How have the expectations on climate action evolved for the financial sector?

The financial sector’s journey in addressing climate change has taken it from the Equator Principles approach of “do no harm,” to scaling-up green finance commitments, followed by scaling-down investments for coal power, to new expectations on enhanced climate risk disclosure policies. Most recently, several global banks, asset owners, and asset managers have committed to net-zero emissions targets or alignment with the Paris Climate Agreement goals. The commitments to “climate alignment” hold great promise as a durable, holistic framework for finance and climate. However, implementing the vision is challenging and requires a comprehensive approach.

The evolution of climate action in the financial sector

2003

Avoiding Adverse Impacts

See: The Equator Principles

2015 - 2017

Sustainable Finance Commitments and Improving Climate-Related Disclosure

See: The Paris Climate Agreement and The Task Force on Climate-Related Financial Disclosures

2019

Contributing to Society's Goals

See: The Principles for Responsible Banking

2020

Actively Driving Solutions

See: About the Center: Prospectus

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Barriers to Climate Alignment

The journey to climate alignment is a challenging one. Today, most mainstream financial institutions examine their portfolios to find they have a significantly higher carbon footprint than would be consistent with a pathway to zero emissions. Moving onto a climate-aligned pathway will require banks, insurers, asset managers, and asset owners to address five key barriers in partnership with corporate partners and governments. When armed with clear decarbonization pathways for the sectors in which they invest, robust data and methods, and effective coalitions of leading corporates and governments, financial institutions will have the tools they need to overcome these challenges.

center for climate alignment infographic modeling the path to climate-aligned finance

The Journey

Pathway

Which pathway should we take?

Methods

Which navigation tools should we use?

Data

How do we know if we're on track and where we need to go?

Competition

What if we act but others maintain business as usual?

Real Economy

How do we achieve < 2°C alignment when investing in a 4°C world?

Our Approach

Climate alignment is a powerful theory that could provide a definitive approach for the financial sector to drive long-term, multi-sector decarbonization. Implementation poses daunting challenges, especially for the large, complex mainstream financial institutions that account for the bulk of commercial financing for carbon-intensive industries today. RMI’s Center for Climate-Aligned Finance was established as an “engine room” to help financial institutions partner with their clients, industry leaders, and key buyers to develop practical and scalable solutions to the barriers to climate alignment.

RMI was centrally involved in the design and implementation of the world’s first climate alignment agreement driven by the financial sector within the shipping industry—the Poseidon Principles. Banks representing more than $150 billion of shipping finance have committed to align their lending portfolios for the shipping sector with a long-term decarbonization trajectory. Extending and replicating this sectoral approach in collaboration with leading climate initiatives focused on data, methodologies, and collective action in other areas of the global economy is central to the Center for Climate-Aligned Finance, as is shaping the pragmatic evolution and future of climate-aligned financial regulation.

1

Building Sectoral Agreements

Convene leaders from carbon-intensive industries, their customers, and financial institutions to establish climate alignment agreements, similar to the Poseidon Principles for the shipping sector, in sectors like power utilities, oil & gas, steel, aviation, and cement

2

Developing Global Frameworks

Develop global, standardized frameworks and definitions for climate alignment spanning the financial sector

3

Supporting Individual Firms

Support financial institutions in navigating the organizational challenge of transforming into a climate-aligned financial institution

4

Shaping the Global Conversation

Shape public discourse through media and strategic communications to clarify and legitimize the concept of climate alignment