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Accounting for finance is key for climate mitigation pathways

Battiston, Stefano; Monasterolo, Irene; Riahi, Keywan; van Ruijven, Bas J (2021). Accounting for finance is key for climate mitigation pathways. Science, 372(6545):918-920.

Abstract

The financial system-the ecosystem of investors (e.g., banks, investment funds, insurance), markets, and instruments-is often considered to play an enabling role in climate mitigation pathways to a low-carbon transition (1). But it can also have a hampering role, e.g., if investors' perceptions of low risk from a missed transition and low opportunities from a transition fail to trigger a reallocation of capital into low-carbon investments. This increases the chance of the transition not occurring within the time window required to stabilize the climate or occurring in a disorderly fashion. Indeed investors, who can influence the realization of climate mitigation pathways, themselves rely on estimates of climate mitigation pathways from process-based integrated assessment models (IAMs) (2). And IAMs do not model the financial system or investors' decisions; thus, the feedback loop between the financial system and mitigation pathways is not taken into account, neither by the IAMs nor by the finance community. This limitation to our understanding of the dynamics and the feasibility of the low-carbon transition weakens the ability of IAMs to inform policy and investment decisions. We propose a framework to capture the interdependence between investors' perception of future climate risk, depending on the credibility of climate policies, and the allocation of investments in the economy.

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Health Sciences > Multidisciplinary
Scope:Discipline-based scholarship (basic research)
Language:English
Date:28 May 2021
Deposited On:04 Nov 2021 15:03
Last Modified:26 Oct 2024 01:38
Publisher:American Association for the Advancement of Science
ISSN:0036-8075
OA Status:Closed
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1126/science.abf3877
Official URL:https://www.science.org/doi/full/10.1126/science.abf3877
Other Identification Number:merlin-id:21077
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