Rethinking Climate Finance – Taking Action against Climate Change. Opportunities and Challenges for Financial Players

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Failure to act on climate-related risks can have potentially devastating consequences. Human lives could be affected by a long list of disastrous outcomes, such as more frequent natural catastrophes, health problems and an escalation in hunger and water crises as well as migration flows. Scientific evidence shows that less-developed countries would be the most affected. Furthermore, climate-related risks could also present significant economic losses in the financial system. Scenarios vary substantially depending on how and how fast we react to climate change and move towards a new low-carbon economy.

On the other hand, this necessary shift to a new low-carbon economy also presents important investment opportunities. Financial investments directed toward mitigating climate change effects and adapting to negative consequences are referred to as climate finance. Both the public and private sectors need to increase their climate finance investments to reach the climate targets outlined in the Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs). Therefore, a partnership between the public and private sectors that maximises synergies and mobilises capital, while setting clear impact targets toward climate change adaptation and mitigation, is crucial. Without it, achieving the Paris Agreement targets and SDGs is at risk.

Against this backdrop, BlueOrchard has collaborated with the FINEXUS Center for Financial Networks and Sustainability at the University of Zurich to analyse the climate finance market’s most recent dynamics. This paper builds on both organisations’ experience and knowledge in the asset-management industry, focussing on the relevant aspects and importance of climate finance for the different players in the asset-management value chain. It highlights the urgent need for private financial players to react to climate-related risks. Moreover, this paper attempts to show that reasonable commercial incentives exist for the private sector to increase its engagement in climate finance. A case study illustrates a scenario of a disorderly transition to a low-carbon economy with two hypothetical portfolios: a ‘brown’ bond portfolio and a ‘green’ bond portfolio with comparable average annual returns. After the disorderly transition, both portfolios are adversely impacted, but the impact is much stronger in the ‘brown’ portfolio. Climate finance can thus be viewed as an opportunity to develop portfolios that are more resilient to climate-related risks in the long term. 

To successfully unlock private capital at scale, climate finance must be developed further and investment vehicles must be customised to meet private investors’ needs and expectations. In order to better understand them and to identify the extent of their activities in climate finance, BlueOrchard conducted a survey among its private sector investors. The survey’s main findings show: i) the limited understanding and reporting of climate-related risks; ii) the moderate exposure of private investors to climate finance; iii) their strong interest in further expanding their sustainability portfolios and including climate finance; and iv) the need for public and private sector actors to work together in constructing an inclusive, forward-looking climate finance strategy.

Document Information

Document Type Report
Author Maria Teresa Zappia, Veronika Giusti Keller, Stefano Battiston
Year of Publication 2019
Publisher BlueOrchard
Number of Pages 36 pages
Region / Country Global /
Primary Language English (en)
Keywords climate finance, Insurance
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