Improving the targeting of climate finance: The need for a tipping point in decision-making

We have left it too late to tackle the climate and environmental crises incrementally. Exponential change is now required to avoid the most devastating impacts of a warming planet. The global financial services industry has a vital role to play in supporting the journey to net-zero – not least through lending, insuring, and investing for a world that its clients would want to live in.

A growing threat is the approach of “Tipping Points” – thresholds which, once crossed, trigger irreversible changes such as the loss of the Amazon rainforest or the West Antarctic ice sheet. Some Tipping Point thresholds have already been reached, and others are coming closer as global warming continues. Once tipped into a new state, many of these systems will cause further warming – and they may interact to form cascades that could threaten the existence of human civilisations.

Improving the targeting of climate finance – and accelerating the pace of deployment – is critical for addressing climate change effectively. To do so, public and private decision-makers must fundamentally reassess their net-zero transition decision-making processes.

Policy: some of the greatest successes in the clean energy transition so far (such as dramatic cost reductions in wind and solar power and LED lighting) have come from policies to shape markets that were not those recommended by conventional economic analysis. To replicate these successes, public sector decision-makers need to think differently about the dynamics of change in our economies, such as considering all of the potential effects of a policy that might be important, even if a financial value cannot be applied to it. Despite the embedded reliance on standard cost-benefit analysis, it is incumbent upon governments and international organisations to accelerate the emergence and development of these new ‘risk-opportunity analysis’ approaches.

Industry: “Official” climate scenarios are increasingly seen as not ‘decision-useful’ for firm-level net-zero transition planning – including climate finance strategies. These one-size-fits-all regulatory scenarios do not capture non-linear dynamics of the transition on the one hand, and physical risks associated with a warming world on the other hand. Net-zero pledges are now widespread and credible transition plans will increasingly be expected. Whilst not traditionally in the wheelhouse of financial services firms (asset owners, asset managers, lenders and insurers), an alternative approach is to develop shorter-term bespoke scenarios that deliver a richer, systemic, analysis of future risks and opportunities through the application of plausible ‘real-world’ narratives. We are seeing this approach being bravely championed in the UK pension sector, in particular.

Commercial: today’s sustainable finance consulting marketplace is saturated with opaque, overly simplistic, commercial solutions. Whilst outliers do exist, the majority deliver outputs that feed the status quo of conventional net-zero decision-making. At the University of Exeter, we increasingly see frustrated financial services executives wanting to incorporate ‘the science’ into their transition plans with limited success due to the lack of decision-useful information. A higher standard is achievable; teams need to embrace complexity (including systems thinking), improve the quantification of uncertainty (instead of ‘single number’ solutions), and provide greater transparency (allowing their methodologies to be open to challenge).

Just as Tipping Points are part of the greatest threat we face – the same logic may also provide the solution. We have identified a variety of Positive Tipping Points in human societies that can propel rapid decarbonisation, in areas including power, transportation, agriculture, ecosystem regeneration, international politics and public opinion. This concept could also unlock the stalemate – the sense that there’s nothing we can do about climate change.

Operationalising positive tipping points will require leaders across society to embed a paradigm shift in decision-making to seek out and deliver these transformational opportunities. Like the negative tipping points in the Earth system, some Positive Tipping Points are already in motion. We must now seize the opportunity we have to accelerate the journey to a net zero and nature positive economy.

Our work alongside many other global partners is to ensure that these new methods of decision-making support climate finance in getting to the right places at the pace required – we will certainly need the full breadth of support from the financial services industry to achieve global goals on net zero and nature that ultimately enable communities around the world to thrive.