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Accounting for finance is key for climate mitigation pathways

How can financial actors' risk perception tilt the dynamics of the low-carbon transition?

Journal Article

Published on 28 May 2021

Summary 

The financial system—the ecosystem of investors (e.g., banks, investment funds, insurance), markets, and instruments—is often considered to play an enabling role in climate mitigation pathways to a low-carbon transition (1). But it can also have a hampering role, e.g., if investors’ perceptions of low risk from a missed transition and low opportunities from a transition fail to trigger a reallocation of capital into low-carbon investments. This increases the chance of the transition not occurring within the time window required to stabilize the climate or occurring in a disorderly fashion. Indeed investors, who can influence the realization of climate mitigation pathways, themselves rely on estimates of climate mitigation pathways from process-based integrated assessment models (IAMs) (2). And IAMs do not model the financial system or investors’ decisions; thus, the feedback loop between the financial system and mitigation pathways is not taken into account, neither by the IAMs nor by the finance community.

This limitation to our understanding of the dynamics and the feasibility of the low-carbon transition weakens the ability of IAMs to inform policy and investment decisions.

We propose a framework to capture the interdependence between investors’ perception of future climate risk, depending on the credibility of climate policies, and the allocation of investments in the economy.

In the press

IAASA (English)

Accounting for finance is key for climate mitigation pathways

A new study published in the journal Science, highlights the opportunity to complement current climate mitigation scenarios with scenarios that capture the interdependence among investors’ perception of future climate risk, the credibility of climate policies, and the allocation of investments across low- and high-carbon assets in the economy. 

Read the full article here.

Le Monde (French)

« Le système financier peut faire pencher la dynamique de la transition écologique d’un côté ou de l’autre »

Les deux économistes Stefano Battiston et Irene Monasterolo observent, dans une tribune au « Monde », que les anticipations des investisseurs peuvent aussi aller contre l’objectif de limitation du réchauffement climatique.

Read the full article here.

CF News (Italian)

Il ruolo chiave della finanza per la transizione verde

Con un articolo apparso oggi su Science, un gruppo internazionale di studiosi ed esperti di finanza climatica tra cui gli italiani Stefano Battiston del Dipartimento di Economia di Ca’ Foscari e Irene Monasterolo dell’Università di Economia di Vienna, propone un quadro concettuale per migliorare la rilevanza degli scenari di mitigazione climatica e transizione sia in termini di business che di politiche.

Read the full article here.