The IPCC estimates that just under USD3 trillion of annual investments are needed to limit warming to 2°C. Article 2.1c of the Paris Agreement also calls for ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (United Nations, 2015). While there has been much progress in markets for green labelled financial products, the capital provision for non-pure play green activities that help emission reduction, but might not be the complete solution, such as hydrogen use or carbon capture and storage, is less obvious.
Showcasing the finance for these transition activities is important since for many of the carbon-intensive industrial sectors the most effective pathway towards zero carbon remains unclear, and subject to future technological developments. Yet investment policies and capital providers are key agents of change in this transition to a low-carbon economy.
This report from Imperial College Business School seeks to advance the concept of transition finance as a channel for systemic decarbonisation of the global economy. The report offers an updated definition of transition finance, reviews estimates of investment flows directed towards low-carbon activities, and highlights metrics that could be adopted by banks, asset managers, and other financial institutions to ensure integrity.
Existing estimates point to around USD800 billion of transition investment, which is most likely still a vast underestimate of the broader universe for transition finance. The report thus highlights the crucial role of transparent criteria and mandatory standards in managing transition funding for fossil-fuel producers and energy-intensive firms to deliver a future energy system.