The industrial sector needs to decarbonise much faster

Although the French industry emits less than neighbouring countries due to its low-carbon electricity, it still emits too much compared to national targets. The rate of decarbonisation of the French industrial sector in recent years is too low to meet the 2030 climate targets. Between 2013 and 2019, industry reduced its emissions by 1.8 % per year, however, to reach the 2030 target set by the National Low Carbon Strategy (SNBC), emissions would need to drop by 4.4 % per year. In addition, this does not take into account the increase in the overall EU target from −40% to −55% of GHGs by 2030, which will lead to a revision of the target for the industrial sector. Meeting these objectives therefore requires a fundamental rethink of the way in which public authorities conduct and support this transition.

The government has launched several initiatives to support the decarbonisation of French industry

In recent years, public action in favour of decarbonising industry has not remained static. Several consultation initiatives at the subsector level have made the potential decarbonisation pathways clearer, and there has been increased public financial support for the transition.

Several initiatives at the subsector level are aimed at developing decarbonisation trajectories.

Article 301 of the Climate and Resilience Act, which was approved last year, proposes to mobilise the Strategic Sector Committees. These committees already bring together manufacturers and the State around ‘sector contracts’, but this time they will draw up ‘decarbonisation roadmaps’. Some roadmaps have already been published (e.g. for the paper & cardboard or the mining & metallurgy sectors), while the others are expected by the end of the year. In addition to this, the Agency for Ecological Transition (ADEME) is developing sectoral transition plans that propose in-depth scenarios for energy-intensive industries by 2050.

There are now several well identified avenues to decarbonise industrial processes.

These include the use of biomass, carbon capture and sequestration, or electrification and the use of hydrogen. A trend towards the last option even seems evident in several decisions. For example, in France, ArcelorMittal made the recent decision to invest in electric furnaces for its two steel plants. The development of new nuclear production capacities desired by the President of the Republic also seems to be part of this trend.

Electrification and the use of hydrogen can also be seen at the European Union level: the REPowerEU plan, presented last May by the European Commission, has a dedicated section aimed at strengthening the production of renewable electricity and the internal production of renewable hydrogen.

New public funding has been made available since the Covid-19 crisis

Until recently, the main public policies to support the decarbonisation of industry were largely based on the European Carbon Emissions Trading Scheme (ETS), the Fonds Chaleur and ADEME grants for energy efficiency studies. Several new funding envelopes have been made available in the last two years: the Hydrogen Plan, France Relance and France 2030 therefore provide support of approximately 20 billion euros over the period 2020-2030. However, it remains difficult to know whether these actions will allow the decarbonisation of industry to be accelerated sufficiently to meet the climate objectives.

Ecological planning can help trigger investments

Recent progress in public action is not producing sufficient results to reduce emissions, and candidate Emmanuel Macron has proposed to strengthen the action of the State with an ‘ecological planning’ project, described as “a programming of investments with objectives on a territory-by-territory basis, economic sector by economic sector, industry by industry”. This project gives the State a key role in steering industrial investments. This may sound promising, but how can we be sure that this time, public action will be more effective in comparison with recent initiatives?

Successful ecological planning will set the medium and long-term course and it will provide the visibility that is essential to convince industry to invest.

While they need to make long-term investments now, they are hampered by a lack of clear prospects, especially for market opportunities. The role of the new Prime Minister will be to steer this transition path at national level and in a coordinated manner with our European partners, as industry remains one of the economic sectors where the internal market has created the most interdependence.

One of the main challenges of this planning is to characterise the investments required for decarbonisation.

When it comes to choosing between various technological solutions, major trends are emerging. However, when it comes to the production level that an industry is expected to deliver, there is still major uncertainty.

The cement industry transition plan developed by ADEME in France clearly illustrates how the question of volumes significantly influences the range of investment needed to achieve the national targets with two distinct scenarios.

The so called ‘techno-push’ scenario, with the assumption of a moderate drop in demand for cement and a significant use of carbon capture and sequestration, implies an investment requirement of around 8 billion euros.

Alternatively, the so called ‘low-tech sobriety’ scenario, which is based on a significant reduction in industrial production in a society that is more sober in terms of cement, would only require some 240 million euros of investment. For firms, the differences between these two scenarios may lead to inaction: how can industrials take the risk of investing massively in a productive capacity that can end up underused?

Clarification of investment needs is a prerequisite for an effective decarbonisation.

Only once we know exactly what investments are required and how much we need to invest,
can the State calibrate the various tools needed to trigger them, monitor them and correct the course if necessary. With this in mind, the Institute for Climate Economics is working to analyse investment need estimates at the subsector level. Our objective is to understand their coherence, to highlight recent progress and to provide a rough estimate of investment needs for the industrial sector. Once these investment needs have been estimated, the government should be able to put in place public policies that will translate the major industrial orientations into concrete measures and provide a strong signal to trigger the investments necessary for the industry’s transition.

L’article Industry: how to plan investments for the ecological transition? est apparu en premier sur I4CE.

So, are they ready? The decoding of the programs (in French only) conducted by the I4CE team shows that, first of all, if the climate is absent from the presidential debate, is not absent from the programs of most of the candidates. This is good news. However, not all of them have the same level of preparation, their proposals are sometimes vague, they are more of an intention and their financial impact is not anticipated. We still read too often that “substantial investments are needed here and there”, without saying who will pay and how much.

The new five-year presidential term begins with a double opportunity to develop a real strategy for financing the transition

 

The next President will have to be ready as soon as he or she takes office. The new five-year term will open with a double opportunity to develop a real strategy for financing the transition: the public finance programming law and the energy and climate programming law. An agenda that will make it possible – as most of the candidates would like – to draw more precisely the paths of the transition sector by sector, to program public financing for the climate over the long term and thus to give more visibility to private actors, to be transparent and to collectively debate the volume of France’s climate budget, its effectiveness and its strategic orientations.

This debate is all the more necessary as I4CE’s decoding (in French only) shows – as expected – very contrasting visions of what this budget should contain. Strong increase of public financing versus mobilization of private savings; reinforcement or stabilization of the regulatory and fiscal framework; public debt versus private debt; effectiveness or efficiency of public spending… So many points of discussion, and different visions.

The next tenant of the Elysée will be able to rely on the consensus between candidates, which is often the legacy of the yellow vest crisis

 

In the future laws of public finance programming and energy climate programming, the new President should not forget some challenges (in French only) that too many candidates tend to omit in their programs, starting with the financing of the new energy mix, the support of farmers or the transformation of the wood industry. He or she will also be able to rely on the consensus between Anne Hidalgo, Yannick Jadot, Jean-Luc Mélenchon and Valérie Pécresse… while waiting for the analysis of Emmanuel Macron’s program.

There is a consensus on the need to adapt France to the impacts of climate change or to give the means to local authorities to take their full part in the transition, even if, in both cases, the proposals are still vague overall. More surprisingly, there is also a consensus on the gradual elimination of subsidies for fossil fuels, on transparency in the use of carbon tax revenues and even on ecological taxation, and on increased support for low-income households.

We can analyse these last consensuses, just like the one on the freezing of the carbon tax, as the legacy of the French yellow vests crisis: the social issue and inequalities are now at the heart of the climate debates. Let’s not forget it. The next President will have the difficult task of organizing a transition that is “fair”. To build a social pact around climate issues and initiate its implementation. The differences between the different candidates on the “climate budget” will be points of discussion to have, not to evade; and the consensuses will be points of anchorage for such a social pact.

See the climate decoding of the French presidential election (website in French only)

L’article French Presidential election: consensus for the new five-year term est apparu en premier sur I4CE.

We have asked the candidates to answer this question, to prepare their “climate budget”. It is a question of transparency and credibility. It is also a way to test the coherence of their climate strategy.

So, are the candidates ready? Do they have very different financing strategies – and even more broadly climate strategies? What is the consensus among the candidates? And what are the under-addressed budgetary challenges? Here are the answers to these questions.

Six candidates analysed, soon seven

The I4CE team deciphered the programs of six candidates: Anne Hidalgo, Yannick Jadot, Marine Le Pen, Jean-Luc Mélenchon, Valérie Pécresse and Eric Zemmour. Emmanuel Macron’s will be analysed as soon as it is published, and our decoding will be updated.

In addition to their programs, we have asked these candidates additional questions: Anne Hidalgo, Yannick Jadot, Jean-Luc Mélenchon and Valérie Pécresse have already answered these questions and most of them have made the effort to quantify their budgets more or less precisely. We would like to thank these candidates for the work they have done and the details they have provided. All the elements provided by the teams of these candidates are available on our website (only available in French). The estimates of the financial impact of the proposed measures are theirs, not ours.

The decoding proposed by I4CE does not comment on the feasibility of the measures proposed by the candidates. It assesses the level of preparation of the candidates: have the challenges put forward by I4CE (only available in French) been well identified, are there measures to try to answer them, has the financial impact of these measures been estimated? The decoding also reveals the different strategies of the candidates for the climate, and in particular their financing strategy: their budget for the climate.  I4CE does not claim to say which candidate has the right strategy, for the simple reason that there are several possible strategies. But we would like to point out the shortcomings or the bets of their different strategies.

Climate is absent from the debates, but not from the programs

The climate is not at the heart of the current electoral campaign, to put it mildly. But it is reassuring to note that it is not absent from the programs of the candidates we have deciphered. Apart from Marine Le Pen and Eric Zemmour, whose programs so far contain very few measures to fight climate change, the four other candidates have several proposals and none of them question the objective of reducing French greenhouse gas emissions by 2030. All are even ready to revise it to contribute to the new European objective, which was recently revised upwards.

However, not everyone has a climate budget. Anne Hidalgo, and even more so Yannick Jadot and Jean-Luc Mélenchon, are coming to the polls with proposals that address many of the budgetary challenges identified by I4CE and whose financial impact has been quantified. Valérie Pécresse does not currently have a complete and quantified climate budget, but her team’s response to our questionnaire nevertheless reveals a strategy for financing the transition. Marine Le Pen and Eric Zemmour have neither.

No surprise: contrasting (financing) strategies

To achieve France’s climate objectives, the candidates have different strategies for financing the transition, and more generally for the climate. This was expected. Let’s leave aside Marine Le Pen and Eric Zemmour: they have yet to answer our follow-up questions and there is not enough material in their public programs at this stage to determine their climate budget philosophy. The others differ in the level of state intervention, in budgetary matters but not only.

Valérie Pécresse: minimal state intervention, the bet on private savings

Valérie Pécresse does not explicitly intend to increase public investments and subsidies for the climate, which she makes conditional on the “global budgetary equation” and increased efficiency. She does, however, plan to invest in railways, electric charging stations or nuclear power, investments for which the contribution of public authorities has yet to be specified. Valérie Pécresse clearly favors private investment, but how can households and companies be encouraged to make climate-friendly investments? Her opposition to “punitive ecology” translates into a stability of the current regulatory and fiscal framework, and she prefers to facilitate their access to loans and mobilize private savings, in particular through a “Green Savings Account”.

Is this enough? It is doubtful. In the energy renovation of housing, for example, access to loans is not the main problem, far from it: low-income households are unable to take on more debt, while others also need stronger incentives, technical support and confidence in the quality of the work.

Anne Hidalgo, Yannick Jadot, Jean-Luc Mélenchon: a strong intervention, the bet of acceptability

Jean-Luc Mélenchon assumes a strong intervention of the State. To encourage private actors to invest, he strengthens the regulatory and fiscal framework and accompanies it with a strong increase in public investments and subsidies, an increase of more than 45 billion euros per year. To finance this increase, he wants to review the tax burden on the richest, fight against fraud and tax evasion and is counting on an increase in economic activity. He does not specify at this stage if he intends to increase public debt, but nevertheless plans to stop applying European budgetary rules.

Yannick Jadot and Anne Hidalgo also assume a significant interventionism. They strengthen the regulatory and fiscal framework, and accompany it with a significant increase in public investments and co-financing, although less than Jean-Luc Mélenchon: respectively 25 and 14 billion euros per year. Contrary to Jean-Luc Mélenchon, they do not want to stop applying the current European budgetary rules, but to reform them in order to promote investment. In a logic of third-party financing, they also count on public or private operators to advance the costs of renovating housing or even acquiring an electric vehicle, with these operators then reimbursing themselves on the reduction of energy bills or when the housing is resold in the case of renovation.

The climate strategies of Anne Hidalgo, Yannick Jadot and Jean Luc Mélenchon raise three questions of acceptability. The first is the question of tax consent to deal with the increase in public spending. The second is the calibration of financial support: is it sufficient for private actors to cope with the parallel strengthening of the regulatory and fiscal framework? The last one concerns our European partners: are they ready to accept a reform of the budgetary rules?

More surprising, and useful for the future: consensus for the new five-year period

Multi-year budgetary programming, the role of local authorities, adaptation to the inevitable impacts of climate change, the end of subsidies for fossil fuels, transparency on the use of ecological tax revenues, reinforced support for low-income households… A detailed analysis of the programs of the four candidates who have proposals for the climate reveals consensuses. Consensuses that are sometimes surprising, some of which can be analysed as the legacy of the French yellow vests crisis, and which are encouraging: they are all potential reform agendas for the five-year period that is just beginning.

Agenda 1: the future multi-annual budget program

All the candidates are in favor of some form of multi-year budgetary programming for the climate: through a budgetary programming law for the climate, for example, or as part of the usual public finance programming law. A multi-year program is necessary to give visibility to private actors, to be transparent and to debate collectively on its volume, its effectiveness and the major strategic orientations. The first public finance programming law and the future energy-climate programming law will be important moments, from the beginning of the five-year period, to give concrete expression to this idea.

Agenda 2: An end to fossil fuel subsidies and transparency on ecological tax revenues

Legacy of the French yellow vests crisis: the carbon tax will remain frozen. Yannick Jadot is the only one to slightly mention it: he would only like to increase it if there is a “significant” drop in energy prices. All of them, however, want to phase out fossil fuel subsidies, which in France mainly take the form of tax niches on energy and which were brought to the forefront during the 2018 debates on the carbon tax.

In addition, many want to clarify the use that is made of the revenues from the carbon tax or more generally from ecological taxation. The lack of transparency on the use of these revenues had become a point of tension during the French yellow vests crisis, and this clarification is a condition for the acceptability of this tax. Yannick Jadot, Anne Hidalgo and Valérie Pécresse explicitly propose to allocate them to the financing of the transition and to households, in various ways.

Agenda 3: the indispensable support of households, and in particular the most modest

The political class, as well as – let’s face it – a number of experts of which we are a part, became fully aware during the French yellow vest crisis of the concrete difficulties faced by modest households in accessing low-carbon alternatives: inability to buy a low-carbon vehicle, limited access to public transport, impossibility of renovating one’s home without going into heavy debt… If the candidates want to invest in offering alternatives to all households, they also want to better “target” modest households. In the answer to our questionnaire, Valérie Pécresse wants to direct public aid “towards the households and companies most affected by the energy transition” and “link ecological measures and purchasing power” for low-income households. This orientation is nevertheless reflected, at this stage, at the margin in her program. Anne Hidalgo, Yannick Jadot and Jean-Luc Mélenchon have many proposals to target and help low-income households more strongly in the areas of housing renovation, mobility and food.

Agenda 4: local authorities – and their financial resources – at the heart of the transition

The candidates agree on the key role that local authorities must play. Many of their proposals, especially when they require major investments, must be implemented “in collaboration” or “in connection” with local authorities. They sometimes go hand in hand with financing mechanisms – more or less precise and quantified. Valérie Pécresse wants a “decentralization law” that will “entrust local authorities with the corresponding missions and resources in terms of housing renovation or electrification of road transport”, while Anne Hidalgo wants to allocate them a share of the carbon tax and create a “green grant” from the State. However, none of them give an overall figure for what the climate objectives will represent in terms of additional expenditure for local authorities. The next government will have to clarify this point – and the corresponding resources – in a future multi-year budgetary program.

Agenda 5: the emergence of adaptation

Adaptation is a subject that is beginning to be addressed. It is only a beginning, it remains partial, but it is an encouraging sign: France must prepare for the inevitable consequences of climate change, and France is not yet ready. This is reflected in the programs by more or less precise proposals to ensure that long-term public spending (investment in transport infrastructure, urban renewal operations, building construction, etc.) take climate change into account. Yannick Jadot, Anne Hidalgo and Jean-Luc Mélenchon also plan, with different levels of detail, to provide more resources to public bodies that play a key role in adapting to climate change.  Some candidates are also proposing more targeted measures which, without yet constituting an overall vision, identify the first concrete levers of action: Valérie Pécresse, for example, wishes to launch “operational plans for adaptation to climate change, to be carried out with the Regions, to prepare for heat waves, forest fires, rising waters and floods with the support of the State”, while Jean-Luc Mélenchon is planning, in particular, an aid fund for the relocation of buildings threatened by floods and rising sea levels.

Other consensuses for the next five years

The decoding of the programs reveals other consensuses on which the next President can rely. In terms of renovation of buildings, all are aware of the need to accelerate the renovation of public buildings and to continue to help households to renovate their homes. To do this, they sometimes promote third-party financing to maximize the leverage effect of public funding, as Anne Hidalgo and Yannick Jadot do. Anne Hidalgo also applies this logic to the acquisition of low-carbon vehicles, which the candidates agree on wanting to support financially. More generally, in terms of transport, they are all aware of the need to invest in rail and public transport, even if their proposals and the distribution of the effort between actors are sometimes vague.

Many candidates also want to improve climate governance, with proposals ranging from an annual vote on a “Climate and Biodiversity Budget”, to the establishment of an independent public body to evaluate laws in terms of climate, through the creation of a “Council for Ecological Planning” and an annual assessment shared with Parliament of the effectiveness of public actions for the climate. The implementation of the carbon adjustment mechanism at European borders, currently under negotiation at the European level, also has consensus, as does the broader issue of taking climate into account in international trade. Lastly, we can mention the convergence of several candidates on the creation of “saving account” to direct French people’s savings towards the transition; or on the need to help French people cope with the rise in energy prices, whether by lowering the VAT on energy, increasing the energy voucher or reforms of the rules governing the European electricity market.

Challenges forgotten during the presidential election will have to be addressed during the five-year term

However, not all of the challenges on which there is a consensus have been sufficiently addressed by all the candidates. This is particularly true of adaptation, a subject that is still emerging. Or the financing of local authorities, which will have to face an increase in their investment and operating expenses for the climate. Other challenges have also been insufficiently addressed by the candidates, and are even the subject of deep disagreement. However, they must be addressed by the next President.

Financing the new energy mix

This is the case for the financing of the energy transition. The candidates obviously have very different visions of the energy mix – and in particular the electricity mix. The opposition between nuclear and renewable energies is prominent in the candidates’ programs. They do not want to finance the same thing, which is normal; but what is less normal is that they are often unclear about who will pay the additional cost of electricity, whether it is nuclear or renewable. Thus, those who promote the revival of nuclear power do not say what the impact will be on consumers’ bills, nor how the State will contribute to the financing of the vast nuclear construction program, if only through capitalization or the public guarantees necessary to help EDF (French national electricity provider) borrow. As for those who promote renewable energies, if they put a figure on the necessary investments, they do not explain what the impact would be on the consumers’ bill and on the amount of the tax “Contribution to the public service of electricity”.

Support for farmers

The candidates have very different visions of what sustainable agriculture and food is, and do not agree on how to finance it. Thus, while Anne Hidalgo, Yannick Jadot and Jean-Luc Mélenchon intend to strongly redirect the Common Agricultural Policy’s subsidies, Valérie Pécresse is counting more on the mobilization of private investors via carbon offsetting, in a logic of payment of farmers for the environmental services they provide to the community.

It is especially in the livestock sector, which is a major emitter of greenhouse gases, that there is the greatest dissensus. While some of them mention the decrease in meat production and consumption and have proposals to support farmers, others do not mention the subject. To date, however, there is no scenario that would allow France to achieve carbon neutrality without a profound transformation of the livestock industry.

The future of the wood industry

Finally, while many candidates talk about the future of the forest and the French wood industry, they tend to overlook the need to develop the production and consumption of long-lasting wood products such as building materials. This development is however essential to store carbon in the long term and thus strengthen the “carbon sink” of France. This is a no-regrets action, whether or not wood harvests increase.

See the climate decoding of the French presidential election (website in French only)

L’article French Presidential election: cross-analysis of programs est apparu en premier sur I4CE.

First of all, it is essential for Europeans to make their point of view known. Although European regulators and supervisors have not waited for the Basel Committee’s endorsement to change their practices, their agenda could nevertheless be disrupted by diverging views on climate issues. For example, until now, Europe has been distinguished by a vision that advocates double materiality, measuring the financial risks related to climate change, but also the impacts that the financial system generates on climate change. However, this concept is not shared by the United States, which remains focused on measuring financial materiality alone.  The risk for Europeans is therefore that lesser standards will be imposed.

For I4CE, the Basel Committee’s proposals for bank supervision must go beyond the mere integration of climate risks and their financial impacts into the traditional major risk factors (default risk, market risk, etc.). Regulators must seek to support an orderly transition to a low-carbon economy, as this is the only way to effectively prevent the risks of financial instability that a disorganized transition would present. It is not enough for banks to measure their exposures and the carbon footprint of their activities, but rather for them to begin a transformation of their portfolio by financing their clients’ transition.

To do this, the Basel Committee must formulate more specific and operational proposals. The Basel texts are organized according to three pillars: the first defines the minimum capital requirements for banks, the second organizes micro and macro-financial prudential supervision. Finally, the third pillar deals with transparency and market discipline.

I4CE makes recommendations for each of the three pillars, which we summarize here before elaborating on them:

• Strengthen the minimum capital requirements for Pillar 1 for the riskiest assets, such as coal, without reducing them for green activities: such a reduction is not justified in view of its low impact on the transition and the risk it represents for banks.
• Strengthen Pillar 2 with a transition plan requirement for banks and the integration of climate issues into the Supervisory Review and Evaluation Process (SREP), and implement supervisory actions for banks with high exposure to climate risks.
• Still within the framework of Pillar 2, integrate a very detailed sectoral approach into stress tests and risk management tools.
• Finally, for scenario analyses, clarify the notion of scenario plausibility and incorporate the use of disordered transition scenarios.

Pillar 1: Strengthen relative minimum capital requirements for the riskiest assets

Under Pillar 1, I4CE recommends strengthening the minimum capital requirements for the riskiest fossil fuel activities (coal, unconventional energy, new exploration and exploitation) on which there is an international consensus to exit. Risk weights for these activities could be increased from 100% to 250%. To formulate this recommendation, I4CE has conducted an impact study modelling the effects of prudential relief and strengthening factors on banks and transition financing.

Read : Indexing capital requirements on climate 

For the strengthening of prudential requirements, I4CE has modelled 3 scenarios and it emerges from the modelling that, to have a significant impact on the cost of the project, the calibration must be high. With a 250% increase in capital requirements, the cost increase for some carbon projects (such as coal) would be around 10%, especially for projects with a long maturity as it is the case for energy projects.

This therefore creates a strong incentive for banks to quickly exit from the relevant activities. It thus makes the effects of the credit crunch transitory and limited. On the other hand, applying a PF on a wider perimeter limits the effectiveness of the penalty. The individual cost of the projects is slightly increased and the number of sectors is too large to consider a quick exit. The contractionary effects on credit are more important and more lasting. They would therefore also affect a fraction of green credits, as banks would be forced to reduce their overall volume of credits. The risk of penalizing companies that have historically been carbon-intensive, but are in the process of transition, is also greater.

Regarding a possible easing of minimum capital requirements for green projects, the I4CE study shows that its impact on financing conditions would remain very limited. I4CE modelled the impact of a 25% Green Supporting Factor (GSF), corresponding to the existing relief for SMEs and infrastructure, as well as a 15% and a 50% reduction. The results show that, for the mobility and energy renovation sectors, the impact of the GSF is very low (e.g. a gain of €200 for a €30,000 electric vehicle). For renewable energies, these projects already benefit from prudential relief thanks to the Infrastructure Supporting Factor. It would be more interesting to limit the existing scheme to green infrastructure only, as it currently supports all infrastructure, including those that have a negative impact on the climate.

Pillar 2: Incorporate a transition plan requirement for banks and strengthen climate oversight within the SREP

To support the implementation of an orderly transition and thus limit climate risks, I4CE recommends that regulators require bank transition plans. These transition plans should include a 2050 carbon neutrality target, as well as intermediate GHG emission reduction targets. They should also cover all of bank’s activities: investment lending and investment banking activities (mergers and acquisitions, IPOs, bond issues, structuring of complex financial products, etc.). Initially, these plans may focus on high-emission sectors and large corporations, and eventually they are intended to cover all economic sectors and all of bank’s clients. With regard to high-emission sectors, supervisors should verify that financing is conditional on the existence of transition plans for large corporate counterparties. Finally, the use of carbon offsetting must be kept to a minimum and supervised by the supervisor. To do this, supervisors will first need laws to regulate the use of offsetting by companies.

To operationalize this monitoring of an orderly transition, changes to the SREP are necessary. First, the analysis of business models and strategy must evolve in order to monitor the exposure of banks to sectors that are high emitters and for which the risk of failed operations is significant. On the other hand, elements of analysis must be integrated into the risk management rating, in order to verify that these risks are taken into account within the bank, that they are monitored in the evolution of the portfolios and that climate metrics are taken into account in the lending decisions. The internal organization of banks regarding climate issues must also be supervised, so that governance is structured in such a way as to regularly address climate issues and that these are integrated into risk management departments, and not left solely to the responsibility of the CSR department.

Finally, actions may be envisaged by supervisors, initially in the form of supervisory actions: requests for training, reorganization of risk management and governance in particular.  In a second phase, and in the event that certain banks fail to implement their transition plan, sanctions such as additional capital requirements could be considered.

Pillar 2: Include detailed geographic and sectoral analysis of climate-related risks within the climate scenarios used in stress tests and risk management tools in general

Because transition and physical risks are systemic in nature and can propagate throughout the value chain of economic agents and their environment, it is important for banking institutions to consider the full range of sectors and geographic areas covered by their portfolios in their analysis of climate-related risks, and not just the sectors or areas most at risk.

Read : Climate stress tests: The integration of transition risk drivers at a sectoral level

For each sector of activity, banks must take into account a set of risk factors that can potentially combine within the same scenario. For example, transitional risk factors can come from an increase in carbon prices, but also from regulatory, technological or market behavior risks. With respect to physical climate risks, a set of climate hazards may overlap in the same geographic region.

Thus, understanding the characteristics and possible developments of each sector is essential to identify in detail the transition risk factors specific to each sector that may impact banking institutions, as well as the different transmission channels and the main indicators of vulnerability among sector players.

These risk factor analyses are valuable analytical tools, both in the construction of climate scenarios used in stress tests and in the improvement of internal transition risk management tools for banking institutions.

Pillar 3: Scenario analyses: clarify the notion of “plausibility” of scenarios in a context of deep uncertainties, and encourage the use of disordered transition scenarios.

Clarifying the notion of “plausible trajectories” is crucial because it conditions the robustness of the approach used. Taking into account “plausible” scenarios can potentially challenge the traditional views or beliefs of financial actors on how the transition can be achieved. Indeed, it is important for financial actors to recognize that the transition process is an unprecedented transformation of economic systems and that the exact form the transition may take is uncertain. The scenarios should therefore represent potential future transition paths for the institution, taking into account its key issues, while being consistent with its potential internal dynamics. It should be emphasized that no objective probability of realization can be attributed to each of these scenarios.

Read : Taking climate-related disclosure to the next level

Including disorderly transition scenarios with abrupt shocks may be relevant in the analysis of bank portfolios, both asset portfolios and loan portfolios (e.g., potential liquidity bottlenecks for counterparties due to abrupt changes in consumer demand, loss of operating licenses, etc.).

Using qualitative information for risk management:

Our research on physical climate risks has shown the persistent difficulty of quantifying losses in euros. When the results obtained are fragile, they can give a false impression of precision and comparability. Faced with this observation, some banks have preferred to focus on classification systems for the level of physical climate risk to which their portfolio is exposed: from very low to very high, for example. The result is not perfect, but it allows these banks to start managing this risk without waiting for a reliable estimate of losses in euros on their entire portfolios.

Read : Addressing challenges of physical climate risk analysis in financial institutions

L’article Finance: I4CE’s recommendations to the Basel Committee est apparu en premier sur I4CE.

Relying on a greater obligation of results is good news…

With this future certification framework, a new direction is taken by the commission: it relies more on the obligation of result. This is good news!

Indeed, until now, very few incentives existed to reduce the carbon impact of the land sector and the proposed tools (green payments of the 1st pillar of the CAP, AEM Agro-Environmental Measures, etc.) all based on obligations of means, have not demonstrated their effectiveness as the European Court of Auditors recalled in its report on the CAP and the climate. Payments on results are a solution to ensure the environmental impact of funding, or to put it another way, to ensure that each euro spent in the name of the climate really contributes to the fight against global warming.

Opposition to this type of instrument is regularly expressed with regard to their supposedly higher transaction costs than for instruments with an obligation of means. An obligation to achieve a result means evaluating this result, which implies collecting a certain amount of data and obviously has a cost. This point must however be qualified because the obligation of means already imposes large transaction costs. Indeed, when we try to optimize the practices to be implemented in a given pedo-climatic context, the costs linked to the multiplication of specifications in the case of the obligation of means (for example for AEM) explode. In the end, the costs of developing these “à la carte” specifications offset the costs of MRV (Monitoring, Reporting, Verifying) of the environmental impact associated with the obligation of result.

On condition that the scope of the certification framework is reviewed

This is good news, but it will be really good under 3 conditions resulting from the French experience with the Low Carbon Standard (LBC). The LBC is the French carbon certification framework piloted by the Ministry of Ecological Transition. Although it is intended to cover all sectors of activity, the first methods and projects focus on the agricultural and forestry sectors, which makes it a perfect case study for the future European framework.

The first condition is to review the scope of the scheme to include agricultural emissions other than CO2. Without this ‘enlargment of the scope’, the scheme will be unusable for the agricultural sector.

In its communication, the Commission treats the objectives of carbon sequestration and the reduction of N20 and CH4 emissions in the agricultural sector separately. However, the nitrogen and carbon cycles are linked. The same practice, such as permanent soil cover or soil conservation, can have impacts on both soil carbon storage and GHG emissions, and not always in the same direction. If we do not want this system to be unusable by farmers or to create perverse effects in this sector, it is essential to broaden the scope to include the reduction of methane and nitrous oxide emissions.

This does not preclude counting separately what comes under carbon sinks and what comes under GHG reductions in order to monitor changes in these two categories, which is essential in order to manage the risk of non-permanence specific to carbon sequestration. This is the choice that has been made in the context of the Low Carbon Standard.

…To ensure that the system encourages real transformations in production systems

The second condition concerns the proper consideration of all sustainability issues.

The Commission’s communication rightly insists on the importance of taking into account all these issues. But it is not so simple to develop methods that are not carbon-centric when the metric is tCO2eq. Several solutions exist, however. Imposing safeguards (maximum stocking, minimum number of species, etc.) to avoid pushing intensive systems, which would have a negative impact on biodiversity and water quality; adding indicators for monitoring other issues to the calculation of carbon impact; and giving priority to accounting for emissions per hectare rather than per quantity produced to encourage extensification. These different approaches are being tested in the Low Carbon Label and their respective effectiveness should be discussed.

More fundamentally, behind this condition lies the question of the transformations of the food chains that we want to push. There are many ways to achieve carbon neutrality, with scenarios relying on technology or scenarios involving major changes in food behavior. But not all of them have the same impacts on the other dimensions of sustainability. As mentioned above, there is no shortage of ways to integrate these issues into a carbon certification framework. But the way they are integrated can drastically change the type of practices and transformations that are pushed on the ground. It is up to the regulator to set the course.

…And not to misjudge the sources of financing

The third condition is not to choose the wrong target for financing. We often hear that carbon certification is a tool dedicated to carbon compensation. In reality, this would be very simplistic. Carbon certification can provide guarantees on the impact of a project and can be useful for any financing, private or public, seeking to have an impact and to monitor this impact.

To those who think that carbon certification is only of interest for voluntary carbon markets, the commission brings a first answer by leaving a place for public financing and agribusinesses via other forms of financing than the purchase of carbon credits (CAP subsidies, investment aid, premium on production, etc.). This is already a great step forward, but it could go even further.

The voluntary carbon market is marginal for the moment, even more so for credits worth several dozen euros, as we can see with the first projects certified by the LBC. It would be risky to bet on its development to finance the low-carbon transition of the agricultural and forestry sectors. Let’s make no mistake, it is the voluntary market that can be a complement to public financing, to financing from the sector and to private investment, and not the other way around as the Commission’s communication might suggest. If the challenge is to find new sources of financing for the land sector through voluntary carbon markets, the result will likely be very disappointing. On the other hand, if the challenge is to provide a tool to channel funding more effectively to low-carbon projects, the future European framework could be a structuring tool in achieving the objectives set by the Green Deal.

Under these three conditions, Europe will be able to develop a robust and credible taxonomy for financing the low-carbon transition of the agricultural and forestry sectors.

L’article Remunerating farmers for their stored carbon, Europe’s good idea? est apparu en premier sur I4CE.

The importance of the joint consideration of climate and social issues

Number of measures against climate change have repercussions on social issues such as poverty or inequalities. These can be negative, as seen with carbon taxes which can increase income inequality unless accompanied with appropriate redistributive mechanisms, or positive, with investments in public transportation enhancing mobility for less connected populations. Social measures can also impact levels of greenhouse gas emissions, with energy subsidies for poorest households often – unwillingly – incentivizing the consumption of fossil energies, or, conversely, with taxes on vacant dwelling facilitating access to housing in areas of real estate tension and therefore avoiding GHG emissions induced by the construction of new housing units.

Considering climate and social issues jointly therefore appears as a necessity, to avoid political gridlock as embodied by the French “Yellow Vests” protests in 2018 and their counterparts in Ecuador in 2019, and to maximize opportunities for climate and social co-benefits in the development of public policies. Several NGO and governmental initiatives are paving the way on the matter, with, for example, the Pacte du Pouvoir de Vivre developed by about 50 French NGO, or with the Citizens’ Convention on Climate established by the French government. Internationally, the Sustainable Development Goals adopted in 2015 and the Silesia Declaration signed in 2019 encourage governments to take holistic approaches to these issues.

It is with the same goal in mind that NGO and institutions like the UNDP, in France and internationally, invite to enhance climate budget tagging exercises and turn them into climate and social budget tagging.

From a climate to a climate and social assessment of budgets

Climate Budget Tagging (CBT) consists in systematically identifying budgetary measures with positive or negative impacts on climate change mitigation and/or adaptation. CBT belongs to the wider range of practices facilitating “green budgeting”, a principle by which the state budget helps achieve national climate objectives. These exercises are increasingly popular worldwide, with at least 60 countries having undertaken at least one CBT exercise since 2012.

For actors aiming to foster the consideration of joint social and climate effects in policymaking, CBT exercises offer an analytical basis for measures written within states’ budgets, a large share of all public policies. Through enhancing CBT exercises to turn them into SCBT – socio-climate budget tagging – governments and their administrations could make better-informed budgetary arbitration.

A methodological proposal tested on the French state budget

I4CE sought to test the SCBT and therefore developed a methodology to identify budgetary measures with climate impacts and impacts on either or combinations of five social dimensions. These dimensions are income inequality, poverty, employment, health, and access to basic needs and services (energy, clean water, food, infrastructures). This methodology also incorporates individual and group characteristics such as age, gender, level of income, sector of employment, and urban or rural residence which condition the impact of budgetary measures on the social dimensions listed above. For example, the health benefits of budgetary measures aiming to reduce air pollution are magnified when such measures affect young or elder populations, known to be more vulnerable to air pollution.

To test it, this methodology was applied to the CBT of the French budget law project for 2021. The graph below presents first results for a sample of budgetary measures, with positive or negative impacts on climate change mitigation or adaptation. Altogether, 93% of budgetary measures with climate impacts can have social impacts. Impacts on health and poverty are most numerous: respectively 90% and 88% of measures with climate impacts can affect these social dimensions.

Figure 1 : the SCBT applied to the CBT of the French budget law project (BLP) for 2021.  

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A useful exercise?

These first results confirm the existence of important interrelations between climate and social issues. However, for the SCBT to foster their joint consideration during policymaking, numerical results are not key. The study currently underway needs to be augmented with an in-depth, measure specific analysis of social and climate effects, and with this analysis’ insertion within budget arbitration processes, or, more generally, within public policy development and evaluation processes. Such analyses should ideally not be limited to measures with climate impacts, nor solely to measures recorded in states’ budgets.

In the coming months, I4CE will continue working on this topic by exploring how such analyses could inform budgetary decision-making processes. It will do though by studying these processes in France, as well as in another country interested in trying the SCBT: Indonesia.

L’article Turn green budgets into green AND social budgets? est apparu en premier sur I4CE.

Public finances: investing more on the climate but spending efficiently

By 2021, the French Government will have made an unprecedented budgetary commitment to the climate of approximately 30 billion euros. In addition to the regular national budget, the climate component of the French Recovery Plan, which is financed by the European Union, will be added. These additional efforts are only intended to last two years, whist the need is expected to continue to increase beyond this timeline. The CO2 problem cannot be solved with current technology however the France 2030 investment plan could help contribute to the financing of some of these new innovations.

Beyond these new innovations, it is also vital to mobilise and increase additional public funding which supports households, businesses and local authorities in the implementation of low-carbon alternatives. In France, there is a vast amount of work to be done and all these projects will require a share of public money: renovation of public buildings; social housing; private housing; tertiary buildings; deployment of public transport; investments in railways; investments to improve energy efficiency in industry; transformation of agricultural systems. Although doing `whatever it takes’ is essential, it results in public money becoming a scarce resource. It is clear that more public money will need to be spent on the climate after 2022 (ie end of the French covid recovery plan). Therefore, it is vital that the way that this money is spent improves and that every euro spent on the transition has an impact.

A law to ensure resources are made available over the long term

The French State must continue this effort over the long term and set up a public finance programming law for the climate, following the example of what is done in other strategic areas and subjects that require constancy. Several French programming laws currently provide budgetary appropriations over multiple years: the Military Programming Law, passed in 1997, which runs from 2019 to 2025; the Justice Programming Law passed in 2019 that runs from 2018 to 2022; the Research Programming Law that runs from 2020 to 2030.

By establishing a similar instrument on climate change mitigation and adaptation, public authorities would be obligated to match environmental ambitions with resources. Today the long-term budgetary implications of France’s climate and energy commitments are formally assessed but not debated. As if it were a separate subject, the presentation of the finance bill does not include an assessment of the compatibility of the financial resources with the environmental objectives. Admittedly, the environmental assessment annexed to the finance bill makes it possible to determine what is favourable or unfavourable to the climate within the bill, however the assessment does not verify the coherence of the objectives and the means.

A public finance programming law for the climate would allow long-term perspectives. Even though the French State sets itself long-term objectives, it seems to be completely short-sighted about how to accomplish them. An observer looking at the evolution of the terms and conditions specified in decrees, in particular window spending (aid for the acquisition of vehicles, energy renovation etc), might conclude – certainly too quickly – that the French State is sailing at a loss.

A public finance programming law does not have any normative value for the programmatic part of credits and uses, since only finance laws – voted annually by French Parliament – can set these authorisations. In practice however, it appears to protect the budget in the areas concerned. The draft Finance Law for the year in fact includes the elements of the programming laws and the areas concerned seem – for the most part – to be protected from saving measures during the execution of the budget.

Steering the means of climate policy by strengthening the role of Parliament

The power of French Parliament could potentially be strengthened by a programming law. Parliament could accept the law presented by the French government and increase its means with much greater ease than with a regular finance bill, where parliamentarians have very little room to manoeuvre to make amendments to appropriations. Having a debate in the Chamber to find out if enough resources are being put into achieving given climate objectives within the next ten years would allow for an open and honest discussion.

Furthermore, this programming exercise could be linked, in Parliament, with the examination of multiannual energy programming, which since the Energy-Climate Law will be the prerogative of Parliament for the next period. There will also be the examination of the reports of the French Climate High Council, which is responsible for assessing the compatibility of commitments with the climate trajectory. In order to assess the progress of climate action and make necessary adjustments, it is becoming increasingly necessary to convene a major parliamentary meeting. Discussing the financial means at the same time would strengthen and enhance the credibility of this exercise.

Involving economic stakeholders and reducing costs: a question for the presidential candidates

Finally, a programming law such as this would facilitate the transition by aligning the climate expectations of the various players. Additionally, the data is presented in a format that is easier to integrate into a business plan, thus reducing uncertainty for economic players and risk-taking and in turn, significantly reducing the high cost of necessary climate action.

Candidate programs for the 2022 French presidential elections must include a Climate Strategy covering public finance for the next five years, laying out the contours of their climate budgets. It is essential that this strategy be included in a public finance programming law for the climate at the start of the five-year term.

L’article A public finance programming law for the climate est apparu en premier sur I4CE.

New IPCC scenarios explore a wide range of plausible futures to 2100

In its latest report, the first working group of the IPCC does not only reconstruct past climate changes and observe those that are taking place today. Crucially, it also explores possible futures. The five new scenarios used in this report present possible evolutions of the climate throughout the 21st century as a function of greenhouse gas (GHG) emissions and of the evolution of human societies. The use of scenarios – which are plausible representations of an uncertain future – enable to explore different possible evolutions of human societies and their implications for the climate. The aim of these scenarios is not to predict the future – no probability is associated with the different scenarios – but to take into account the uncertainty linked to future human activities and to inform the decisions of States and more widely of societies.

These five scenarios cover a wide range of plausible futures for GHG emissions – from a scenario in which CO₂ emissions decline drastically to carbon neutrality by 2050 and are negative in the second half of the century (SSP1-1.9) to a scenario in which CO₂ emissions continue to rise sharply to twice current levels in 2050 and more than three times current levels in 2100 (SSP5-8.5) (see Figure 1).

Figure 1: Future CO₂ emissions in the five illustrative scenarios

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Source: Sixth Assessment Report of IPCC Working Group I, 2021

These scenarios have been constructed from plausible developments in societies over the 21st century

The five scenarios are based on reference socio-economic trajectories – the SSPs (Shared Socioeconomic Pathways) – developed by the scientific community in order to create a common framework for thinking about the issues related to climate change.

Five narratives describing possible social, economic, political and technological developments by the end of the century were developed (see Table 1). These five narratives were used to model different scenarios of evolutions of the economic, energy and land use systems. Some of these scenarios were constrained by the achievement of a climate objective (these are called “transition scenarios“), while others were not (“reference scenarios“). This scenario-building was carried out by the scientific community of the IPCC third working group, which assesses solutions for mitigating climate change. Note that the socioeconomic pathway can be more or less favourable to the achievement of climate objectives, as indicated in the two columns on the right: for example, limiting global warming to 1.5°C or 2°C may prove very difficult, if not impossible, in a context of regional rivalries and inequalities described by the SSP3.

Table 1: The SSPs and their narratives

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Source: I4CE, 2019, based on Riahi et al. (2017), O’Neill et al. (2015), Bauer et al. (2017)

The GHG, aerosol, and land use emission trajectories resulting from these scenarios were then processed by the scientific community to harmonize them and supplement them with other datasets -in particular, a geographic grid of emissions. In total, nine emission scenarios were obtained – representing consistent and distinct evolutions of human societies.

These scenarios are identified by a name of the form SSPx-y, where SSPx is the socioeconomic pathway used to model the scenario and y is the approximate level of radiative forcing resulting from the scenario in 2100.

Five scenarios demarcated from each other were chosen for further evaluation in this report:

• SSP1-1.9: very ambitious scenario to represent the 1.5°C goal of the Paris Agreement
• SSP1-2.6: sustainable development scenario
• SSP2-4.5: intermediate scenario
• SSP3-7.0: regional rivalry scenario
• SSP5-8.5: fossil-fuel based development

The assessment report of the IPCC first working group details the evolutions of climate for each of these five scenarios on a global scale as well as on a regional scale

These five emission scenarios have been used as inputs to climate models – which are mathematical formulations of the natural laws that govern the evolution of climate-related systems: atmosphere, ocean, cryosphere, land, biosphere, carbon cycle. These models simulate the future evolution of climate according to a given GHG emission trajectory.  The models used for this sixth assessment report allow for a finer representation of certain physical, chemical and biological processes than the models previously used.

The IPCC Working Group I report details the evolution of the climate system throughout the 21st century for each of these five illustrative scenarios. The evolution of the climate system is described by a very large set of climate variables, such as temperatures, winds, precipitation.

The report describes the average change in climate variables in each of the scenarios, such as the increase in surface temperature – ranging from 1.4°C to more than 4.5°C by 2100 in the different scenarios (see Figure 2). The report also describes the evolution of extreme events – such as the frequency and intensity of heat waves, droughts, torrential rains, cyclones… It also describes the evolution of the cryosphere and the oceans – with for example information on the melting of ice floes, permafrost, glaciers or the rise in sea level and ocean acidification in the different scenarios.

Figure 2: Increase in surface temperature in each scenario relative to 1850-1900 levels

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Source: Sixth Assessment Report of the IPCC Working Group I, 2021

In this figure, the lines represent the average value obtained by all the climate models used. The coloured areas represent the values obtained in 90% of the simulations for SSP3-7.0 and SSP1-2.6. This range is not represented for the other scenarios for the sake of readability.

These developments are described at the global scale, but also at a regional level. This new report comes with an interactive online atlas that allows users to explore the evolution of numerous climate variables observed or simulated according to the scenarios, at different time horizons and geographical scales. This regionalized information can be used by public and private decision-makers to understand the climate changes they are facing.

These scenarios are more precise than the scenarios previously used by the IPCC and explore different trajectories over the 21st century

The previous IPCC assessment report was based on other scenarios, the RCPs – for Representative Concentration Pathways. RCPs are trajectories of the evolution of emissions and concentrations of greenhouse gases and aerosols, named according to the radiative forcing they reach by 2100. Five in number, they were developed to form a representative set of the multiple GHG emission trajectories of existing scenarios in the literature. The RCPs were previously used as inputs to climate models.

The new SSP scenarios differ from the RCPs in several respects: first, they provide a much higher level of precision and detail for climate model inputs. Second, they allow for the exploration of combinations that were not covered by the RCPs, such as the combination of low mitigation efforts and low air pollution control – and thus high aerosol emissions (now studied in SSP3-7.0).

Both RCPs and SSPs are identified by the approximate level of radiative forcing achieved in 2100, but they are not directly comparable for the same radiative forcing. The distribution of emissions over time and the proportion of different GHGs and aerosols differ. For example, SSP5-8.5 has higher CO₂ concentrations than RCP 8.5, but lower methane concentrations. As another example, the ambitious SSP scenarios describe a later peak in emissions than in the ambitious RCPs: this is because actual emissions have not yet followed the trajectory of the ambitious scenarios.

RCPs are cited in this report: on some topics – such as sea level rise or regional scale projections – the scientific literature still largely uses modelling results based on RCPs.

The results of the five scenarios call for immediate action on adaptation and mitigation

The findings of this report leave no excuse for delaying action on adaptation and mitigation. Indeed, in all the scenarios considered, warming exceeds the 1.5°C limit in the next twenty years. Immediate efforts are therefore required for adaptation, and this report helps us to identify unavoidable climate changes so that we can better prepare for them.   In this report, the IPCC also reminds us that the objective of limiting warming to 1.5°C in the long term is not lost, via the SSP1-1.9 scenario in which warming is limited to 1.4°C at the end of the century after temporarily exceeding 1.5°C. However, this requires drastic and immediate decisions for mitigation.

This information will be completed by reports to be published: the impacts of climate change on human societies and the solutions to be implemented to limit global warming will be assessed in detail respectively in the reports of the second and third working groups, to be both published in 2022.

Ahead of COP26, this first report already sends a clear message to decision-makers on the importance of reducing our emissions more drastically than ever to seize the last chance to limit warming below 1.5°C, but also on the need to start adapting to the impacts of climate change now.

To better understand these different terms – transition scenario, reference scenario, climate model, SSP, RCP, … – do not hesitate to (re)read the publication “Understanding transition scenarios – eight steps to read and interpret these scenarios“, which explains the key concepts around climate-related scenarios, presents the main families of scenarios and the questions that these scenarios can answer!

L’article Where do the five new IPCC scenarios come from? est apparu en premier sur I4CE.

Understanding of the Alignment of the Entire Financial Chain

After committing to align their portfolios with the Paris Agreement, financial institutions have started by developing approaches to assess the alignment of their own portfolios. However, understanding the alignment of a portfolio requires that they look at the alignment of different “parts” of the financial chain. 

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As presented in Figure 1, some institutions started with the ‘what’ or a ‘use of proceeds’ approach, focusing on the activities directly financed through project finance and other asset classes with known use of proceeds, i.e. the individual projects or business activities. This has often been the case for development banks and lenders to activities where direct use of proceeds is relatively easy to trace. 

Other Financial Institutions, have focused on the “who”, or the recipient counterparties or clients to which they are extending debt or purchasing an equity share. In this case, alignment involves ascertaining whether the company or entity as a whole is aligned. This has particularly been the case of corporate lenders, institutional investors and asset owners those involved in corporate and retail lending and finance, non ‘pure player’ equity.

Finally, in some cases Financial Institution may also be assessing the alignment of its partners – such as banks  they are  doing syndicated lending with or involved in intermediated finance or credit lines; or whether the entities that buying their ‘green’ bonds or from whom they are securing financing from themselves are aligned. 

Moving forward, many financial institutions recognize that to align they will need to look at both the “what” and “who” and connecting the dots between these approaches. 

Different entry points, but many shared questions 

While financial institutions may start the alignment process with different areas of focus, they are often encountering similar questions as the discover that looking at one part of the financial chain can quickly lead to other parts of the chain. Furthermore, financial institutions are often facing similar strategic and technical questions their peer financial institutions, as well as financial institutions in other parts of the financial system.

• Strategically, how can financial institutions determine when it is sufficient to look at use of proceeds level only, or also at recipients; whether this can support clients, counterparts and companies to align themselves support both improved risk management and positive climate impact; and how can Financial Institutions make engagement, avoidance, divestment, etc. successful strategies to align the financial chain. Finally, Financial Institutions are asking what can be expected from regulators on the alignment of financial chains. 
• At a technical level, all Financial Institutions are asking how they can overcome technical challenges such as asset/client/counterparty level data, scenarios and ‘methodological’ questions of direct transactions? And for many, how do you address the additional layer of complexity around the alignment of intermediated transaction (onlending, equity funds, etc.) ? This often touches on the complex question of whether it is necessary to go beyond a binary ‘yes/no’ assessment of alignment? And, in turn, how to interpret a counterparty’s target, progress, etc.?  

Addressing these questions through interdisciplinary and cross-sector exchanges Can accelerate the development of comprehensive approaches consistent across the financial chain.  

A Group to Help Financial Institutions Go Further, Faster – Together

In the final six months in the run-up to COP26, the UNEP FI and the Climate Action in Financial Institutions Initiative, of which I4CE is the secretariat, have co-convened an “FI Group” of like-minded institutions from across the financial sector to look at how they can assess – and support – the climate-consistency or ‘alignment’ of financial chains. By partnering and enjoying the support of the Finance in Common Summit, the two initiatives and stakeholders can leverage the growing collective knowledge and emerging practice to move forward together – both further and faster.  

This Financial Institution Group on the Alignment of Financial Chains aims to serve as part of the needed ‘connective tissue’ between initiatives. It will complement the conversations happening under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ) with those occurring among the public development banks. It will connect in a voluntary manner the different parts of the financial community to: 

• Facilitate cross-capitalization and knowledge sharing between leading financial institutions across the financial community on approaches for the alignment of clients and counterparts, and the critical conditions for success;  
• Foster collective emulation and convergence to help overcome internal and external challenges;  
• Send signals to the rest of the financial community about possible next steps on the alignment journey. 

The group will look at the common question around three areas where there is a strong potential for financial institutions to learn from each other: 

• WHY and WHEN should financial institutions focus on the alignment of the different parts of the financial chain (ie. who and what is financed)?  
• HOW can Financial Institutions assess the alignment of different parts of financial chains (ie. overcoming challenges around assessing both what and who)?  
• WHAT should Financial Institutions do with the results of alignment assessments (ie. avoidance, engagement, awareness at strategic and operational)? 

With the support of the Finance in Common Summit, the informal Financial Institution group was launched during an inaugural webinar on Thursday July 1. The webinar was on opportunity to hear from leading Financial Institutions such as AFD, CDC Group, BBVA and Standard Charter Bank on why this is a key issue for Financial Institutions seeking to align – and that more work is needed moving forward. Two more webinars are planned later in the year prior to the COP in Glasgow. To move forward at pace and scale, this group will help to both raise ambition across all Financial Institutions – as well as ensure they have access to the knowledge they need to move forward.” 

L’article The Next Step for Financial Institutions: Aligning the entire Financial Chain est apparu en premier sur I4CE.

Development Banks can build on their existing efforts around climate finance to rapidly ensure the consistency of all their activities with the Paris goals 

The Group of Multilateral Development Banks (MDBs) and members of the International Development Finance Club (IDFC) – as well as a number of other public and private financial institutions –  have put much effort into “climate finance” – or support for transactions with direct mitigation and adaptation co-benefits. Over the past year MDBs and development banks have announced increased climate finance targets post 2020 and the World Bank confirms this trend in its upcoming 2021-2025 Climate Action Plan, with a commitment to increase the percentage of the Group financing with climate co-benefits to 35 percent. Climate finance represents a major contribution in reaching the Paris goals and should continue to be an investment priority as part of Paris Alignment approaches. To support this, IDFC and the MDBs can build on their experience in tracking and reporting on their support for mitigation and adaptation based on the Common Principles for Climate Finance Tracking. These efforts provide a strong basis for climate finance – and the forthcoming update to the Principles is hoped to provide further guidance for the internal alignment process. 

However, when developing Paris-aligned strategies development banks must look beyond the “climate finance” in their portfolios; they must also ensure that all activities do not hinder the achievement of climate objectives. The first key requirements for Paris alignment is that all new projects, clients and counterparties are already or making credible efforts to be consistent with Paris-aligned national and international socio-economic pathways. The World Bank Action Plan starts to address this aspect with the objective to align all new operations by July 1, 2023 at the development bank level and by July 1, 2025 at the group level. This should be a key priority as it is something new for internal teams and will require the use of additional alignment assessments at the project level – as well as at the counterparty, country and sector levels. The Operationalization Framework on Aligning with the Paris Agreement developed by NewClimate Institute and I4CE for IDFC provides an overview of the tools and approaches already available to do it. Further work is however needed to improve these methodologies and tools and mainstream their use in the financial institutions’ community. The development of dedicated country climate and development diagnostic by the World Bank, as announced in the Action Plan would represent a major step forward for such assessments. Moving forward, actively working whenever possible to support the alignment of existing assets within their portfolios and long-term counterparties should also be a priority.  

To maximize the contribution to climate goals by public finance, development banks need to focus on maximizing their impact  

As seen in I4CE’s Alignment Bulls Eye, aligned financial institutions should seek to as a minimum do no harm, and as much as possible support Paris consistent climate co-benefits and foster transformative outcomes. 

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L’article By COP26 development banks must go beyond climate finance to align with Paris est apparu en premier sur I4CE.