The sustainable finance work focuses upon the financing dimensions of low carbon investment and transition, and the architecture of the financial system to identify points of intervention that climate policy can leverage to spur green finance.
What we do
Exploring the dynamic interplay of the financial, technology and policy elements in the investment system is crucial to better inform policy design. These elements will likely influence key actors, leverage existing interconnections and deploy instruments of public finance and policy effectively to accelerate the deployment of low-carbon technologies.
Current research on Sustainable Finance is supported by the LINKS project. This project will last for the next five years and will focus on the role of climate finance to meet the Paris climate goals (2019-2024). This research will promote essential guidance for a re-orientation of financial flows towards low-carbon and energy efficiency investments. Previous findings come from other two EU Horizon 2020 projects, namely GREEN-WIN and RIPPLES, both projects focus on the cross-cutting role of finance in overcoming barriers to climate action, with a particular emphasis on exploring avenues for integrating climate public policies with a mainstream finance framework and system. Below a short description of these projects and related websites.
- LINKS: Tracing climate investments
The LINKS project looks at aligning the broader financial system with low-carbon pathways of development is key to delivering the Paris Agreement. However, the financial system is increasingly built on the interdependencies and interconnections of investors that, at the aggregate level, are hard to predict and control. The 2008 financial crisis demonstrated how policy makers and financial regulators had great difficulty managing interconnected systems - due to inadequate visibility on the structure and monitoring of the systems.
When it comes to low-carbon assets, this interconnectedness between investors remains unexplored as climate policy analysis takes the existing structure of financial systems as given.
Understanding the anatomy and the architecture of the financial system as well as its evolution, is crucial to identifying points of intervention that climate policy can leverage to spur green finance.
‘Shifting the trillions’ to close the climate investment gap will require to exploit investors’ interactions and dynamics as their collective dynamics shape the actual flows in low-carbon technologies and drive the direction of technical change. The evolution of inter-connected structures will determine how the system could pool long-term financial assets to boost the low-carbon transition; how policy can seek to take advantages of non-linearity and tipping points in the system by influencing key actors and connections; and will determine the main winners and losers within the financial system itself.
The recently established LINKS programme, focuses on the role of the financial system in boosting the low-carbon transition and explores the market structures for low-carbon finance. It looks at the capital flows directed towards renewables and energy efficiency interventions using advanced computational techniques and extensive financial and investment data. The goal is to show how micro investors’ behaviour and interactions give rise to large scale investment trends.
Employing network analysis on long-term investment data will allows us to determine the structure and growth of the system based on the dynamism of its investors’ behaviour, their influence in the system and investment trends. Key features of this analysis are to determine:
- which network structures and investors lead to pathways of low-carbon deployment to reduce GHG emissions,
- how they evolve and self-organise over time in response to stimulus from external environment, and
- how their dynamics could boost more investment towards low-carbon projects, when supported by conducive policy.
- GREEN-WIN: Win-win solutions for green-growth strategies
GREEN-WIN focuses upon financing dimensions of low carbon investment and transition, and its interaction with technology and modelling. In particular, key analyses include:
- Map out key actors and financial instruments for climate finance in G20 countries with a focus on the US, China and selected European countries, including Germany, UK and Italy. In particular, this analysis explored i) key actors and their interests in providing climate finance ii) governance arrangements and financial instruments that affect finance flows; iii) possible misalignments between investors’ expectations and financial instruments available. This task included also analyses on the consistency between climate finance and mainstream finance versus climate goals;
- Analyse the reasons why institutional finance is not directing more substantial investment to low-carbon projects, and identify which policy packages can leverage more finance into low carbon assets. This analysis included interactions between government, private institutional finance and behavioural practices, and between pricing frameworks, market design and structural barriers;
- Explore several dimensions of economic analysis of transition to a low carbon economy, in particular concerning financial and technological considerations that need to be represented in the modelling work. This analysis focused on i) determinants and values of the weighted average cost of capital (WACC), and the micro-economic leverage effect of lower WACCs in lowering the cost of capital-intensive sources and thereby supporting investment; ii) technology spillover mechanisms used by the macroeconomic models; iii) multipliers in economic models and estimates of the associated macroeconomic leverage effects on employment intensities of investments in different technology/sector areas.
- RIPPLES: Implications for low-carbon pathways
RIPPLES focuses on the financial implications of NDC and 2°C-1.5°C trajectories, in terms of investment required across all sectors, cross-border capital flows, public budgets, and the financial system more broadly.
The analysis focuses on the role of the financial sector in facilitating the transition towards the Paris Agreement goals. It undertakes both quantitative and qualitative approaches in order to provide key recommendations to stakeholders and policymakers related to climate finance. The modelling analysis soft-links three different model types (TIAM-UCL, MEWA and ENGAGE) to consider investment requirement pathways and how the levels of investment are achieved through different financial instruments.
The qualitative analysis explores how the financial sector must be transformed to meet the long-term public interest and common goods. Accordingly, it requires making finance sustainable as a whole rather than adding a layer of “sustainable finance”.