The current level of finance falls significantly short of what is required to achieve net-zero emissions by 2050. While many financial industry leaders step up their efforts to drive the transition forward, there is still a substantial shortfall in the investment that is needed to reach the global climate objectives.
According to the Intergovernmental Panel on Climate Change (IPCC), global mitigation investments need to increase by a factor of 3 to 6. The gaps are wide for all sectors and present a major challenge for developing countries. According to the International Monetary Fund (IMF), climate mitigation investment needs in emerging market and developing economies (EMDEs) are estimated to reach about $2 trillion per year by 2030 and private finance is key to meet the required investments.
This article presents UNEP FI’s eighth recommendation on credible net-zero commitments as outlined in a UNEP FI input paper to the G20. The eleven recommendations, alongside this series of articles, aim to support policymakers in understanding the progress in net-zero finance to date and how to scale up the global transition to a net-zero economy.
Financing beyond green
More transition financing is needed to facilitate the transformation of business models in sectors that are currently less environmentally friendly, encouraging them to adopt greener practices. Financial institutions can engage with hard-to-abate industries like shipping, transport and steel to invest in the necessary capital expenditures for business model transition.
To promote decarbonisation across all sectors and geographies, regulatory frameworks should support the financial industry to go beyond green financing. Leveraging client engagement opportunities may increase financed emissions in the short-term, causing potential pressure from investors. With credible transition planning, financial institutions can ensure transition financing is consistent with net-zero commitments and decarbonisation targets.
Just transition
Scaling up private finance to reach net-zero emissions should always aim for a fair and inclusive transition. This means optimising economic opportunities while addressing any associated challenges. A just transition requires fostering open and inclusive social dialogue. By prioritising positive and meaningful engagement, we can ensure that the benefits and burdens of climate action are shared collectively, creating a sustainable and just future for all.
As the IPCC finds a clear mismatch between capital availability in the developed world and the future emissions expected in developing countries, there is positive social value of global cross-border mitigation financing.
In conclusion, to achieve net-zero emissions by 2050, a substantial boost in financing is imperative, especially in emerging market and developing economies. Policymakers should develop regulatory frameworks that activate alignment and mobilise transition finance.