In 2019, Gianfranco Gianfrate, Professor of Finance at EDHEC Business School and Research Director at EDHEC-Risk Climate Impact Institute, was invited to contribute to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). In this short piece, we review the role and organisation of the IPCC, look at the main observations of the IPCC in relation to Climate Finance, zoom on the contribution of Professor Gianfrate, and present our conclusions.
The IPCC is is the United Nations body for assessing the science related to climate change; it was established in 1988 to provide governments with information in order to develop climate policies.
The IPCC does not conduct its own research – instead, experts volunteering as IPCC authors assess the body of scientific literature to provide a comprehensive summary of what is known about the drivers of climate change, its impacts and future risks, and how adaptation and mitigation can reduce those risks. Through its regular assessments, the IPCC determines the state of knowledge on climate change by identifying where there is agreement in the scientific community on topics related to climate change, and where further research is needed. The IPCC also produces special reports on topics agreed to by its member governments – a recent example is the report on Global Warming of 1.5 ºC that was prepared in the wake of an invitation made at the time of the adoption of the Paris Agreement – and methodology reports that provide guidelines for the preparation of greenhouse gas inventories.
The assessment report work is performed by three working groups with distinct mandates. The first working group assesses the physical science of the climate system and climate change. The second looks at the vulnerability of socio-economic and natural systems to climate change, and the possibilities for adapting to it. The third focuses on options for reducing greenhouse gas emissions and removing greenhouse gases from the atmosphere. The reports are drafted and reviewed in several stages with a view to producing objective and complete assessments. There is typically a volume for each of the working groups (including a summary for policymakers) plus a synthesis report.
The work on the Sixth Assessment started years ago and will be completed later this year with the finalisation of the synthesis report – the approved summary for policymakers and the adopted longer report are out.
The Synthesis of the Sixth Assessment Report warns that there is a “rapidly closing window of opportunity to secure a liveable and sustainable future for all” and that “the choices and actions implemented in this decade will have impacts now and for thousands of years.” The necessary climate change adaptation and mitigation investments require international cooperation including improved access to adequate financial resources, particularly for vulnerable regions, sectors, and groups.
The Sixth Assessment Report finds that finance flows for climate-change mitigation and adaptation have increased markedly (+60%) since the previous assessment report but continue to fall short of needs – they are also lower than flows into fossil fuels. Flows are heavily focused on mitigation but even so are grossly inadequate relative to the mitigation investment required to try and maintain global warming within the targets of the Paris Agreement targets. Investments for this decade in scenarios that limit warming to 2°C or 1.5°C are modelled to be three to six times greater than current levels. The gap between the rising estimated costs of adaptation and the funds allocated to adaptation, which are predominantly from public sources, has increased. Hard and soft limits to adaptation (including resulting from financial, governance, institutional and policy constraints) have been reached in some ecosystems and regions. Maladaptation is happening. Insufficient adaptation finance flows constrain implementation of adaptation options, especially in developing countries. They are even insufficient to prepare for near-term climate change and are threatened by adverse climate impacts, particularly in developing and least developed countries. Finally, while markets for green bonds, environmental, social and governance and sustainable finance products had expanded significantly, the IPCC notes that they face challenges in terms of integrity and additionality.
Ambitious mitigation pathways imply large and disruptive changes in existing economic structures whose adverse consequences can be mitigated by fiscal, financial, institutional and regulatory reforms and by integration with macroeconomic policies (e.g., support of sustainable low-emission growth paths; climate resilient safety nets and social protection; and improved access to finance for low-emissions infrastructure and technologies).
Effective climate action is enabled by “political commitment, (...) governance, institutional frameworks, laws, policies and strategies and enhanced access to finance and technology.” Regulatory and economic instruments can support deep emissions reductions and climate resilience if applied widely.
The report identifies finance, along technology and international cooperation, as a critical enabler for accelerated climate action. Both adaptation and mitigation financing need to increase many-fold if climate goals are to be achieved. There is sufficient global capital to close the global investment gaps but there are barriers to redirect capital towards climate action.
First and foremost, clear signalling and support by governments is needed to lower “real and perceived regulatory, cost and market” barriers and risks and to improve the risk-return profile of investments (in other words, stronger alignment with climate ambitions of regulation, policy, and public sector finance would reduce uncertainty and transition risks for the private sector). Other challenges outside finance include shallow capital markets; limited institutional capacity to ensure safeguards; standardisation, aggregation, scalability and replicability of investment opportunities and financing models; and, a pipeline ready for commercial investments. Barriers within finance include poor assessment of climate-related risks and investment opportunities, regional mismatch between available capital and investment needs, home bias factors, country indebtedness levels, economic vulnerability, and limited institutional capacities. Financial regulators, central banks, and investors can play a supportive role by elevating awareness, disclosure, and consideration of climate risks and facilitating capital allocation.
A key role for finance in climate-resilient development pathways
As contributing author to the chapter on Climate Resilient Development Pathways in the (second working group) volume looking at “Impacts, Adaptation and Vulnerability,” Professor Gianfrate was tasked with describing the extent to which finance can contribute to climate change mitigation and adaptation.
Key takeaways from Climate Change 2022: Impacts, Adaptation and Vulnerability
Observed and Projected Impacts and Risks
Human-induced climate change, including more frequent and intense extreme events, has caused widespread harm to nature and people. Some adaptation efforts have reduced vulnerability, but the most vulnerable people and systems suffer disproportionately.
Vulnerability differs substantially due to intersecting socio-economic development, unsustainable ocean and land use, marginalisation, inequity, and governance. Some 3.3 billion–3.6 billion people live in hotspots of high vulnerability. Unsustainable development patterns increase exposure to climate hazards.
Global warming, reaching 1.5°C in the near-term, would cause unavoidable increases in multiple climate hazards and present multiple risks to ecosystems and humans. Near-term global warming mitigation actions would substantially reduce projected losses and damages.
For 127 key risks, assessed mid- and long-term impacts are up to multiple times higher than currently observed. The magnitude and rate of climate change and associated risks depend strongly on near-term mitigation and adaptation actions.
Climate change impacts and risks are becoming increasingly complex and more difficult to manage. Concurrence of hazards and interaction of risks will result in compounding and cascading across sectors and regions.
1.5°C overshoot will create additional and severe risks. Depending on the magnitude and duration of overshoot, some impacts will cause release of additional greenhouse gases, and some will be irreversible.
Current Adaptation and its Benefits
Progress in adaptation planning and implementation has been observed but is unevenly distributed. Prioritisation of short-term risk reduction reduces the opportunity for transformational adaptation.
There are feasible and effective adaptation options. Effectiveness will decrease with increasing warming. Integrated solutions that address equity and differentiate responses based on risk increase feasibility and effectiveness.
Soft limits to some human adaptations have been reached, but can be overcome by addressing financial, governance, institutional and policy constraints. Hard limits to adaptation have been reached in some ecosystems. Increasing warming will bring more human and natural systems to adaptation limits.
There is increased evidence of maladaptive responses to climate change, which can create lock-ins of vulnerability, exposure, and risks.
Enabling conditions are key for adaptation and include political commitment and follow-through, institutional frameworks, policies and instruments with clear goals and priorities, enhanced knowledge on impacts and solutions, mobilisation of and access to adequate financial resources, monitoring and evaluation, and inclusive governance.
Climate Resilient Development
Climate resilient development action is more urgent than previously assessed. Comprehensive, effective, and innovative responses can reduce trade-offs between adaptation and mitigation.
Climate resilient development is enabled by prioritising risk reduction, equity and justice, and integrating decision-making processes, finance and actions. It is facilitated by international cooperation; by governments at all levels working with all stakeholders; and by partnerships with traditionally marginalised groups.
Interactions between changing urban form, exposure and vulnerability can create risks and losses for cities and settlements, but urbanisation offers a critical opportunity to advance climate resilient development. Equitable outcomes contribute to multiple benefits for health and well-being and ecosystem services.
Safeguarding biodiversity and ecosystems is fundamental to climate resilient development; this depends on conservation of 30%-50% of Earth’s land, freshwater and ocean areas.
In his contribution, Gianfrate asserts that finance can contribute to climate action by efficiently pricing the social cost of carbon, by reflecting climate risks in the valuation of financial assets, and by channelling resources towards mitigation and adaptation. It observes that the magnitude of climate change-related risks faced by global banks and financial institutions is substantial.
He emphasises that financial actors increasingly recognise that the generation of long-term, sustainable financial returns is dependent on a stable, well-functioning and well-governed social, environmental and economic systems. Hence, while the integration of sustainability dimensions into investment may be driven by preferences, it may also be merely driven by financial performance. Institutional approaches include capital allocation strategies; active ownership; targeted investments in green assets (e.g., green bonds, clean energy public equity), specialised funds/vehicles for renewable energy infrastructure (e.g., via project finance), cleantech venture capital and alternative finance.
His contribution suggests however that the positive contribution of green finance to climate action may be weakened by poor-quality terminology, greenwashing-prone labelling standards, heterogeneity of metrics and divergence of rating methodologies leading to inconsistent quantification of the environmental footprint of issuers.
Gianfrate notes that stable and predictable carbon-pricing regimes would significantly contribute to fostering financial innovation that can help further accelerate the decarbonisation of the global economy, even in jurisdictions which are more lenient in implementing climate mitigation actions (note that by 2020, over a fifth of global emissions were covered by carbon taxes or emissions trading systems; carbon pricing instruments had incentivised low-cost emissions reduction measures, but coverage and prices were insufficient to promote deep reductions).
He recognises efforts to enhance climate-related disclosure of financial actors (with countries adopting the recommendations of the Task Force on Climate-related Financial Disclosures and prudential authorities considering climate stress testing for financial institutions).
Yet, transparency is but the first step, and as climate risks appear more pervasive and material than previously thought, the compelling issue for investors is how to manage or neutralise such risks once they have been properly identified and quantified. Applied financial research and financial engineering are clearly needed to advance the understanding and management of climate risks.
The transition towards low-emissions and climate-change resilient economies is an epochal challenge; the role of finance, financial markets and institutions as mechanisms and channels to transmit climate polity and accelerate the pace of change remains underestimated by both policymakers and investment professionals.
 The synthesis report covers the findings of the three working groups' assessment reports as well as any relevant special reports and methodological reports.
 And these flows are primarily domestic. The picture is even more dire for cross-border flows which are key to enabling the transition to low emissions and just transitions. Notably, the public and private climate finance flows from developed to developing countries have remained below the collective goal of USD100 billion per year by 2020. Without effective action, losses and damages will continue to disproportionately affect the poorest and most vulnerable populations.
 Increased access to finance could build capacity and address soft limits to adaptation and avert rising risks.
 IPCC, 2022: Climate Change 2022: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press. Cambridge University Press, Cambridge, UK and New York, NY, USA, 3056 pp., doi:10.1017/9781009325844.