Developing 2°C-Compatible Investment Criteria

This report studies the development of criteria for assessing the compatibility of financial investments with the international goal to limit global temperature increase to below 2°C above pre-industrial levels. The findings are intended as a starting point and a key input for a longer term process to develop consensus-based 2°C investing criteria. The focus here is placed on investments in projects and physical assets, in particular of development and climate finance organisations.

In order to limit global temperature increase to 2°C, global greenhouse gas (GHG) emissions will have to be reduced significantly, eventually to zero, during the course of this century. This requires shifting capital from high to low carbon investments as well as significant capital mobilisation for investments in 2°C- compatible infrastructure. Given the long lifetime of physical assets, and the urgency of decarbonisation over the coming decades, this needs to begin today.

Public financial institutions can play a prominent role in contributing to aligning investment flows with the 2°C limit, as well as in closing the current infrastructure investment gap, responding to their explicit or implicit climate mandates and leadership role in the finance sector.

The majority of international financial institutions integrate climate considerations into their finance decisions to some degree, and are familiar with different types of criteria, including positive and negative lists, qualitative and quantitative benchmarks, and the use of shadow carbon pricing. However, current approaches do not link to the 2°C limit. 2°C investment criteria are therefore needed to guide investors in this regard. Such criteria may also support other purposes, including an understanding of climate risks and improved reporting and accountability.

Developing 2°C investing criteria

In general, it is possible to develop 2°C investment criteria for individual projects on the basis of 2°C scenarios. Despite certain limitations, scenarios are a good starting point for developing criteria. In many areas, the different 2°C scenarios are sufficiently aligned to allow the identification of projects and technologies that are unambiguously 2°C-compatible, and those that are clearly misaligned. For many technologies, however, 2°C-compatibility depends on what happens at the sector-wide level, and a straightforward statement is not possible (Table 1).

In some cases, project-based criteria need to be combined with a broader systemic perspective. It is also important to consider country-specific contexts, including aspects of market maturity, development priorities and specific system characteristics of the technology in question.

The development of concrete and incontestable project- specific 2°C investment criteria is easier in some sectors than in others. The research showed that the transport sector – due to its systemic complexities and limited availability of sector-wide decarbonisation strategies in any part of the world – is furthest away from implementation-ready, clear 2°C guidance, compared to, for example, the electricity supply sector, where political consensus on sector decarbonisation already exists, and where systemic considerations are easier to break down to the individual project level.

An immediate move to full 2°C-compatibility is, in many cases, not possible. Hence a transition approach will be needed that allows for investments in transition technologies, with the aim to achieve 2°C compatibility over time. 2°C criteria and benchmarks will also need to be adjusted as new technologies and knowledge become available. [...]

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Acknowledgements:
This report was written for the German Federal Environment Agency (UBA) as part of the project titled “Klimagerechte Ausrichtung zukünftiger Investitionen – Entwicklung Zwei-Grad kompatibler Investitionskriterien” (project no. 48568). Funding for the design and printing of this report was kindly made available by the Gesellschaft für Internationale Zusammenarbeit (GIZ).
The contents of this publication do not necessarily reflect the official opinions of the German Federal Government and/or the German Federal Environment Agency (Umweltbundesamt).