OECD Review on Aligning Finance with Climate Goals

5. Conclusion: lessons learnt for the way forward

Achieving net-zero emissions and building resilience to climate change requires aligning finance with such goals, as emphasised by Article 2.1c of the Paris Agreement. This inaugural edition of the OECD Review on aligning finance with climate goals brought together best-available information, data and research to support building the evidence base to design an effective policy landscape that incentivises and enables reaching this goal. It did so by reviewing approaches to assess the climate alignment of finance, the current degree of climate alignment of finance, as well as financial public policies and financial sector actions adopted that may influence the climate alignment of finance.

5.1. Good practices in ensuring the environmental integrity and policy relevance of climate-alignment assessments

Public policy and private actions to contribute to aligning finance with climate policy goals and avoid misaligned new investments must be informed by robust assessments of progress towards such alignment. However, efforts to increase the climate alignment of finance are currently fragmented, in part due to the absence of a common framework to credibly assess progress. Such assessments need to rely on credible methodologies and best-available evidence. Against this backdrop, the present review highlighted significant progress that has been made in assessing the climate alignment of finance, but also several gaps and greenwashing risks that may undermine climate-alignment assessments.

The review points to five key good practices to ensure the environmental integrity and policy relevance of climate-alignment assessments:

• Place best-available estimates of finance to activities contributing to or undermining climate goals in the context of total financial flows and stocks. This needs to be done across all layers of finance, from real-economy investments to financial assets across asset classes, financial institutions, and financial jurisdictions.

• Rely on a pertinent set of core yet complementary metrics. Across layers of finance, different metrics highlight different aspects of climate performance. Due to the complexity of climate-alignment assessments, no silver-bullet metric can credibly and transparently capture all dimensions. Combining a set of key complementary metrics provides a more holistic and nuanced assessment of the degree of progress and actions towards climate alignment.

• Transparently disclose underlying methodological assumptions and choices. A range of complex methodological choices and assumptions influence the results of climate-alignment assessments of finance. Key climate performance metrics can follow different calculation approaches. Transparency on these approaches and assumptions facilitates the comparability of different assessments and analyses of their environmental integrity.

• Assess the reliability and comparability of input data. The credibility of climate-alignment assessments is highly depended on the accuracy, granularity, and coverage of underlying input data, all of which differ depending on the source. Such data can be reported, based on mandatory or voluntary disclosure practices, or estimated. Moreover, different disclosure policies can propose different reporting approaches and scope. Increased transparency on data gaps and estimation methods in disclosures is needed.

• Rely on best-available reference points against which to assess climate alignment, that reflect characteristics of assets and the ambition needed to reach climate policy goals. Climate-alignment assessments require matching granular data on investment and financing with climate-related characteristics of underlying assets or actors and analysing the consistency of such characteristics with existing climate policy goals as reference points. Notably, climate change mitigation scenarios can provide a credible reference point for target setting and alignment assessments when the selected scenario can be considered as consistent with the Paris Agreement, matches the granularity of the financial asset or entity under consideration, and provides transparency on climate outcomes and underlying assumptions.

Assessing progress towards achieving Article 2.1c of the Paris Agreement also requires assessing the climate alignment of drivers influencing the climate alignment of finance. Such assessments depend on the credibility of climate-alignment assessments of financial flows and stocks.

5.2. Actions to better assess and drive climate alignment in finance

Different communities play different roles in informing and influencing assessments of and developments in the climate alignment of finance, including public policymakers and financial sector participants. Each community can take a range of actions to enhance alignment assessments, improve the availability and credibility of data, and more generally support efforts to redirect finance towards aligned activities that result in progress towards net zero GHG emissions and climate resilience in the real economy. This section highlights sets of three key actions based on the evidence compiled in this review.

Government ministries, notably economic, environmental, and financial ministries, can influence assessments and drivers of the climate alignment of finance through a wide set of policy tools. Based on this review, governments, ideally in coordination across ministries, could:

• Promote disclosure of key complementary metrics that is interoperable across jurisdictions and considers not only climate-related risks but also the alignment perspective. In doing so, policymakers need to reflect best-available climate science as well as disclosure and reporting capacities. Aside from real-economy policies such as economic or regulatory policies, disclosure policies are one of the main financial policy tools available to governments. Across jurisdictions, a range of voluntary and mandatory disclosure policies are in place. Their interoperability should be improved, while maintaining sufficient specificity to avoid greenwashing. Moreover, disclosure policies need to address financial institutions explicitly, as well as place more efforts on climate resilience-related disclosure to help build the evidence base for resilience alignment of finance.

• Support climate-alignment efforts through improved availability of granular input data and reference points that are both tangible and ambitious. Access to granular and accurate data is essential for scenario development and analysis in the financial sector. Policymakers can provide mechanisms to support the availability of geography and sector specific data, which is critical to inform the design of scenarios. For example, they can support improved data in national energy accounts, as well as, for providers of international development finance, help increase the capacities of developing countries in this area.

• Identify and revise policies incentivising and enabling domestic and international financial flows going to climate-misaligned activities. A range of real-economy policies remain in place that continue to support finance going to activities that are misaligned with climate goals. As the financial system and real economy are inherently linked, respective policy ecosystems affect each other. The effectiveness of climate-related financial system policies depends on the effectiveness of climate-related real-economy policies.

Financial system policymakers, such as central banks, and regulatory and supervisory authorities, focus on ensuring the stability, efficiency, integrity, and functioning of the financial system. Financial system policymakers may, depending on their mandates, develop tailored financial sector policies to address climate risks and, in some cases, address climate alignment of finance explicitly. Considering these varying mandates, central banks and regulatory and supervisory authorities could:

• Collect and, to the extent possible, make publicly available detailed data on finance exposed to activities misaligned with and contributing to climate goals. For this, financial policymakers could work together with national statistical offices to develop green finance statistics for jurisdictions, as per ongoing efforts under the System of National Accounts. Moreover, data collected for financial stress tests or other risk assessments can be highly relevant to climate policymakers in the context of alignment assessments and to inform their policymaking.

• Develop disclosure requirements of key complementary metrics for financial institutions. Climate-related disclosure by financial institutions is currently scarce, likely due to the relatively limited climate-related disclosure requirements for these institutions across jurisdictions globally. A key set of complementary metrics could provide insights into the climate risks and performance of financial institutions.

• Assess the effects of existing policies. Central banks and regulatory and supervisory authorities can further assess the effects on core financial and price stability objectives of integrating climate‑related considerations. Additionally, they could, to the extent consistent with their mandates, consider the impacts of their policies on climate goals.

Investors and financial institutions, including commercial banks, asset owners, and asset managers, can play a key role in shifting finance towards activities aligned with climate goals. While certain actions may be mandated or incentivised through policies, investors and financial institutions also have taken actions voluntarily. Building on this, they can take further actions to support assessments of climate- alignment in finance, and help drive the transition to net-zero emissions and climate resilience:

• Disclose on a broader set of metrics and asset classes in a comparable and transparent manner. Climate-alignment assessments of investors and financial institutions remain limited. These actors could voluntarily disclose aggregate volumes of financial flows or stocks in activities contributing to or undermining climate goals, as well as take part in climate-alignment assessments organised by government authorities in their jurisdiction(s).

• Assess impacts of climate-related actions and unintended consequences of existing practices. The evidence base on best practices in financial sector actions is still developing. Financial institutions could consider sharing information on their ex-post assessments of actions intended in influencing the climate alignment of their portfolios. Such assessments should prioritise assessing impacts in terms of GHG reductions and improved climate resilience in the real economy.

• Explore new ways to increase financial flows to activities contributing to climate goals by systematically embedding climate considerations in financial decision-making. Beyond targets, financial institutions need to scale up efforts to shift finance towards climate-aligned activities, by integrating climate considerations in their investment decision-making and actions more broadly, rather than only for specific “green” assets. They can also further share experiences with policymakers on existing and perceived barriers to scaling up climate-aligned finance and to financing the transition of misaligned activities.

Data, assessment, and rating providers provide information on which many actions and decisions are based, including for climate-alignment assessments of finance. They could further:

• Develop assessments across all asset classes and layers of finance to address blind spots. The development of new metrics and methodologies to assess both finance to activities contributing to or undermining climate goals can prioritise private equity, corporate loans, as well as assessments of financial flows and stocks at the level of financial institutions.

• Disclose methodological assumptions and calculation approaches behind available climate performance metrics and data. Metrics that inform climate-alignment assessments can be complex. Data and rating providers can rely on a range of methodological assumptions and approaches. While choices based on different perspectives can be valid, transparency on those choices is important to enable users to understand advantages and limitations of the data on which they rely, as well as their applicability for their use case.

• Include information on the scope and comparability of available climate-related metrics and data. Climate performance data used for climate-alignment assessments may be based on different scopes or disclosed through different reporting regimes. Data and rating providers could provide further metadata to provide clarity on these elements to users. This should for instance include information on the type of asset classes and share of total activities within a portfolio that are covered by the climate metric and assessment being put forward. Such information is critical to qualify results and avoid their misuse, as well as to reduce risks of greenwashing.

Climate science and policy researchers can play a crucial role in supporting environmental integrity in climate-alignment assessments of finance. This community encompasses climate scientists, climate scenario providers, climate policy academics, environmental economists, or sustainable finance researchers, as well as NGOs, which can contribute in different ways. Three key actions are to:

• Increase the transparency and comprehensiveness of disclosure of climate change scenario data. Scenarios are key inputs into climate-alignment assessments of finance. To ensure scenarios used in the financial sector are fit for purpose, further information could be shared by scenario providers. They could disclose more complete temperature outcome data, with peak and end-of-the-century temperatures associated with several likelihoods. Increased transparency of country-level and sectoral-level specificity in their models would also be helpful for uses in finance.

• Develop new approaches to credibly assess the climate alignment for financial asset classes and layers of finance that are insufficiently covered, including in relation to climate change resilience. Climate policy researchers can contribute to methodological developments where approaches are still maturing such as for corporate loans or private equity. They can also provide crucial independent and third part evaluation of the extent to which existing financial sector assessments and practices result in real economy impacts. This could include developing evidence to prioritise metrics and comparing methodological approaches and assumptions.

• Develop theoretical and empirical analysis on the impacts of climate-related policies and actions. While investors and financial institutions can proactively invest in climate solutions and the climate transition, their decisions ultimately depend on the credibility and effective implementation of ambitious climate policies. Such policies, in turn, need to be informed by improved evidence base, which researchers can contribute to developing such evidence, notably by using emerging best-available data on the evolution of financial flows and stocks aligned or misaligned with climate mitigation policy goals, and by conducting trial and pilot studies for climate resilience. Both empirical analysis where policies have been adopted and theoretical analysis on policies that could be adopted can help support building an effective policy landscape.