Impact of Finance on Climate Change Mitigation and Adaptation

The Impact of Finance on Climate

What This Research Strand Is About?

This research strand looks at the ways in which finance can foster or hinder economic decarbonization and adaptation to climate risks, considering the role of policies, investors’ expectations and preferences, instruments and markets.

Impact of investors’ climate expectations and preferences on portfolio rebalancing and decarbonization

Investors' expectations and preferences can play a key role in climate mitigation and adaptation. We account for these expectations and preferences as well as climate policy credibility in their investment decisions and portfolio rebalancing in order to identify the conditions in which investors can enable or hinder an orderly transition. We then analyze whether the actual investments of financial institutions have been effective given their stated Net Zero goals, identifying a taxonomy of investors’ behaviors along the lines of committing, conforming or transforming roles. Whether or not investors are translating their climate pronouncements into concrete investment actions is important in understanding market impacts and designing incentives and appropriate policies..

Corporate and blended finance innovations

It has become very urgent to channel greater public and private investments into climate mitigation and adaptation. Blended finance has attracted growing attention and yet we still do not fully understand whether and how blended finance can play a role in adaptation investments, especially in emerging markets and low-income countries. We focus on the financial innovations taking place at:

• non-financial corporations that need to incorporate climate risk considerations into their financial management decisions,
• financial organizations endowed with concessionary capital with the objective of attracting and mobilizing commercial funding.

We consider what type of corporate governance features favour the integration of climate into corporate business models, and what type of blended finance solutions and financial instruments are most effective in mobilizing private capital towards mitigation and adaptation.

Effectiveness of green finance policies on mitigation investments

Green financial policies and instruments are in principle very important in scaling up the investments needed to fill the green investment gap and build resilience to climate change. However, in reality they are only effective if properly designed and implemented. We look at which policy designs are most effective at decarbonizing the economy considering:

• Through which channels can different green finance initiatives affect capital allocation and prices?
• To what extent can green finance initiatives help countries deliver on their mitigation objectives, avoiding trade-offs? 
• Under what conditions could these initiatives backfire and end up increasing risk?

Impact of green finance initiatives on mitigation and adaptation investments. 

Green financial policies and instruments are in principle very important to scale up the investments needed to fill the green investment gap and build resilience to climate change. However, in reality they are only effective if properly designed and implemented. We look at which policy designs are most effective to decarbonize the economy considering:

• Through which channels can different green finance initiatives affect capital allocation and prices?
• To what extent can green finance initiatives help countries deliver on their mitigation and adaptation objectives, avoiding trade-offs? 
• Under what conditions could these initiatives backfire and end up increasing risk?

Green financial instruments for adaptation

Climate adaptation finance has received much less attention than mitigation finance but should play a key role in building climate resilience. The ability of countries to invest in adaptation can be limited by low fiscal space, tight budget constraints and high levels of public debt. Here we study the feasibility and characteristics of instruments aimed to increase debt capacity for investments in climate adaptation, designed to enable countries to access better financing conditions on the market (via pooling and swaps), while preserving debt sustainability. We analyze the conditions for implementation that would maximize impact on the climate and on the transition and minimize risks for financial stability.