The world is well into the decisive decade for decarbonization, but the narrow path to 1.5˚C looks increasingly threatened. July 2023 was the hottest month ever in global temperature records, and the Intergovernmental Panel on Climate Change’s (IPCC) 6th Assessment Report1 shows that human-induced warming is likely to reach 1.5˚C between 2021 and 2040. The United Nation’s first Global Stocktake, which speaks of a ‘rapidly narrowing window to raise ambition and implement existing commitments’2 underlines the need for a global surge in decarbonization finance.
So far, however, the required scale-up has proved hard to achieve. Macroeconomic and geopolitical headwinds, which are pushing up costs of capital and risk sensitivity, are just two obstacles. The need is especially acute in developing markets, where multiple factors are limiting the supply of investable projects.
On the upside, there are encouraging demand signals for investment in green and transition finance. Despite the recent spike in demand for oil and coal, we are seeing a real push for renewables, progress on electrification and strengthening of low-carbon supply chains. An increasing number of companies are setting science-based targets, and the growth of carbon markets like the European Union (EU) Emissions Trading System (ETS) and the China National ETS is catalyzing decarbonization.
There are also signs of positive changes to policy and regulation, such as the work of the International Sustainability Standards Board (ISSB); the EU’s Green Deal Industrial Plan and “Fit for 55” initiative; the US’s Inflation Reduction Act; the ASEAN Green Taxonomy; and the evolution of the UK’s Transition Plan Taskforce (TPT), even though it is not yet enshrined in policy.
Globally though, progress between COP27 and COP28 has been more gradual than transformational. The harsh reality is that existing financing globally falls far short of what is required. Investment in clean energy and related infrastructure needs to almost triple to meet the US$4 trillion3 that the International Energy Agency (IEA) has identified as required each year to keep us on course for net-zero by 2050. Additionally, the 2023 report from the IPCC estimates that the level of current climate financing would need to increase by 3 to 6 times to keep warming below 1.5°C or 2°C between 2020-2030.4
The private sector has a crucial role to play in overcoming these obstacles. Financial institutions (FIs) should be in the driving seat. They are increasingly motivated by growing risks of inaction, including the threat from stranded assets, the reputational risk of greenwashing and their moral responsibility. They should be transforming themselves and partnering with governments to overcome blockers and mobilize investment.