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How Paris placed climate change at the heart of the financial system

Five months on from Paris, the sense of a new finance agenda is even more apparent​, writes Nick Robins

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(Image by NikolayF)

Last month, around 170 countries signed the Paris Climate Agreement, raising hopes that the world’s best chance of curbing climate change can be brought into force well ahead of 2020.

Getting countries to agree and sign the deal is one thing but mobilising the trillions of dollars need for the move to a prosperous, low-carbon and resilient economy is quite another. Yet, what was striking about the COP21 negotiations last December was the innovative way in which often tense question of financing this transition was addressed.

Mobilising capital lay at the heart of the Agreement with governments committing to, “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.

Importantly, the Agreement was part of a much wider package connecting the formal negotiations with actions by central banks, financial regulators and by financial institutions themselves.


For much of the past quarter century, the finance agenda in the UN climate negotiations boiled down to the transfer of funds from richer industrialised countries to poorer developing nations. In 2009, governments agreed a commitment to transfer US$100 billion (650 billion yuan) each year from industrialised to developing countries by 2020 from a variety of public and private sources.

After the failed talks in Copenhagen, a more expansive view of climate finance began to be taken, one that encompassed the global financial system, with its more than US$300 trillion (195 trillion yuan) in assets. This reflected the realisation that holding global warming below the accepted 2C target would require an unprecedented reallocation of capital.

Funds would also have to flow away from carbon-intensive assets, most notably coal, oil and gas. Extra investment would be required to protect communities from increasing natural hazards exacerbated by climate change.

This refocusing of the climate finance agenda from the billions to the trillions meant a broadening of the ambition for Paris. At the beginning of 2015, Laurent Fabius, France’s then foreign minister and president of the talks, made clear that “it is essential that the financial system as a whole takes climate risk into account, anticipates ambitious targets and integrates this into investment decisions”.

the vast majority of fossil fuel reserves are unburnable if the world was to meet the 2C target

A powerful dynamic was now set in motion between France’s actions to green its own financial system and its wider efforts to place climate factors as part of the overall architecture of global finance. The country’s new Energy Transition Law, for example, contained world-leading requirements for investors to report on their exposure to climate-related risks and the alignment of their portfolios with the 2C target.

The law also included a commitment to develop ‘stress tests’, which would assess how the lending books of banks could be impacted by climate change.

In April, France’s finance minister Michel Sapin also requested the Financial Stability Board (FSB) to examine how global warming could impact the global financial system. Set up in the wake of the 2008 credit crunch to restore integrity and credibility to global capital markets, the FSB had never before looked at the environmental agenda.

What made Sapin’s intervention significant is that the chair of the FSB is the Bank of England’s Governor Mark Carney. Carney had taken a lead on climate risks, suggesting in 2014 that the “vast majority of fossil fuel reserves are unburnable” if the world was to meet the 2C target.

Importantly, these steps within France are part of much wider changes in the international financial community, where leading institutions have started to draw down their holdings in fossil fuels, boost allocations to sustainable investments (such as green bonds) and push for greater climate accountability from corporations.

Behind these moves lay a surge in smart analytics from groups, such as Carbon Tracker, which had popularised the argument that investors risked considerable ‘stranded assets’ if business as usual investment in fossil fuel development continued. So by the time, the Paris climate summit got underway, the three key aspects of a new model of climate finance were coming together: the inner circle of the formal negotiations, the next ring of actions from financial system regulators and the outer circle of actions from the financial sector itself.

The multilayered Paris Agreement itself sent an important signal to financiers that net emissions from fossil fuels need to be brought down to zero well before the end of this century. The Agreement also set out steps to refocus the financial system so that it responds to the increasing impacts of climate change, particularly in developing countries. All major national and international financial institutions were asked to report on how their programmes incorporated climate-proofing measures.

In terms of hard cash, the road to Paris generated a growing chorus of public finance pledges from industrialised countries and the world’s development banks. In the end, the Paris Agreement shifted the way in which the iconic US$100 billion (650 billion yuan) target was seen – no longer as the ceiling, but now as a floor for international flows.

Looking just at the text of the Agreement, however, misses much of the significance of the overall Paris package. The second ring of action involved financial system rule-makers – and Paris became the location for the launch of a new industry-led FSB task force on climate disclosure, under the chairmanship of former New York mayor Michael Bloomberg, founder of the eponymous information business.

Nowhere in the Paris Agreement is there any mention of the new FSB task force or the role of financial regulation. But financial regulation was now accepted as a critical dimension of the overall solution set, something quite unthinkable a year earlier.

Paris shifted the way in which the iconic US$100 bn target was seen – no longer as the ceiling but as a floor for international flows

Beyond these first steps from the regulatory community lay the third circle of commitments from financial institutions themselves. Institutional investors with assets of more than US$24 trillion (156 trillion yuan) gave their backing to an ambitious deal in Paris, including the introduction of far-reaching carbon pricing. Twenty-eight billionaire investors – such as Bill Gates, Vinod Khosla, Jack Ma and George Soros – came together in the Breakthrough Energy Coalition to place private capital behind innovative clean technologies coming out of the public research pipeline.

A further US$11 trillion (71 trillion yuan) of investment capital pledged to support policies to grow the green bond market, which had emerged as one of the most promising ways of allocating capital for specific climate finance solutions. Going beyond this, the Portfolio Decarbonisation Coalition had mobilised an alliance of 25 investors committing to reduce the carbon footprint of US$600 billion (4 trillion yuan) of assets under management, more than six times the amount expected when the Coalition had been launched in September 2014.

Five months on from Paris, the sense of a new finance agenda is event more apparent both among financial policymakers and capital markets. China has placed the broader imperative of green finance at the heart of its 13th Five-Year Plan – and has also established a new Green Finance Study Group as part of its 2016 presidency of the G20.

Work is now underway in some countries to develop ‘green finance strategies’ to implement the Intended Nationally Determined Contributions (INDCs) that governments submitted before Paris. Here, the Green Infrastructure Investment Coalition is one expression of a new desire from both governments and investors to develop long-term pipelines of green assets that simultaneously support national ambitions and also meet investors’ risk: return requirements.

To deliver the transition, all these elements need to work together – markets that reallocate capital in advance of future shocks, public finance that pulls forward private capital and regulation that extends the notion of financial stability to incorporate the new imperatives of decarbonisation and resilience. In the end, Paris provides the foundations for a new financial framework that will shift the trillions.

A longer version of this article is available on the Inquiry's website

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