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#1 Aligning finance for the net zero economy: new ideas from leading thinkers

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#1 achieving alignment in finance

The IPCC Special Report released in late 2018, highlighted the urgency of minimising global temperature rise to 1.5°C and emphasised the need for systems transitions that can be enabled by investments in climate change mitigation and adaptation, policy and acceleration of technological innovation and behavioural changes (IPCC; 2018).


Amongst the emissions pathways scenarios, it proposed, for the first time, a limited or no overshoot scenario – the P1 low energy demand (LED) scenario, where future energy demand could be met through low-emission energy sources and enhanced energy efficiency.


This scenario presupposes that system changes are more rapid and pronounced over the next two decades.


Five years after the Paris Agreement, and with calls by the IPCC for urgent action in the coming decade to prevent climate change catastrophe, 2020 has been billed as a key year for climate action.


The COVID-19 crisis that has accompanied this year marks a point of transformation for the economy and society: it has demonstrated how remarkable and rapid systems change can be.


The global pandemic has given us a clear opportunity to pave the way for building back better and establishing new norms, as well as lessons that can inform how we might face the unabated climate crisis and future climate shocks.


A paradigm shift is needed if we are to move towards a limited or no-overshoot climate scenario.


Stakeholders in financial markets, capital and investment represent important levers of change, as they have a key allocative role in society, and can enable investment into a net-zero low-energy future.


Financial intermediaries can effectively support and enable societies to mobilise the investment required for the systems change needed to transition economy and society onto a net-zero pathway that is compatible with 1.5°C by 2100.


This paper examines how financial institutions can move beyond climate risk management and towards much closer alignment with climate outcomes. Instead of incidentally contributing to alignment with climate outcomes through climate risk management initiatives, we need specific ways of dealing with and contributing to the challenge of alignment.


These need to be articulated, developed, and scaled across the financial system rapidly. Without rebalancing the distribution of effort and spending more time explicitly on alignment with climate out-comes, we cannot ever hope to align finance and the financial system with climate change objectives.


This report is one attempt to try and rebalance the conversation.