Synthesis report for the technical assessment component of the first global stocktake: Synthesis report on finance flows-Information related to finance flows

Information related to finance flows pursuant to Article 2, paragraph 1 (c) of the Paris Agreement
1. Information on consistency of finance flows
This section provides an overview of information available on the long-term goal outlined in Article 2, paragraph 1(c), of the Paris Agreement of making finance flows consistent with a pathway towards low GHG emissions and climate-resilient development
Article 2 of the Paris Agreement sets out three interlinked goals aimed at strengthening the global response to climate change in the context of sustainable development and efforts to eradicate poverty: (a) limiting the increase in global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the increase to 1.5 °C above pre-industrial levels; (b) increasing the ability to adapt to and foster resilience against the adverse impacts of climate change; and (c) in paragraph 1(c), making finance flows consistent with a pathway towards low GHG emissions and climate-resilient development. Article 2 states that the Paris Agreement will be implemented to reflect equity, and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances.
The fourth BA provides the most comprehensive overview of global climate finance flows, climate finance trends and their composition. It finds that global climate finance flows were 16 per cent higher in 2017–2018 than in 2015–2016, reaching an annual average of USD 775 billion. Global climate finance estimates increased from USD 692 billion in 2016 to USD 804 billion in 2017 and USD 746 billion in 2018, for an annual average of USD 775 billion in 2017–2018.44 The growth in 2017 was driven largely by an increase in new private investment in renewable energy as a result of decreasing technology costs, while the decline in 2018 was due primarily to a slowdown in wind and solar investment in major markets. Figure 2 below provides a breakdown of global climate finance flows in 2015–2018 by sector.

Figure 2

Global climate finance flows in 2015–2018

(Billions of United States dollars)

Data on financial instruments used are not available for all sources, in particular for the energy efficiency and sustainable transport sectors. Based on the information available on the lower bound estimates of global climate finance flows (i.e. USD 574 billion as the annual average of flows in 2017–2018), project-level market rate debt comprised 39 per cent of the flows (see figure 3 below) followed by balance sheet equity (21 per cent) and balance

44 For an overview of data quality and completeness on global climate finance estimates, see UNFCCC SCF. 2021b. Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows. Technical Report. Bonn: Germany. Available at

https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20 Report%20-%20V4.pdf.

sheet debt (16 per cent). Grant finance represented approximately 5 per cent of total global finance flows (Climate Policy Initiative, 2020a).

Figure 3

Breakdown of climate finance by financial instrument, 2017–2018

Although climate finance flows are increasing, they remain relatively small in the broader context of other finance flows, investment opportunities and costs. Climate finance accounts for just a small proportion of overall finance flows, as shown in figure 4 below. The level of climate finance is considerably below what would be expected in view of the investment opportunities and needs that have been identified. However, although climate finance flows must obviously be scaled up, it is also important to ensure the consistency of finance flows as a whole (and of capital stock) with the long-term goals of the Paris Agreement, specifically those set out in its Article 2.
As outlined above, financial flows and stocks in GHG-intensive activities remain worryingly high. Fossil fuel investments amounted globally to USD 977 billion in 2017– 2018, while fossil fuel subsidies amounted to USD 472 billion in 2018. Fossil fuel corporate capital expenditure at risk of becoming stranded amounted to USD 50 billion in 2018, while investments with deforestation risks amounted to USD 43.8 billion per year in 2017–2018, and net agriculture subsidies amounted to USD 619 billion per year on average for 2017– 2019. Fixed assets in sectors linked to fossil fuel systems amounted to USD 32 trillion, real estate assets at risk in 2070 amounted to USD 35 trillion, and stranded assets worth USD 20 trillion are at risk out to 2050. This highlights the need to ensure that broader finance flows integrate climate risks into decision-making and avoid increasing the likelihood of negative climate outcomes, as otherwise the effectiveness of climate finance flows could be called into question or even negated.

Figure 4

Global climate finance in the context of broader finance flows, opportunities and costs

Information on finance sector initiatives related to Article 2, paragraph 1(c), of the Paris Agreement
Some Parties have articulated polices and measures in their long-term strategies or domestic policy frameworks that relate to the goal set out in Article 2, paragraph 1(c), of the Paris Agreement. Furthermore, some public and private sector institutions in the financial sector have articulated in their strategies efforts to align with the Paris Agreement and the goal in Article 2, paragraph 1(c).
As outlined above, there has been significant growth in relevant initiatives since the Paris Agreement entered into force, in particular in coalitions fostering collective commitments on climate action. Activities relevant to Article 2, paragraph 1(c), in many instances, are found in practices, coalitions and initiatives that predate the Paris Agreement.

Policy and regulatory measures on green finance have been recorded since 1980, although there has been a marked increase in such measures since the adoption of the Paris Agreement.

The Paris Agreement did, however, lead to existing sustainability and climate-related finance initiatives seeking to adopt objectives or activities that matched those of the Paris Agreement goals. There are at least 115 sustainability- or climate-related financial initiatives that claim to be either directly or indirectly associated with contributing to the goals of the Paris Agreement. The majority relate to promoting new financial instruments that address funding needs for sustainable development and climate change. A smaller pool of approximately 31 initiatives are focused on greening financial systems, for example, the Task Force on Climate-related Financial Disclosures, the EU High Level Expert Group on Sustainable Finance and the Network for Greening the Financial System.
Many activities across the stakeholder mapping exercise that explicitly refer to achieving the goals of the Paris Agreement, and Article 2, paragraph 1(c) in particular, are executed through collective initiatives and organizations. This highlights the importance of network effects, knowledge-sharing and common goal setting. In contrast, relatively few relevant actions by national governments are framed in the context of Article 2, paragraph 1(c). In developing countries, the ability to access international climate finance in the context of Article 9 is mentioned, as is directing domestic finance flows towards achieving NDC goals.

Figure 5

Alliances among private finance flows on climate and sustainability

Source: Partnership for Carbon Accounting Financials. 2021.

Note: UN=United Nations, SBTi=Science-based Targets Initiative, 2DII=2 Degrees Investing Initiative, RMI=Rocky Mountain Institute.

Figure 6

Sustainability- or climate-related financial initiatives

Note: AuM=assets under management, BCG=Boston Consulting Group, SBTi=Science-based Targets Initiative, TCFD=Task Force for Climate-related Financial Disclosures, PCAF=Partnership for Carbon Accounting Financials.

Efforts relevant to Article 2, paragraph 1(c), are widespread across all types of actors within the financial sector, including investors, banks and regulators, with actions concentrated on defining their exposure to climate risks and the economic opportunities linked to climate response measures. However, achieving the goal in Article 2, paragraph 1(c), related to low GHG emission and climate-resilient development, set in the context of Article 2, depends on real-economy actions that reduce emissions in line with temperature goals and help to develop climate resilience. Many actors in the financial sector operate at a number of steps removed from real-economy activities, through stock or bond trading, portfolio allocations, or microprudential supervision, which has little direct effect on real- economy investment decisions relative to banks lending to projects, corporations approving capital expenditure plans or governments announcing support incentives. Therefore, measuring the effective role of financial actors in the context of Article 2, paragraph 1(c), is a notable topic of debate among initiatives, including which metrics are most important as indicators of success. The fourth BA found that assessing the real-economy impact and the risk of greenwashing remains a challenge.
A number of initiatives relevant to Article 2, paragraph 1(c) include representation from different regions and both developed and developing countries. For private finance actors, such representation is important and it reveals the different relative starting points, capacity and skills gaps that exist within coalitions that make common commitments.

Figure 7

Country representation overlaps among five sustainable finance initiatives, as at end of 2020

Source: UNFCCC SCF, 2021b.

Note: Based on review of membership pages of each organization’s website. NGFS=Network for Greening the Financial System, CFM=Coalition of Finance Ministers for Climate Action, FC4S=Financial Centres for Sustainability, SSE=Sustainable Stock Exchanges, SBN=Sustainable Banking Network.

Pursuing consistency requires consideration of how finance targeted at GHG- intensive activities can support pathways, as well as elements towards just transitions. A focus on individual financing or investment decisions that are consistent with a pathway towards low GHG emission and climate-resilient development is not straightforward, owing to the significant potential range of pathways that may be followed for achieving the broader goals in Article 2 of the Paris Agreement. The trend towards developing climate, green or sustainable finance taxonomies, as seen across multiple public actor initiatives, can support the identification of activities that are consistent with such pathways, but may risk excluding necessary investment in high-emission sectors or activities that can support the overall transition to such pathways. These may be in areas where activities that are consistent are not yet available at scale owing to slow technological innovation (e.g. steel and cement processes), where activities are needed to enable the transition (e.g. financing of mining activities and road building), or where financing is needed to wind down or responsibly manage the retiring of high-emission activities and transition communities away from their reliance (e.g. coal phase-out policies and subsidies).
Transition finance taxonomies and transition bonds are being developed for private actors to finance, for example, transitional activities in the context of financing just transitions, which implies projects that meet certain conditions, such as displacing more carbon-intensive options compared with industry norms; and enabling wider application or integration of less carbon-intensive options.
The Paris Agreement also refers to the imperative of implementing the goals through a “just transition of the workforce and the creation of decent and quality jobs”. This also applies in the context of implementing Article 2, paragraph 1(c), where some countries such as India and South Africa are developing just transition finance road maps through academic

and financial sector partnerships, aiming to direct future investment towards achieving fair distribution of social and economic benefits.

Multilateral efforts that associate climate responses with just transition are also growing. For example, the Climate Investment Funds co-developed the Just Transition Initiative to analyse their investment portfolio and understand the dimensions of just transition by developing knowledge products to encourage engagement, such as the Framework for Just Transition Definitions. Further, the World Bank is supporting a platform initiative to assist coal regions in transition in Ukraine and the Balkans and facilitate experience-sharing with regions that have made the transition to low-carbon energy systems. OECD research highlights just transition related policy options such as carbon pricing, regulations, policies for skills and labour, and accounting for distributional impacts of transition (gender, age and geographically vulnerable communities) (Just Transition Centre, 2017).
The principles behind just transition of fairly distributing burdens and benefits is also relevant in the international context and through the references to equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances in Article 2, paragraph 2 of the Paris Agreement. Where countries are economically dependent on fossil fuel industries and energy sources, the policies of trade partners may affect inward investments and/or access for export markets. Further, vulnerabilities to climate impacts may reduce access to capital for countries seen to be most at risk, as better data and awareness of climate-related risks are integrated into investor portfolios. The Vulnerable Twenty Group, for example, offers useful insights and mechanisms on insurance, macrofinancial risks, financial protection, enabling access to affordable finance to grow small and medium-sized businesses, and its climate prosperity plans (MCII/V20, 2020).
Further consideration of climate-resilient development pathways is necessary to complement existing approaches. The mapped approaches include a strong focus on actions linked to achieving the goal in Article 2, paragraph 1(a), of the Paris Agreement, namely financing investments related to low GHG emissions, and to mitigating the physical and transition-related risks of shifting from high- to low-emission development trajectories. There appears to be limited evidence of the degree to which financial actors are aligning their investment mandates with climate resilience goals linked to Article 2, paragraph 1(b), of the Paris Agreement. There is a view that focusing on proper climate-related risk disclosure should lead to better, more resilient investment and financing decisions as an end in and of itself, while other views have recognized the existing gaps in guidance and understanding ways to engage in this element.
COP 26 and CMA 3 welcomed the mapping of the information relevant to Article 2, paragraph 1(c), of the Paris Agreement in the fourth BA and took note of the key findings of the report, including that banks representing over USD 37 trillion in assets and institutional investors with USD 6.6 trillion in assets have pledged to align their lending and investments with net zero emissions by 2050. Furthermore, Parties were encouraged to ensure that just transition financing is incorporated into approaches to align climate action with the goals of the Paris Agreement.45

45 Decision 5/CP.26, paras. 9 and 10.