The Global Stocktake offers a wake-up call for financial institutions working towards long-term climate targets

A Global Stocktake to update on the world’s progress towards goals set down in the Paris Agreement shows notable ambition, although not enough ambition or follow-through to keep on a 1.5° C trajectory. One of the upcoming milestones required to stay on track is for the world to reach peak global emissions by 2025. The nearness of this deadline highlights an important reality in addressing climate change – the world is working on mitigating an issue that will bring catastrophic consequences if unmitigated, and we will only know whether we’re back on target long after the actions we are discussing today may be completed.

The financial sector has a particularly important role in this process because investments made in the next 1-2 years will determine whether global emissions peak in time to preserve the possibility to limiting warming to 1.5° C. A lot of efforts in responsible finance are focused on long-term trajectories, improving data collection quality and Net Zero alignment of high-emitting sectors. Those efforts are important, but will produce less effect if we collectively fail to reach peak global emissions by 2025.

There is also a need to step up the urgency of action by using as much of the financial sector’s assets as possible. A key message from the Global Stocktake is that although the development of cost-competitive renewable energy has progressed quickly (unit costs for some technologies have dropped 80%), it isn’t leading to a reduction in emissions at the scale needed.

The Global Stocktake summarizes the ‘all-of-the-above’ approach with the call to action that “achieving net zero CO2 and GHG emissions requires systems transformations across all sectors and contexts, including scaling up renewable energy while phasing out all unabated fossil fuels, ending deforestation, reducing non-CO2 emissions and implementing both supply- and demand-side measures”.

For the purpose of finance, that means climate action through responsible finance cannot be limited to allocating funding towards renewable energy generation, although that amount should be increased as much as possible. It does not mean only addressing deforestation enabled by the financing of companies working in forests, although that is also important. Addressing both supply- and demand-side measures means looking across a financial institution’s whole set of financing to see how it can contribute to reducing emissions.

That sounds like an obvious point, but much of the work being done in the financial sector is narrowly targeted towards high-emitting sectors’ direct emissions, beginning with efforts to build better data collection systems. Given the urgency of the emissions reductions needed to reach global peak emissions, however, financial institutions should work more broadly and fully across their financing assets, even where data are less available or less reliable.

Methodologies such as that embedded in the RFI Foundation’s financed emissions reports which are based on top-down models may not reach the precision of developing emissions data collections standards, but they do provide broad outlines of what’s needed and do so in a way that is coherent with our top-down understanding of global emissions and the links between supply- and demand-sides. The bigger-picture issue is that broad action is urgently needed and lack of data cannot be an excuse for lack of action.