each country is economically better off than under current climate pledges (i.e. nationally determined contributions - NDCs), following an effort-sharing optimizing approach applied to 1.5°C and 2°C global warming thresholds. Their approach shows that countries should follow a “self-preservation strategy” in order to avoid self-inflicted economic losses by not enhancing their NDC sufficiently. The study’s results show that following the current emissions reduction efforts, the whole world would experience a clear benefit (amounting to about 600 trillion dollars by 2100) compared to well below 2°C commensurate action. If they fail to implement their NDCs, the world would lose up to about 800 trillion dollars by 2100. However, if they follow the self-preservation strategy, all countries will have a significant positive cumulative net income before 2100. Implementing such strategies in the real world requires countries to recognize the gravity of climate change and make breakthroughs in low-carbon technologies, on the basis of an equitable effort sharing in emission reduction.

For a complementary explanation of this study, read the Independent’s article here.

And also, on the link between the Covid-19 crisis and the ecological and social transition

Former Managing Director of the World Bank Bertrand Badré, published an opinion article (in English) about the opportunity that the Covid-19 crisis represents to accelerate the transition to a more sustainable society and the critical role of the financial sector (“Don’t waste the pandemic response”).

Now that the world is committing to doing “whatever it takes” to avert a deeper catastrophe from COVID-19, we must recognize that the same imperative applies to the longer-running global sustainability crisis. And yet, it already looks like the first wave of stimulus policies will once again center on high-carbon sectors, as evidenced by the pushback against the European Green Deal and the bailouts being extended to the fossil-fuel industry […] Now that the fiscal dams are breaking loose, public investment must be directed where it is most needed, not just now, but also in the long term. This need not involve a trade-off. […] They can invest in renewable energy and sustainable infrastructure, while also funding new research and development, reforestation, coral-reef restoration, regenerative agriculture, sustainable fisheries, and so forth. Moreover, there is now an opportunity – and an urgent need – to pursue deeper global cooperation on all of these fronts […] The financial sector is the economy’s main mechanism for allocating resources and the distribution of risk. Given current constraints on government budgets, the financial sector has a critical role to play in redirecting private capital flows toward the investments needed for a more sustainable economy”.

The French High Council on Climate (Haut Conseil pour le Climat) published a policy report (in French) on the “Just Transition” that needs to happen in a post-Covid world, entitled “Climate, Health: Better Prevention, Better Healing”.

Along with various recommendations, it states that:

- Early warning systems must be strengthened within a strong international framework, and surveillance and crisis management strategy must be based on scientific evidence. Resilience to multiple and simultaneous crises needs to be strengthened through investments consistent with the priorities for disaster risk reduction identified in the 2015-2030 Sendaï framework.

- Investments must be oriented towards social and technological innovation, energy efficiency, and resilient infrastructures that promote carbon-free uses and solutions based on healthy ecosystems. Debt must be converted to investments for low-carbon transition.

The French Central Bank published a note (in French) on the links between health and environmental risks, based on the analysis of the “Green Swan” report, published by the Bank of International Settlements in January 2020.

This report indeed states that the financial risks related to climate change (green swans) are only "the tip of the iceberg", as the multiplicity of ecological crises we face (loss of biodiversity, soil erosion, etc.) and the interconnections between these crises pose unprecedented risks to our socio-economic and financial systems. According to the “Black Swan” theory (Taleb, 2007) and given that Covid-19 and climate risks have common origins , their impacts are unpredictable, despite their occurrence becoming increasingly predictable. In addition, climate change increases the potential of exposure to human pathogens, which could increase the risks tenfold and trigger new pandemics. Therefore, considerations that initially apply to commonly known climate-related risks also apply to Covid-19, which has served as a stark reality check for the vulnerability of every sector of the global economy and global value chains. Covid-19 and climate risks thus create both a supply and a demand shock, making any monetary and fiscal response particularly complex. As such, according to the French Central Bank, calls for new approaches in macroeconomic, financial and economic-climate modelling must increasingly take into account potential cascade effects.

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