Skip to content

Breaking the code

This report takes stock of the regulatory and policy efforts, market trends, and voluntary initiatives actively shaping the role of private financial institutions in supporting decarbonization of the real economy. It clarifies what is being asked of the financial sector today and what may be needed to ensure that the actions taken by the financial sector in support of decarbonization are effective and that expectations are realistic.

Key points

What is being asked of the financial sector today?
Financial institutions across the investment chain are being asked to be proactive in support of decarbonization rather than reactive to policy. For asset owners and banks (particularly commercial banks), climate alignment commitments—commitments to align portfolios with the temperature goals of the Paris Agreement—may become a norm. As asset owners push the implementation of these commitments down the investment chain and investor interest continues to shift toward environmental, social, and governance (ESG) issues, this shift will have significant implications for asset managers as well.

What does it look like in practice?

A climate alignment commitment is a commitment to assess alignment with climate targets and improve that alignment through product offerings, investment and financing decisions, and engagement. A meaningful climate alignment commitment is a commitment to influence the real economy. While not all financial institutions will make such commitments, the expectation that they should proactively support decarbonization will go beyond those who make them. Financial institutions’ influence is limited, but they still have the responsibility to proactively support decarbonization. They should be expected to develop ambitious, sophisticated, and transparent approaches to influencing the real economy that span all levers of influence.

What may be needed to ensure that actions taken by the financial sector in support of decarbonization are effective and that expectations are realistic?
• Harmonized alignment assessment methodologies—Harmonized methodologies for assessing the climate alignment of financial institutions across the financial sector are needed to ensure that progress can be reported in a comparable fashion while also acknowledging that both policy and the real economy are not aligned with climate targets. Methodologies must be pragmatic.
• Decarbonization pathways—A shared vision and understanding of real economy sector-specific decarbonization pathways, including quantitative emission benchmarks and transition pathways, must
inform the actions taken by financial institutions— regardless of type or whether they have a formal climate alignment commitment—in support of decarbonization. Pathways must be informed by industry.
• Collective action with individual leadership and accountability—Collective action initiatives can help establish assessment methodologies and decarbonization pathways more quickly and at lower cost. They reduce the risks to first movers and make actions more effective. However, leadership by and accountability of individual financial institutions are still important and necessary.
• Data—More and better-standardized data is needed to understand climate risk, the alignment of climate impacts with climate targets, and the decarbonization readiness of corporates, all of which are needed to fully mobilize the financial sector.