Latest IPCC Report Short Shrifts Finance’s Potential

Key Points: The financing conclusions in the latest IPCC report disappoints in its apparent lack of vision regarding the potential for finance to act on its own. Instead what the report demands of developed-world governments/central banks — in policy change, macro interventions and building developing world capacity — is vast and will be challenging to achieve.

The IPCC WGIII of the AR6.  The Working Group III contribution of the sixth assessment report from the Intergovernmental Panel on Climate Change was released on April 4. As with previous iterations, the document is encyclopedic in its scope as it documents the academic and industry experience associated with the energy transition effort. The section on financing the transition (chapter 15) is no different, weighing in at 90 pages (and 65 pages of references), although as we note below there is very little coverage of financial innovation currently underway.

The primary messages heavily stress the role of government/multilateral institutions. The report profiles many logical and commendable steps that developed-world governments can (must) take in order to facilitate greater amounts of climate finance. These include:

• setting decarbonization policies and mandatory targets;
• assisting the development/scaling of capital markets in the developing world (e.g. through technical assistance);
• “freeing” developing countries from excessive debt burden (e.g., debt-for-nature swaps);
• developing clarifying definitions/taxonomies and mandating consistent disclosure;
• having central banks impose risk-weighting for climate change impacts on financial institutions;
• more effective use of public funds to mobilize private investment (e.g. through provision of guarantees, supporting earlier stage development to de-risk investments and public-private partnerships); and
• ending fossil subsidies

The concern regarding the laundry list is that it bumps up against unwilling legislatures, entrenched interests and government capacity to do as much, as quickly, as it suggests is necessary.

The report’s finance recommendations distill to the need for consistent disclosures. It is telling, presumably, that the “innovative financial products” subsection (15.6.6) has no mention of any new products beyond green bonds (and indices of green bonds). Instead, the subsection emphasizes consistency of definition (taxonomy) and disclosure to avoid greenwashing, which it sees as a key deterrent to green finance growth.

Related, it appears to see limited potential for finance to “act on its own.” The “new business models and financing approaches” subsection (15.6.8) offers only a nod to Fintech and Energy-as-a-Service models. Meanwhile, ironically, given its own concerns about greenwashing and additionality, it appears also to extol nature-based carbon credit solutions and lament that these are undercapitalized. It is unfortunate that more consideration wasn’t offered to (how to encourage), for example:

• other forms of carbon credit/offset potential;
• the potential for fintech/blockchain to fund, e.g., distributed renewable energy growth;
• the role private venture capital can play in early stage technology commercialization investment; and
• financial structures that securitize cost savings (from shutting down unprofitable coal plants, for example) and/or recapitalize ailing fossil-fuel companies

  4/7/2022