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Removing Barriers For Climate-Friendly Investment

Posted on May 6, 2015 at 12:25 AM

Policy actions in the financial sector can significantly contribute to shifting private capital towards climate-friendly investments, says a report recently published by the European Commission.

Shifting Private Finance Towards Climate Friendly Investments - with policy options for mobilising institutional investors has multiple authors including the Climate Bonds Initiative and 2 degrees Investing Initiative. It recognises the significant role such investors could play in contributing to financing the transition to a low-carbon economy. This report is designed to be an 'actionable toolbox' to help move in that direction.

The estimated share of 'climate-friendly assets' (not always defined in the same way therefore difficult to measure) in the portfolios of EU institutional invetsors is between just 1-2%. But in the EU alone, the annual climate investment needs to 2020 are an estimated €200bn. Untapped potential from institutional investors can contribute to closing this gap, says the report.

There has been a global surge in taking action on climate change, bringing together a multiplicity of seemingly unlikely partners in collaboration.

This report points out two categories of barriers to climate-friendly investment: those external to the decision making framework of institutional investors ie availability and volume of climate-related investment options, less favourable risk/return profile, high transaction costs - and those barriers that arise from the very decision-making framework used by insttituional investors.

These include mismatching the time horizon of decision-making, lack of integration of climate in fiduciary duty and engagement practices and lack of relevant climate-related risk and performance methodologies, says the report. There is a clearly a lot to be done.

But "there is a role for policymakers to speed up market enablers" it argues. It offers a host of recommendations both for the shorter term - including action by the European Commission to improve the risk-return profile of climate friendly assets - as well as for the longer term.

 Stan Dupre, 2degrees Initiative 

"Financial regulation and policies represent a key window of opportunity to remove barriers for climate-friendly investment by financial institutions. This report demonstrates the avenues to take advantage of this window of opportunity" says Stan Dupre, 2degrees Initiative global director and co-author of the report. 

Categories: Green Issues, Stewardship, Investors