Climate Change in APEC
Assessing Risks, Preparing
Financial Markets, and
Mobilizing Institutional Investors
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ACKNOWLEDGEMENTS
Acknowledgements
Climate Change in APEC: Assessing Risks, Preparing Financial Markets, and Mobilizing Institutional
Investors was prepared by a team led by Miria Pigato and Fiona Elizabeth Stewart and comprised of
personnel from Vivid Economics, the Council on Economic Policies, and The Investment Integration
Project, including: Pablo Anton Arnal, William Burckart, Ethan McCormac, Jason Eis, Pierre Monnin, Mark
Westcott and Jessica Ziegler. The team worked under the overall guidance of Marcello Estevao and
Alfonso Garcia Mora.
The team benefited from comments from Benoit Blarel, Stephane Hallegatte, Morten Lykke Lauridsen,
Martin Raiser, Tristan Reed, Peer Stein, Anderson Caputo Silva, Jaqueline Morillo, and Andres Perez.
The team would like to thank Lorenzo Alfieri, Francesco Dottori, Daniel Lincke, Anthony Liu, Luana
Valentini for providing data and modelling support; and IFC colleagues Shari Friedman, Thomas Michael
Kerr and Kruskaia Sierra-Escalante for their inputs and suggestions.
FOREWORD
Foreword
Many private and public sector leaders agree on the urgent political and business imperative of
addressing climate change, and of sustainable development and sustainable investment more broadly.
While public resources are important to advance this process, mobilizing private investors is essential to
financing climate change mitigation and adaptation and to closing the United Nations Sustainable
Development Goals’ investment gap. A significant share of global investment capital is concentrated in
the hands of a relatively small number of institutional investors and banks. Engagement and alignment of
global policymakers with investors around areas of shared interest will be essential to ushering in the new
era of climate finance and of sustainable investment and development. Acting jointly, leaders of the
global investing community can be highly effective in reshaping markets – by allocating investments to,
and creating the enabling environment for, companies and projects that support their shared objectives.
The World Bank Group prepared this report, Climate Change in APEC: Assessing Risks, Preparing Financial
Markets, and Mobilizing Institutional Investors to inform policymakers, financial sector regulators, and
investors from across APEC member economies about the interconnected climate change challenges that
they face. This report aims to help these stakeholders better understand the human and economic risks
that climate change poses to the region and to provide them with a starting point for discussions about
opportunities for action.
CONTENTS
Executive Summary.......................................................................................................................................................i
Chapter 1. Macro-economic Impacts of Climate Change on APEC Member Economies ..................................... 1
1.1 Physical impacts of climate change........................................................................................................... 3
1.1.1 Average temperatures and number of extreme heat days ............................................................. 4
1.1.2 Sea level rise, precipitation and drought ......................................................................................... 6
1.2 Human impacts of climate change ...................................................................................................... 6
1.2.1 Air pollution ...................................................................................................................................... 6
1.2.2 Effects on health due to changes in extreme hot and cold days..................................................... 7
1.2.3 Coastal and river flood mortality ..................................................................................................... 8
1.2.4 Disease..............................................................................................................................................8
1.3 Economic impacts of climate change ........................................................................................................ 9
1.3.1 Modelling the economic impacts of climate change ..................................................................... 10
1.3.2 Economic impacts .......................................................................................................................... 11
1.4 Other impacts of climate change ............................................................................................................ 13
1.5 Mitigating climate change ....................................................................................................................... 14
1.5.1 Change in global emissions and expected global mean temperature increase ............................ 14
1.5.2 Costs of achieving the Paris Agreement goals ............................................................................... 15
1.5.3 Energy investments needs ............................................................................................................. 16
1.5.4 Adaptation investments ................................................................................................................. 17
1.6 Mitigating climate change: benefits and co-benefits ............................................................................. 18
1.6.1 Avoided physical impacts ............................................................................................................... 18
1.6.2 Health benefits ............................................................................................................................... 19
1.6.3 Revenues from carbon taxation ..................................................................................................... 20
1.6.4 Benefits of carbon taxation in the presence of an informal sector............................................... 21
1.6.5 Comparing economic costs and benefits of emissions reduction ................................................. 22
1.7 Summary .................................................................................................................................................. 23
Chapter 2. The Impacts of Climate Change on Financial Institutions ................................................................. 25
2.1 Climate change as financial risk .............................................................................................................. 25
2.1.1 From climate change to climate financial risk ............................................................................... 25
2.1.2 The impact of climate change on financial institutions: existing evidence ................................... 28
2.1.3 Climate change and financial institutions: what lies ahead?......................................................... 30
2.2 Financial regulators’ responses to climate risks ..................................................................................... 30
2.2.1 The NGFS recommendations ......................................................................................................... 30
2.2.2 The Bank of England: a leading example in developed economies............................................... 33
2.2.3 Chinese financial regulators: a comprehensive agenda ................................................................ 34
2.2.4 Options currently discussed by financial regulators ...................................................................... 36
CONTENTS
2.3 Green credit markets: an opportunity for financial institutions ............................................................. 38
2.3.1 The rapid growth of green credit markets..................................................................................... 38
2.3.2 Green credit and financial risks ...................................................................................................... 41
2.3.3 Fostering the development of green credit markets..................................................................... 41
2.4 Summary .................................................................................................................................................. 43
Chapter 3. Mobilizing Institutional Investors in APEC to Address Climate Change ............................................ 44
3.1 Trends in institutional investors’ contributions to climate finance in APEC........................................... 45
3.1.1 Existing efforts to manage climate risks ........................................................................................ 45
3.1.2 Contributions to climate finance ................................................................................................... 47
3.2 Increasing institutional investors’ contributions to climate finance in APEC ......................................... 49
3.2.1 Policy, regulatory, and market barriers ......................................................................................... 50
3.2.2 Policy solutions ............................................................................................................................... 55
3.2.3 Regulatory solutions ....................................................................................................................... 57
3.2.4 Market solutions ............................................................................................................................ 62
3.3 Creating a path forward: Lessons from Chile’s policy changes and regulatory guidance ...................... 68
Conclusion .............................................................................................................................................................. 70
Appendices
Appendix A. Methodological Assumptions and Additional Data Tables ....………………………………………………A.1
Appendix B. Trends in Global Climate Finance Over Time ....……………………………………………………..……………B.1
Boxes, Figures, and Tables
Box 1. Global Circulation Models ..................................................................................................................... 4
Box 2: Chinese financial authorities ............................................................................................................... 36
Box 3. Institutional investors in APEC that are among the 25 largest in the world (millions USD 2016) ..... 44
Box 4. NZ Super Fund’s Climate Strategy – a plan for managing climate risks and increasing contributions
to climate finance .................................................................................................................................... 48
Box 5. Plans to expand Viet Nam’s successful FIT ......................................................................................... 56
Box 6. Chinese banks and regulators: a model for climate risk management .............................................. 59
Box 7. Institutional investors using their influence to advocate for policy and regulatory reform .............. 61
Box 8. Raising and using blended finance for climate change mitigation and adaptation in action – Climate
Investor One and the Sarulla geothermal project (Indonesia) ............................................................... 63
Box 9. Active ownership to reduce emissions ............................................................................................... 66
Figure 1. Modelling framework........................................................................................................................ 1
Figure 2. Global emissions and Expected Global Mean Temperature increase under baseline scenario ...... 3
Figure 3. Country-level temperature change, baseline ................................................................................... 5
Figure 4. Impact of disease on labor productivity per °C of warming............................................................. 9
Figure 5. Economic losses in 2100 as share of GDP ...................................................................................... 10
Figure 6. Economic impacts under baseline scenario ................................................................................... 12
CONTENTS
Figure 7. Extra economic impacts under higher climate sensitivity, 2100 .................................................... 13
Figure 8. Change in global emissions and expected Global Mean Temperature increase ........................... 15
Figure 9. The cost of emissions reduction in 2050 are highest for exporters of fossil fuels ......................... 16
Figure 10. Additional annual investment in the energy system needed per year in 2050 in Paris scenario 17
Figure 11. Benefits of emissions reduction in avoided mortality from air pollution..................................... 19
Figure 12. Avoided mortality from extreme hot and cold days from Paris compatible policy compared to
baseline .................................................................................................................................................... 20
Figure 13. Predicted revenues from carbon tax in 2050 as share of GDP under emissions reduction
scenario ................................................................................................................................................... 21
Figure 14. Estimated increase in formal sector economy due to a carbon tax which reduces emissions by
25% .......................................................................................................................................................... 22
Figure 15. In 2100, benefits of lower temperatures are larger than the costs of emissions reduction in
most member economies ....................................................................................................................... 23
Figure 16. UK banks approach to climate financial risk ................................................................................. 33
Figure 17. Issuances of green bonds worldwide ........................................................................................... 39
Figure 18. Issuances of green bonds in South East Asia ................................................................................ 39
Figure 19. Issuances of green bonds by types of institutions ........................................................................ 38
Figure 20. Issuance of green loans worldwide .............................................................................................. 39
Figure 21. Growth in total PRI signatories over time, from APEC member economies and elsewhere ....... 45
Figure 22a. APEC member economies with 100+ PRI signatories, by type of signatory ............................... 45
Figure 22b. All other APEC member economies with PRI signatories, by type of signatory ......................... 45
Figure 23. Contributions to global climate finance over time, by source (billions)....................................... 47
Figure 24. Value of fossil fuel subsidies over time, worldwide (billions) ....................................................... 50
Figure 25. Co-financing mobilized for every $1 spent by multilateral DFIs for climate change mitigation
and adaptation, 2016-2018 ..................................................................................................................... 65
Table 1. The impact of climate change is better understood for some perils than for others .......................4
Table 2. Change in temperature related variables in baseline scenario ......................................................... 5
Table 3. Major co-benefits of climate action ................................................................................................. 18
Table 4. Pension fund and insurance corporation assets in select APEC member economies, 2018
(millions) .................................................................................................................................................. 45
Table 5. Sustainably-invested AUM in four major markets in APEC, 2014-2018 (billions) ........................... 47
Table 6. Summary of barriers to scaling-up institutional investors’ contributions to climate finance, and
possible solutions .................................................................................................................................... 49
Table 7. Value of fossil fuel subsidies over time, in select APEC member economies and worldwide
(millions USD) .......................................................................................................................................... 52
Table 8. Fiduciary obligations in select APEC member economies ............................................................... 53
Table 9. Carbon pricing mechanisms in APEC member economies .............................................................. 56
EXECUTIVE SUMMARY
Executive Summary
Climate change poses extreme risks to the Asia-Pacific Economic Cooperation (APEC) region. Without
increased action from governments, global temperatures are expected to rise by more than 3°C above
pre-industrial averages by 2100, with a 20% chance of warming more than 4°C. Today, 70% of global
natural disasters happen in the APEC region, the intensity and severity of which are expected to increase
with climate change. This is expected to include more days of extreme heat, more frequent droughts,
inundated coastal land and more frequent coastal and river flooding – all of which will have significant
human and economic costs.
Climate change and related policy responses pose substantial risks to financial systems in APEC member
economies and across the world. Given their intergenerational obligations and long-term investment
horizons, these risks are particularly troublesome for the many of the world’s largest institutional
investors that are based in the region. With leadership from regulators including central banks and
financial supervisors, financial markets across APEC can mobilize to manage the risks of climate change
and to capitalize on related investment opportunities. They can do so most effectively if policymakers
similarly mobilize to remove barriers to climate finance (i.e. fossil fuel subsidies) and use carbon pricing
and other policy mechanisms to level the investment playing field between fossil fuels and renewable
energy.
This report outlines the potential human and economic impacts of climate change on APEC member
economies and the benefits to mitigating these impacts. It then outlines the climate-related risks to
financial institutions and how financial system regulators can help institutions to manage these risks. It
concludes with a discussion of the policy, regulatory and market barriers to scaling-up institutional
investors’ contributions to climate finance and solutions to each. In doing so, this report aims to capitalize
on the unique and exciting opportunity provided by the 2019 APEC Investor Forum for policymakers,
financial sector regulators and investors from across APEC member economies to share insights on the
interconnected climate change challenges that they face and to provide a starting point for discussions
about opportunities for action.
Key considerations outlined in this report are as follows.
Climate change poses great risk to human life and economic progress in APEC member economies.
If they act now, APEC member economies can avoid its most severe consequences.
The impacts of unmitigated climate change on APEC member economies will potentially be catastrophic.
The expected increase in temperatures could reduce agricultural and labor productivity and cause
reductions in output across most sectors of the economy. Increased sea levels are expected to inundate
productive coastal land and increase the frequency and severity of coastal floods, and more frequent
extreme rainfall could increase the regularity and severity of river floods, causing destruction of capital
stock. Without adaptation measures, lower and middle-income economies in the APEC region —
including Indonesia, Thailand and Viet Nam — are likely to feel these impacts most severely. Across the
APEC region, losses are expected to equal 7.3% of GDP.
Beyond the economic impacts, climate change is expected to bring considerable human costs. The
resulting increased number of days with dangerously high heat levels could cause an estimated additional
350,000 deaths per year across the APEC region. Higher temperatures might increase the disease burden,
i
EXECUTIVE SUMMARY
and more frequent and intense coastal and river floods could cause displacement and mortality. In
addition, the ongoing combustion of carbon intensive fuels will continue to degrade air quality and cause
respiratory disease and premature mortality.
These estimates say nothing of what might happen if increases in global temperatures exceed 3°C or of
other potentially costly impacts of climate change. One extra degree of warming, a plausible outcome
given current policy, could double the economic losses caused by chronic climate change impacts. There
is also a risk of ‘tipping-points’ in the climate system, whereby small changes in climatic variables have
large impacts on others, leading to a “Hothouse Earth” pathway. Further, the scientific evidence base is
not yet able to quantify other important and likely economic impacts of climate change, including
increased migration and conflict and reduced biodiversity.
The necessary actions to reduce or mitigate these disastrous consequences can be undertaken
immediately by APEC member economies. While the problems may seem daunting, other of the
recommendations in this report provide a roadmap for APEC member economies to help slow the
harmful effects of climate change.
Investing in mitigating climate change (e.g. through carbon taxes) and adapting to its effects
would be cheaper for APEC member economies than inaction.
The average economic costs of reducing emissions to limit warming to below 2°C are estimated to be only
2.6% of GDP in 2050 and 3.4% of GDP in 2100 across APEC member economies. This is less than half of
the cost of the expected damage caused by the physical impacts of unabated climate change. Strict
climate policy could also save lives. Phasing out fossil fuels and reducing related air pollution could reduce
deaths by around 500,000 per year by 2050 across the APEC region. Limiting warming to below 2°C by
2100 could help to avoid 380,000 extreme-heat related deaths per year.
Carbon taxation, a key instrument of climate policy, could raise significant government revenue, which
could be used to reduce labor or other marginal tax rates. Introducing carbon taxes at a level sufficient to
achieve Paris goals is estimated to result in revenues averaging 0.6% of GDP across APEC countries. In
addition, carbon taxes can encourage reallocation of resources from the informal to the formal economy,
resulting in increases in GDP for countries with large informal sectors.
Enacting strict climate policies could create an additional $470 billion per year
in additional energy investment opportunities across APEC.
Implementing strict climate policy in line with the Paris Agreement goals would create an estimated
additional $470 billion per year in energy investment opportunities in APEC member economies.1 This
includes investments in energy efficiency, renewable energy generation and energy transmission and
distribution infrastructure. Opportunities to invest in climate-resilient infrastructure and other adaptation
measure could provide additional investment opportunities and generate benefits equal an estimated
four times their costs.
1
All $ in this report are USD unless otherwise noted.
ii
EXECUTIVE SUMMARY
Further, in order to achieve emissions consistent with the Paris Agreement, low-carbon investment needs
to overtake fossil fuel investment by around 2025. Unfortunately, this goal is unlikely to be met, as fossil
fuel subsidies have almost doubled since 2015 and very few countries have adopted carbon taxes. Making
the shift from fossil fuels towards low-carbon energy as soon as possible could help APEC member
economies to effectively mitigate the impacts of climate change while capitalizing on new energy
investment opportunities.
Climate risks are financial risks.
Financial regulators in APEC can support financial institutions in managing these risks.
Beyond its expected impact on GDP, climate change poses substantial risks to financial markets across
APEC member economies. To effectively manage these risks, financial institutions should treat climate
risks as pure financial risks, systematically integrate them into financial risk management frameworks and
take organizational steps to treat them with the same importance as other financial risks. These risks
include physical risks to supply chains, decreased worker productivity, operations, facilities and damage
to capital equipment caused by extreme weather events and rises in sea levels. They also include the
transition risks embedded in governments’ policy responses to climate change (e.g. new carbon pricing
schemes and emission standards) and related changes in financial markets (e.g. shifts in consumer
preferences to “green” products and increased competitiveness of low-carbon technology).
Research shows that financial markets do not adequately reflect climate risk. This underpricing of climate
risk could have huge implications as the effects of climate change become more severe. Given the
substantial interconnectedness of global financial institutions, climate change-related losses could spread
to institutions not directly exposed to climate risks and wreak havoc on broader financial systems.
Financial system regulators can play a vital role in ensuring that financial institutions across APEC member
economies comprehensively address the risks of climate change. This includes assessing the
preparedness of financial institutions to manage climate risks, setting related expectations and providing
needed technical support. Treating climate risk as financial risk requires financial institutions to adopt the
right quantitative tools to manage this risk and access needed climate risk data.
Green credit markets provide notable opportunities to reduce financial institutions’ exposure to climate
risks. Policymakers and financial systems can partner to expand these markets.
Financial systems across APEC member economies can continue to expand green credit markets,
including markets for green bonds and green loans. Green credit markets are an important component
for the financing of low-carbon, climate-resilient investments and provide financial institutions with
valuable tools for reducing their exposure to climate risks. Green bonds and green loans fund projects
and firms are the most aligned with low-carbon standards and are therefore less exposed than other
projects and firms to transition risk. Expanding green credit markets requires a combination of policy
leadership and market-based actions that focus on things like harmonizing definitions and guaranteeing
market integrity and credibility.
iii
EXECUTIVE SUMMARY
Institutional investors are particularly vulnerable to climate risks
and uniquely positioned to address them.
Institutional investors in APEC are responsible for ensuring the present and future solvency of pension,
insurance and sovereign wealth funds with more than $42 trillion in assets across the region and
representing the equivalent of more than 100% of GDP in some countries. They include more than two-
thirds of the largest 100 institutional investors in the world. Risks to their investment portfolios from
climate change threaten the retirement and insurance payments and savings of millions of people,
substantial portions of the savings of entire nations, and regional economic stability. The long-term
horizon of these investors not only makes them particularly vulnerable to climate risk, but it also uniquely
positions them to capitalize on things like the $470 billion in new annual investment opportunities that
could be generated by enactment of strict climate policy across the region.
Institutional investors in APEC can most effectively address climate risks and capitalize on climate change
investment opportunities with adequate support from policymakers, regulators and capital markets.
Enabling and supporting institutional investors to effectively manage the risks of climate change is
centrally important to the successful functioning of financial systems in APEC member economies.
Despite notable efforts by some, institutional investors across APEC do not appear to managing climate
risks in a systematic way or capitalizing on low-carbon investment opportunities, and for good reason:
fossil fuel subsidies disincentivize investments in renewable energy; regulatory frameworks do not
adequately encourage and support integration of climate risks into long-term investment management;
and institutional investors struggle to find climate finance products that align with their risk appetites and
return expectations.
A collection of policy, regulatory and market solutions can help support institutional investors’ climate
risk management and encourage their increased investment in climate solutions. First and foremost, this
includes eliminating fossil fuel subsidies and using carbon taxes and other policy mechanisms to level the
investment playing field between fossil fuels and renewable energy. It also includes mandating corporate
climate-related disclosures aligned with the recommendations from the Task Force on Climate-Related
Financial Disclosures and otherwise helping institutional investors build their capacity for climate risk
analyses; using innovative blended finance structures to attract institutional investor capital to climate
change mitigation and adaptation projects that they might otherwise forgo given associated risks;
connecting institutional investors to immediate opportunities to contribute to climate finance available in
most asset classes (e.g. green bonds, climate-focused indexes and sustainable Exchange-Traded Funds);
developing robust infrastructure pipelines and enhancing local capital markets.
It is primarily within the purview of governments and regulators to enact most of these reforms, but that
does not mean that institutional investors must sit on the sidelines and wait for action; rather they can
use their size and influence to advocate for requisite policy and regulatory action.
If combined and brought to scale, these recommended solutions provide a remarkable opportunity for
policymakers, regulators and institutional investors in APEC member economies to work together to save
lives, save money and protect trillions of dollars in pension, insurance and sovereign wealth savings from
the risks of climate change – all while capitalizing on the expected $470 billion per year in new energy
investment needs.
iv
CHAPTER 1: MACRO-ECONOMIC IMPACTS
Chapter 1.
Macro-economic Impacts of Climate Change on APEC Member Economies
Across the globe there is increasing understanding of the need to reduce emissions in order to mitigate
the most damaging physical effects of climate change. This increase is partially attributable to urgent calls
for action from the scientific community. The Intergovernmental Panel on Climate Change (IPCC)’s recent
report, “The Ocean and Cryosphere in a Changing Climate” outlines the projected risks for people and
ecosystems from changes to the ocean system caused by anthropogenic climate change. In its earlier
“Global Warming of 1.5°C” report, the IPCC highlighted the potential for large differences in climate
change impacts caused by small changes in global average temperatures (IPCC, 2018).
Simultaneously, there is a growing understanding of the wide-ranging impacts of climate change on the
economy. Researchers including McKibbin et al. (2017), for example, suggest that climate change and
climate policy could undermine the ability of policymakers to promote macroeconomic stability by
increasing the frequency of supply side shocks from climatic events (e.g. tropical storms or coastal
flooding) and by impacting price stability from carbon pricing, complicating monetary policy. Climate
change and climate policy could also impact financial stability by increasing the risk to assets from
extreme weather events or causing a rapid devaluation of assets.
This chapter estimates the economic and human impacts from climate change for APEC member
economies. It does so under a baseline “weak policy” scenario in which climate change is not abated, and
under a scenario where policy mitigates climate change, avoids climate related damages, and generates
economic and human co-benefits. These estimates draw on the latest scientific evidence and economic
literature and use state-of-the art models to assess potential impacts (see Figure 1). Recent evidence
suggests that the estimates presented in this report are conservative and might underestimate the
negative impacts from climate change (Schewe et al., 2019). Accordingly, there is a non-negligible risk
that the impacts of climate change on APEC member economies could be greater than the results
presented here. In addition, this report does not quantify the important impacts of climate change on
land systems, biodiversity, species loss and extinction.
Figure 1. Modelling framework
Source: Vivid Economics
1
CHAPTER 1: MACRO-ECONOMIC IMPACTS
This chapter also describes how climate policy can be used to achieve the goal of the Paris Agreement to
limit global warming to well below 2°C, identifies investment opportunities from the transition to a low-
carbon economy and outlines the primary benefits and co-benefits of climate policy. It draws on the
models identified above to estimate the physical, human and economic benefits of a reduction in
emissions to levels consistent with the Paris Agreement. Appendix A contains additional information
about the methods used to produce estimates in this chapter and additional data tables.
Baseline scenario
Future greenhouse gas emissions depend on the interaction between socioeconomic trends, technology
and climate policy. Socioeconomic trends (e.g. economic and population growth) impact the demand for
energy: higher growth and higher energy demand increase the difficulty of achieving aggressive
greenhouse gas reductions; lower growth and rapid technological progress in low carbon technologies
make achieving reduction targets relatively easier.
The baseline emissions scenario considered in this report is a “weak policy” scenario with a middle-of-the-
road socioeconomic pathway and medium technological progress. Figure 2 below depicts the future
trajectory of global carbon emissions under the baseline scenario and the increase in global temperatures
expected to result. The baseline emissions scenario is “weak policy” in the sense that it is consistent with
continuation of climate policy excluding announced policies under the Paris Agreement’s Nationally
Determined Contributions (NDCs).2 The combination of weak policy, reduced population growth and
medium technological progress results in a slowing of the rate of increase of annual emissions and a peak
in emissions peaking towards the end of the century.
By the end of the century, climate models suggest that the most likely outcome for global mean
temperatures under the baseline emissions scenario is an increase of more than 3°C compared to pre-
industrial times. Due to uncertainties regarding the response of the climate to emissions, there is
estimated to be a roughly 20% chance that temperatures might exceed 4°C by 2100 given this emissions
profile (Schellnhuber et al., 2012). Wagner and Weitzman (2015) calculate a 10% chance of long-term
warming exceeding 6°C with a similar emissions profile.
Shared Socioeconomic Pathway
This report draws on a Shared Socioeconomic Pathway (SSP) for projections of socioeconomic trends,
including population and economic growth. SSPs are based on narratives about broad socioeconomic and
technological trends and are used in analysis supporting the IPCC’s Sixth Assessment Report (due in
2020). The analysis in this report is based on SSP2, a middle of the road scenario described as follows:
“The world follows a path in which social, economic, and technological trends do not shift
markedly from historical patterns. Development and income growth proceeds unevenly, with
some countries making relatively good progress while others fall short of expectations. Global and
national institutions work toward but make slow progress in achieving sustainable development
goals. Environmental systems experience degradation, although there are some improvements
2 Thebaseline emissions scenario is defined by as RCP60/SSP2 in the RCP-SSP-SPA framework (van Dingenen et al., 2018).
Projected radiative forcing from the AIM/CGE model under the “Continuation of climate policy ambition prior to the
announcement of the NDCs, accounting for the effects of the Cancun Pledges” policy scenario and SSP2 assumptions is 6.11
W/m2 in 2100, compared to 6.0 under the RCP 6.0 scenario.
2
CHAPTER 1: MACRO-ECONOMIC IMPACTS
and overall the intensity of resource and energy use declines. Global population growth is
moderate and levels off in the second half of the century. Income inequality persists or improves
only slowly and challenges to reducing vulnerability to societal and environmental changes
remain.” (Riahi et al., 2017)
All models run in support of this report use population and growth projections consistent with this
narrative and displayed in Appendix A.
Figure 2. Global emissions and Expected Global Mean Temperature increase under baseline scenario
Note: Expected Global Mean Temperature increase relative to pre-industrial baseline. Baseline emissions scenario is defined
by SSP2/RCP6.0. Lighter shaded area shows 25-75th percentile of probabilistic estimates from the MAGICC climate
model. Darker shared area shows 17-83th percentile of probabilistic estimates.
Source: Fricko et al., 2017; Vivid Economics
1.1 Physical impacts of climate change
Increased atmospheric concentration of greenhouse gases will raise global temperatures and cause
changes in numerous other climatic variables, including those driving extreme weather events. Currently,
70% of global natural disasters happen in the APEC region, with an estimated $100 billion in related losses
annually and significant human costs (Emergency Preparedness Working Group, 2017). The intensity and
severity of such natural disasters is expected to increase with climate change, adding to the burden on
the APEC region.
The impact of climate change is better understood for some climatic variables than others. Table 1 shows
the scientific consensus of climate change impacts on a selection of important weather variables, drawing
on evidence from the Intergovernmental Panel on Climate Change (IPCC). While there is scientific
consensus about the impacts of climate change on temperatures, sea levels and precipitation, impacts on
drought, tropical cyclones and winter windstorms remain less certain.
3
CHAPTER 1: MACRO-ECONOMIC IMPACTS
Table 1. The impact of climate change is better understood for some perils than for others
Likelihood of further changes
Impact Region
by late 21st century
Warmer and/or more frequent hot days Virtually certain Over most land areas
Increased incidence and/or magnitude of
Very likely Global
extreme high sea level
Heavy precipitation events, increase in the Over most of the mid-
frequency, intensity, and/or amount of heavy Very likely latitude land masses and
precipitation over wet tropical regions
Increases in intensity and/or duration of drought Likely On a global scale
In the western North Pacific
Increase in intense tropical cyclone activity More likely than not
and North Atlantic
Source: IPCC (2013), Table SPM.1
This section draws on outputs from Global Circulation Models (GCMs) to describe the expected physical
impacts of climate change on APEC member economies from extreme heat, sea level rise, precipitation
and drought. These are important climatic variables that are expected to be impacted by climate change,
but other changes in weather and climate can be expected too. In all cases and in line with common
practice, results are presented based on the combined predictions of many different GCMs (see Box 1).
Different GCMs have different internal representations of the climate and its response to emissions,
causing uncertainty in projections of the future climate which increases over time. As such, impacts could
be significantly larger or smaller than those presented here.
Box 1. Global Circulation Models
Global Circulation Models are mathematical representations of the climate used by the international scientific
community to model future climates. They simulate the climate system through representations of energy
transfers, including models of the atmosphere, ocean, land and ice. They can be used to model the climatic
impact of greenhouse gas emissions by running simulations of climate under varying emissions trajectories. GCMs
vary in their representations of the climate system and as a result produce somewhat diverging simulations for
any given emission scenario. It is common practice to report the average of the outputs of multiple GCMs (“an
ensemble”) to provide a central estimate of climate change impacts. An overview and evaluation of the GCMs
used in the IPCC’s 6th Assessment Report is provided in Flato et al. (2013).
1.1.1 Average temperatures and number of extreme heat days
Across APEC member economies, an average warming of 2.5°C relative to 1986-2005 is expected by the
end of the century under the baseline scenario.3 Figure 1 and
Table 2 depict the expected increase in temperature for each APEC member economy. The changes in
annual average surface air temperatures are larger in more northerly countries. By the end of the
century, warming of over 4°C is expected in Canada and Russia. This potential for increased warming at
higher latitudes has been highlighted by other research, including the IPCC “Global Warming of 1.5°C”
report (IPCC, 2018). As a result of increased temperatures, there is expected to be a significant increase in
the number of days with dangerous heat (defined as more than 35°C) by 2100. This increase is most
severe for equatorial countries with high average temperatures today. In Singapore, the average number
of days with dangerous heat per year is projected to increase by 144 days by 2100. Impacts of climate
3 Globally, average temperatures 1986-2005 are estimated to be 0.61°C above their pre-industrial levels.
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change on temperature are less pronounced in 2050, where average temperatures are predicted to rise
by 1.3°C, with a more modest increase in the number of days with dangerous heat.
The country-level temperature changes presented here represent the expected outcome under the
baseline emissions scenario. However, the outcomes could be more extreme. Averaging across APEC
member economies, the range of temperature increases is 0.3°C to 2.8°C by 2050 and 0.9°C to 4.9°C by
2100, relative to 1986-2005 levels.
Figure 1. Country-level temperature change, baseline
Note: Relative to baseline period of 1986-2005, based on average of 16 Global Circulation Models.
Source: World Bank Climate Change Knowledge Portal, Vivid Economics
Table 2. Change in temperature related variables in baseline scenario
Note: Relative to baseline period of 1986-2005, based on average of 16 Global
Circulation Models
Source: World Bank Climate Portal, Vivid Economics
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1.1.2 Sea level rise, precipitation and drought
Alongside impacts on temperature, climate change is expected to cause higher sea levels, increased
intensity of extreme precipitation events and increased likelihood of drought. Rising sea levels are likely
to inundate low lying coastal land, rendering it economically unproductive, and increase the chance and
severity of coastal flood events, causing economic and human losses. More extreme rainfall is likely to
increase the severity of both river and surface water flooding, again causing economic damages and loss
to human life. Droughts are likely to reduce agricultural yields and cause stress to the urban water supply.
The impact of these changes on APEC member economies is expected to be significant, with the most
severe physical impacts likely to fall disproportionately on APEC members nearest the equator. Sea levels
are expected to rise by an average of 56cm across APEC countries over the course of the century, with an
increase of as much as 75cm expected around the Philippines. Extreme precipitation is expected to
increase in most APEC member economies in both 2050 and 2100, with the largest increases expected in
Thailand, Chinese Taipei and Papua New Guinea. The likelihood of severe drought is expected to increase
across all APEC member economies in both 2050 and 2100, which would reduce agricultural yields and
cause stress to the urban water supply. Notably, by 2100, there is a 45 percentage point increase in the
annual probability of severe drought in Chile and Mexico.
1.2 Human impacts of climate change
Significant human damages are expected from unabated climate change. Rising temperatures are likely to
increase the number of days with extreme heat, make fatal coastal and river floods more frequent and
increase the disease burden. In addition, the continued combustion of carbon intensive fuels is likely to
degrade air quality, causing respiratory related disease. Such impacts on human health have
consequences for economic output, as described in Section 1.3. In this section, mortality impacts are
reported as change in the annual number of deaths, while the impact of disease is quantified through its
expected impact on labor productivity.
1.2.1 Air pollution
In addition to the release of greenhouse gases, the combustion of fossil fuels releases pollutants that can
become suspended in air and negatively impact human health. The World Health Organisation (WHO)
estimates that 91% of the world’s population currently lives in areas where air quality exceeds WHO
guidelines, with 4.2 million deaths annually attributable to air pollution globally. This report assesses the
impact of pollutants most closely associated with negative human health impacts, particulate matter
(PM2.5) and ozone (O3). Health impacts from particulate matter include ischemic heart disease (IHD),
chronic obstructive pulmonary disease (COPD), stroke, lung cancer and acute lower respiratory airway
infections. Ozone is linked to increased incidence of respiratory disease.
This report uses the TM5-FASST model to assess the impacts of air pollution on human health.4 The TM5-
FASST model is a global air quality model capable of estimating the impact of air pollution on human
health for 56 regions, including for most APEC member economies (van Dingenen et al., 2018). The TM5-
FASST model can be used to model the impact of any emissions profile. For this report, pollutant
4 TheTM5-FASST model is only used to estimate human health damages from air pollution. The FASST model is not used to
assess the interaction between air pollutants and warming. Likely levels of warming under the baseline and policy scenarios are
assessed using GCMs.
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emissions consistent with the baseline and emissions reduction scenarios were extracted from Fujimori et
al. (2018), which provides spatially explicitly emissions data for 2005-2100 under combinations of SSPs
and emissions trajectories. The Fujimori et al. (2018) outputs were processed and used as inputs into the
TM5-FASST model. More methodological details are provided in Appendix A.
By mid-century, air pollution could cause 1.8 million deaths per year in the APEC region under the
baseline scenario. In relative terms, Russia, the Republic of Korea and China are expected to experience
the largest annual number of deaths from air pollution in 2050, experiencing more than 900 deaths per
million population per year. Member economy level results expressed in annual deaths per million
population can be found in Appendix A. Even under the baseline emissions scenario, the absolute number
of deaths from air pollution is expected to decline in the APEC region by 2100. This is largely driven by a
decline in population, particularly in China. However, some member economies, such as the United States
could experience an increase in the number of annual of deaths from air pollution from 2050 to 2100.
1.2.2 Effects on health due to changes in extreme hot and cold days
Extreme temperatures negatively affect human health and can lead to temperature related-excess
mortality. Typically, such impacts arise when temperatures fall below freezing or rise above 35°C.
Segments of the population with impaired health are particularly at risk. For example, the elderly and
people with cardiovascular or respiratory disease, diabetes or other pre-existing medical conditions are at
greater risk from extreme heat exposure than the rest of the population (Huang et al., 2011).
This report draws on the estimates of temperature-related excess mortality from Gasparrini et al. (2017)
to estimate the future impacts of extreme hot and cold days on human health. The results assume that
member economies do not undertake any adaptation actions to changing temperatures. In practice,
some adaptation is likely to occur, such as the purchase of air conditioning or changes to daily routines.
For example, Carleton et al. (2018) estimate that increasing incomes could result in a 68% decline in heat
related excess mortality globally for the 5-64 age category by 2100.
Changes in the number of extreme hot and cold days could lead to more than 350,000 deaths per year by
2100 compared to today. In 2050, the number of deaths is expected to be slightly lower than today,
driven by a reduction in the number of excess cold days. However, the net reduction in deaths from a
reduction of excess cold days by 2050 is quickly eclipsed by a substantial increase in the number of deaths
from excess heat by 2100. There is considerable regional variation between APEC member economies in
both 2050 and 2100. By 2050, Indonesia and Mexico are likely to experience an increase in deaths from
days with extreme heat, while there is a net reduction in deaths in China and Japan. This is driven by an
increase in the number of days with extreme heat in Indonesia and Mexico and a decline in the number of
days with extreme cold in China and Japan. By the end of the century, the number of days with extreme
heat increases further from 2050. In Mexico and Indonesia, an extra 100,000 deaths are expected per
year by 2100 respectively.
The net impact of temperature-related excess mortality could be larger if modelled declines in excess
cold mortality does not occur. The estimates presented above are the combined effect of changes in
mortality due to changes in the number of extremely hot and extremely cold days. As temperatures
increase, some of the increased mortality from extremely hot days is expected to be offset by a decline in
mortality from cold days. However, some recent literature has questioned the link between winter
temperatures and excess mortality (Ebi & Mills, 2013). If the reduction in mortality from extreme cold
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does not materialize, the impacts of climate change on mortality might be substantially larger, particularly
in APEC member economies at higher latitudes.
1.2.3 Coastal and river flood mortality
Temperature rise is expected to increase the frequency and intensity of coastal and river flooding, which
could cause small increases in mortality. Higher sea levels are likely to increase the frequency and
intensity of coastal floods (Hinkel et al., 2014). Warmer temperatures are expected to trap more moisture
in the atmosphere leading to more intense rainfall and an increase in the frequency and intensity of river
floods (Coffel, Horton, & de Sherbinin, 2018, Dottori et al., 2018). Across the APEC region today, annual
average mortality from flooding is estimated at 1,400 deaths a year from river flooding and 900 a year
from coastal flooding. Given these relatively low baseline mortality levels, absolute increases in mortality
from climate change are likely to be modest.
The health impacts from coastal and river flooding using the DIVA model (Hinkel & Klein, 2009) for coastal
floods and estimates from Dottori et al. (2018) for river floods. Under the baseline scenario, it is assumed
that no adaptation measures are undertaken. Adaptation measures, such as new or improved sea dikes
or levees, can reduce the risk of flooding to people and property. The adoption of better flood warning
systems, which could also reduce the risk to people, are also not considered here.
Across the APEC region, increased coastal flooding underline the baseline scenario could cause an
additional 5,000 deaths per year by 2100 compared to today. Mortality from river floods in the APEC
region is expected to increase modestly by around 300 deaths per year by 2050 and 500 deaths per year
by 2100. China is expected to experience the largest absolute increase in mortality from river flooding,
with deaths increasing by 130 per year by 2050. By 2100, Viet Nam, Thailand and the Philippines also
experience a sizeable increase in mortality from river floods.
1.2.4 Disease
Rising temperatures are likely to change the incidence of vector borne and hot and cold related diseases,
which could negatively impact labor productivity. Rising temperatures could increase the existing range
of mosquito borne diseases such as malaria and dengue fever and the prevalence of heat related
diseases. If untreated these diseases can increase the disease burden in the population. As well as
negative human impacts and increased spending on healthcare, this is likely to generate negative impacts
for labor productivity (Levi, Kjellstrom, & Baldasseroni, 2018).
This report uses estimates from Roson and Sartori (2016) to assess the disease related health impacts
from climate change. Roson and Sartori (2016) estimate the effect of increases in temperature on labor
productivity, assuming a linear damage function without medical advances or changes in behavior to
treat or avoid infections. They assess vector borne diseases, including malaria, dengue and
schistosomiasis, heat related diseases and diarrhea. However, the research acknowledges that the
impact of the changing incidence of disease from climate change is highly uncertain. In the future, new
types of medicine and technology could treat or even eliminate the risk of infection, mitigating potential
impacts. This section estimates the disease related health impacts in the absence of this possibility.
China, Hong Kong and Chinese Taipei are expected to experience the largest reductions in labor
productivity (0.5% per °C of warming) from climate change induced disease. Papua New Guinea,
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Singapore, Mexico and Chile are likely to experience moderate reductions in labor productivity of
around 0.25% per °C of warming while APEC member economies with temperate climates, such as
Canada, Japan, Republic of Korea and Russia, are likely to experience much more minor increases 0.06%
per °C of warming. Figure 4 depicts the estimates of the impact of climate change induced variation in
disease on labor productivity per °C of warming, from Roson and Sartori (2016).
Figure 4. Impact of disease on labor productivity per °C of warming
Source: Roson and Sartori (2016)
1.3 Economic impacts of climate change
Climate change is expected to cause global economic damages as higher temperatures reduce productive
capacity and increase the risk of damage to land, capital stock and people. Rising temperatures and
changing rainfall patterns are expected to reduce agricultural yields, while temperatures reduce labor
productivity and increase the level of heat related disease and mortality experienced by workers.
Increased sea levels can inundate productive coastal land and increase the damage from coastal floods.
More frequent extreme rainfall increases the severity of river floods, which can result in capital
destruction. Recent research has suggested the physical impacts of climate change might result in a net
global economic impact of 6.6% of GDP by the end of the century (Takakura et al., 2019). Economic
impacts will vary across countries depending on current and future temperatures, exposure to extreme
weather and economic structures.
The APEC region could experience long-term economic losses equivalent to 7.3% of GDP by 2100 due to
the physical impacts of climate change under the baseline scenario. The economic losses are expected to
fall most severely on lower middle-income APEC member economies located near the equator. Figure
presents the economic losses by member economy by 2100.
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Figure 5. Economic losses in 2100 as share of GDP
Source: Vivid Economics
1.3.1 Modelling the economic impacts of climate change
Climate change will cause economic losses both through long-term reductions in productive capacity and
through increased losses from more frequent extreme weather events. Increased temperatures directly
impact labor and agricultural productivity and the associated sea-level rises can inundate productive
coastal land. For this report, the impact of these ‘chronic’ climate change impacts on economic output
are integrated and modelled using GTAP-IAM, an integrated assessment model which permits climate and
trade interactions for 37 countries and 60 commodities groups, allowing for forward looking behavior.
The model encompasses the climate change impacts described below, with estimates for each APEC
member economy drawn from Roson and Sartori (2016). It is one of many models used within the
scientific literature to estimate climate change effects on the macroeconomy. The GTAP-IAM model
encompasses the climate change impacts described below, with estimates for each APEC member
economy drawn from Roson and Sartori (2016).
Higher average temperatures are expected to reduce labor productivity, particularly in the
manufacturing and agricultural sectors. There is a documented empirical relationship between local air
temperatures and labor productivity (Somanathan et al., 2018). In addition, as discussed in Section 1.2.4,
increased temperatures can increase the disease burden, making labor less productive. The economic
implications are likely to be largest in member economies with larger agricultural and manufacturing
sectors and those with higher baseline temperatures. Acclimatization and air conditioning might go some
way to reduce impacts, although the effectiveness of these measures is uncertain (Roson and Sartori,
2016)
Agricultural yields are sensitive to climatic variables including temperature, precipitation patterns and
drought. Agricultural production is likely to be negatively impacted in most APEC member-countries as a
result of climate change. The expected impact varies across crops and countries, with the expected effect
greatest for APEC economies nearest the equator. For example, wheat yields are expected to decline
nearly 20% in Malaysia, Viet Nam and the United States. However, these impacts could be larger or
smaller depending on the level of adaption by farmers, firms and organizations, the amount of
fertilization due to higher CO2 concentration and level of future water availability (Roson and Sartori,
2016).
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Higher average temperatures are virtually certain to cause rising sea levels, which could inundate low-
lying coastal lands. The macro-economic model integrates the effects of the reduction in available land
due to inundation from sea level rise. The most severe reductions in available land are expected in the
territorially small coastal economies of Singapore (7.7% of land lost) and Hong Kong (4.4% of land lost).
The impacts could be larger or smaller, with uncertainty in the response of polar ice sheets to climate
change (Horton et al., 2018)
In addition to chronic GDP impacts, temperature rise is expected to result in more frequent and severe
river and coastal floods, increasing average expected economic losses. Economic losses from coastal
flooding are modelled using the DIVA model, a research modelling framework for coastal systems that
assesses biophysical and socio-economic consequences of sea-level rise (Hinkel & Klein, 2009). The
economic damages from river flooding in terms of GDP are derived from data published in support of
Dottori et al (2018). More details on these models are provided in Appendix A.
1.3.2 Economic impacts
Across APEC, losses of 7.3% of GDP are expected under the baseline scenario by 2100, with developing
countries near the equator likely to experience the largest economic losses. Figure shows the combined
losses from chronic and acute climate change impacts for each APEC member economy in 2050 and
2100. Singapore, Thailand, Indonesia and Viet Nam could each experience losses of more than 20% of
GDP by 2100. Developed member economies located in higher latitudes, including Canada, the United
States, Republic of Korea, Australia and New Zealand are expected to see lower losses, of less than 5% of
GDP by 2100. However, although many of the countries with the largest losses are developing, there are
substantial impacts in the developed economies of Hong Kong and Singapore. There is considerable
variation across countries as to the source of losses and relative exposure to impacts of flooding. While
coastal flooding in Singapore and Hong Kong could result in losses of more than 15% of GDP, river
flooding is likely to cause the larger impacts in Papua New Guinea and Australia, with losses of 2% and
0.8% of GDP by 2100 respectively.
Economic impacts are less pronounced in 2050. Losses in 2050 follow a similar pattern of relative
intensity between APEC member economies. However, due to the more modest temperature increases
expected by 2050, no member economy experiences losses of more than 7.5% of GDP from the climate
change impacts modelled.
Economic impacts could be more severe in certain subnational locations. The results presented above are
estimates of average country-level impacts. However, there might be considerable variation in within
countries, caused by differential exposure to climate change risks. For example, in the United States, the
Gulf Coast region is expected to experience a greater increase in sea level rises than the Pacific Northwest
(Sweet et al., 2017), which can be expected to lead to more severe coastal flooding impacts. More
research is needed to identify how the severity of subnational impacts compare to the estimated impacts
at the economy-wide level presented above.
Estimated losses of 7.3% of GDP in the APEC region are consistent with much of the recent modelling
literature. For example, Kahn et al. (2019) estimate that a persistent increase of average global
temperature of 0.04°C per year would reduce GDP by 7.2% by 2100. Most of the existing climate change-
macroeconomy literature estimates the GDP effect of increases in average temperatures to be in the
range of a few percentage points of GDP (Kahn et al., 2019).
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Figure 6. Economic impacts under baseline scenario
Note: 2050 coastal flood costs with adaptation are unavailable for Papua New Guinea
Source: Vivid Economics
Despite this, there is a risk that the economic impacts of climate change under the baseline scenario
could be substantially higher than the macroeconomic impacts presented above. Burke, Hsiang & Miguel
(2015) estimate climate change could cause losses of 23% of GDP by 2100 under a worst-case emissions
scenario. Figure shows that an extra degree of warming, a plausible outcome of current climate policy,
could lead to a doubling of chronic impacts on GDP for most APEC member economies. In addition, there
is recent evidence to suggest that the kinds of models used for assessing the impact of climate change on
economic outcomes might still underestimate impacts (Schewe et al., 2019). Other studies have
suggested the risk of “tipping-points” in the climate system, whereby small changes in climatic variables
have large impacts on others, leading to a “Hothouse Earth” pathway (Steffen et al., 2018). For example,
small changes in the extent of Artic summer sea ice could amplify warming (Lenton et al., 2008). Because
of such concerns, the probability of a disastrous collapse of global welfare due to climate change is seen
by many as non-negligible (Weitzman, 2009).
Adaptation measures could substantially reduce negative economic impacts of climate change,
particularly from coastal flooding. The DIVA model used for generating estimates of losses from coastal
flooding also calculates the costs of building sea dikes to provide an optimal level of protection against
coastal flooding. Accounting for construction and maintenance costs, adaptation could limit increased
losses from coastal flooding from an average of 5% of GDP in the APEC region to less than 1% of GDP by
2100 for most member economies. Adaptation measures such as air-conditioning or introduction of more
temperature-resistant crops could reduce some of the other economic impacts of climate change too.
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Figure 7. Extra economic impacts under higher climate sensitivity, 2100
Note: Combined impact of climate change on agricultural productivity, labor productivity and available land
Source: Vivid Economics
1.4 Other impacts of climate change
The results presented above account for the impact of climate change on agricultural productivity, labor
productivity and land and capital stock, however, climate change could additionally impact or exacerbate
existing stresses in several other fragile human and ecological systems. Given the complexity and
potential for non-linearities in these systems, estimates of climate change impacts are uncertain.
However, recent literature and historical examples can shed light on direction and scope of possible
impacts across.
Lower agricultural yields can be expected to lead to higher food prices, which have historically increased
food insecurity and poverty in vulnerable regions. Globally, increased temperatures, more extreme
precipitation events and more droughts are expected to negatively impact agricultural yields. These
changes could be severe and increase food insecurity and poverty in vulnerable regions. In the past,
higher food prices have disproportionately affected lower income segments of the population. For
example, it is estimated that the 60% increase in food prices in 2008 pushed 105 million people into
poverty in low-income countries (World Bank, 2013). Variability of yields is also expected to increase
under climate change, particularly in tropical regions, which could experience in an increase in food
insecurity and hunger as crop unexpectedly fail (Challinor et al., 2014).
Climate change could have a significant impact on both internal and between country migration. Hauer et
al. (2016) assess the impact of sea-level rise on the potential for movement within the United States,
accounting for population growth. The study estimates that increased sea-levels could affect 13.1 million
people by 2100, which could lead to a significant internal migration. There are numerous historical
examples of environmental degradation in combination with depressed economic activity and extreme
weather events leading to large-scale resettling. For example, the 1930s drought in the Great Plains
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region of the United States, known as the “Dust Bowl,” led to significant migration, with some counties
experiencing population declines of 20% (Long & Siu, 2018).
Climate change might also increase social tensions and lead to conflict. Mach et al. (2019) assess the
current understanding between climate and conflict. Drawing on the judgements of experts from diverse
disciplines, they find consensus that climate has affected conflict within countries in the past and could in
the future. Negative economic shocks from climate change may fuel conflict in countries with fragile
social and political systems. Volatility in food prices and food shortages, which might increase with
climate change, have been found to trigger incidents of conflict (Brück & d’Errico, 2019).
Climate change could increase or perpetuate within and between country inequality. Diffenbaugh &
Burke (2019) find that global warming has already likely exacerbated global economic inequality. Lower
income groups are typically more exposed to the adverse effects of climate change, more susceptible to
the damage caused by climate change and less able to cope and recover from climate change induced
damages (Islam and Winkel, 2017).
Changes in climate, growth in human populations and changes in land use are likely to have a severe
impact on biodiversity. For example, Newbold (2018) estimates the impact of climate and land-use
change on the biodiversity of terrestrial vertebrates. By 2070 around 38% of these species could be lost.
The impact of climate change on complex ecosystems is likely to pose additional negative risks to
economic activity.
1.5 Mitigating climate change
In 2015, signatories to the Paris Agreement agreed to take action to limit global temperature increases to
“well below” 2°C and to pursue efforts to limit temperature increases to 1.5 °C relative to pre-industrial
temperatures. A wide range of macroeconomic and financial policies are available to help mitigate
impacts and achieve this target. These include carbon pricing, as well as fiscal and monetary policy
(Krogstrup & Oman, 2019).
Results show that the economic costs of limiting greenhouse gas emissions to levels consistent with the
Paris Agreement might be less than the losses expected from unabated climate change. The transition to
a low-carbon economy requires a reallocation of resources which can result in economy-wide costs.
However, if energy efficiency continues to improve in line with recent trends, the average economic costs
of reducing emissions across APEC members are expected to be only 2.6% of GDP in 2050 and 3.4% of
GDP in 2100. This is less than the expected damage caused by the physical impacts of unabated climate
change. Policy costs are expected to be lowest as a share of GDP in developed economies and highest in
energy exporting economies.
1.5.1 Change in global emissions and expected global mean temperature increase
Limiting the increase in global temperatures to well below 2°C requires a sustained reduction in emissions
from 2020 to the end of the century. Figure compares a carbon emissions trajectory compatible with the
Paris agreement to expected emissions under the baseline scenario. Annual emissions need to reduce
rapidly from 2020 and turn negative after 2070, based on the use of Negative Emissions Technologies
(NETs). In addition to reducing the quantity of greenhouses gases released into the atmosphere,
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emissions reduction is associated with a reduction in the emissions of pollutants, including those
damaging to human health.
Figure 8. Change in global emissions and expected Global Mean Temperature increase
Note: Global Mean Temperature increases are relative to pre-industrial baseline. Baseline emissions scenario is defined
by SSP2/RCP6.0. Emissions reduction scenario is defined by SSP2/RCP2.6. Lighter shaded area shows 25-75th
percentile of probabilistic estimates from the MAGICC climate model. Darker shared area shows 17-83th percentile
of probabilistic estimates.
Source: Fricko et al., 2017; Vivid Economics
1.5.2 Costs of achieving the Paris Agreement goals
Reducing emissions to a level compatible with the Paris Agreement is expected to cost only an average of
3.4% of GDP across APEC members by 2100. Reducing emissions to this level will have economic and
human benefits, which are outlined in Section 1.0. However, using more expensive energy sources also
has economic costs. If energy efficiency continues on its current trajectory, the economic costs of
achieving emissions reduction are moderate, particularly for developed APEC member economies. Across
the region, achieving emissions consistent with the Paris goals in 2050 costs 2.3% of GDP by 2050 (see
Figure for member economy results). This figure does not consider the avoided economic losses caused
by higher temperature, which are described in Section 1.0. The costs of achieving the Paris goals are
lowest in developed economies, less than 6% of 2050 GDP in equatorial economies, and highest in energy
exporting economies. Fossil fuel exporters Brunei and Russia could face policy costs of 11% and 6% of
2050 GDP respectively.
The economic costs of emissions reduction will depend on technological developments and demand-side
changes in energy demand. Policy costs will be higher if the current trajectory in energy efficiency does
not continue or if population growth is higher than modelled. In line with most Integrated Assessment
Models, the modelling assumes the presence of Negative Emissions Technology (NET) later in the
century. If NET fails to become economically viable additional costly decarbonization will be required in
‘hard-to-treat” sectors. However, behavioral changes, such as a reduction in meat consumption or travel,
could substantially reduce economic costs of emissions reduction (Mundaca, Ürge-Vorsatz, & Wilson,
2019). Costs will also be lower if costs of low carbon technologies, such as zero emissions vehicles and
low carbon heat, reduce at a greater rate than expected.
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Figure 9. The cost of emissions reduction in 2050 are highest for exporters of fossil fuels
Note: Figure shows cost of emissions reductions as a share of projected 2050 GDP
Source: Vivid Economics
1.5.3 Energy investments needs
By 2050, implementing Paris consistent policies is expected to require an additional $470 billion per year
in energy investment in the APEC region compared to baseline.5 This provides a significant opportunity
for investors. As well investment in the generation of renewable electricity and the production of low-
carbon fuels, there are also considerable investments required in electricity transmission and distribution
and storage. Figure shows the additional annual energy investment needs as a proportion of 2050 GDP
that is required in order to meet Paris targets in 2050, based on modelling in McCollum et al. (2018).6
Total energy investment needs across APEC countries are estimated to be $1.8 trillion per year in 2050,
approximately 1.4% of GDP on average. Around 90% of the additional investment is needed in China, the
United States, Indonesia and Japan. The United States and China require an addition $220 billion and
$160 billion in energy investment per year by 2050 respectively to achieve Paris consistent climate policy.
This additional energy investment is driven in part by the need to expand transmission and distribution
infrastructure to accommodate the electrification of currently unelectrified end uses. Fossil fuel
exporters, such as Russia, could experience a decline in total energy investment needs as investment in
hydrocarbon extraction declines.
5A discussion of infrastructure investment needs in a range of sectors is provided by Rozenberg and Fay (2019). The estimates
presented in this sub-section result from global-level modelling, which is unable to provide a detailed sectoral breakdown of
investment requirements.
6 McCollum et al. (2018) estimates an additional $320 billion in annual energy investment in needed globally between 2015 and
2030 to limit warming to below 2°C. This is comparable to the estimate from the New Climate Economy, which estimates an
additional $270 billion in energy investment is needed over this period.
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Figure 10. Additional annual investment in the energy system needed per year in 2050 in Paris scenario
Source: Vivid Economics, based on McCollum et al. (2018)
Although reducing emissions requires only a modest increase in total energy investment by 2050, a
substantial reallocation of the energy investment portfolio is necessary (McCollum et al., 2018). Globally,
it is estimated that low-carbon investments need to overtake fossil investments by around 2025 in order
to limit warming to 2°C or 1.5°C (McCollum et al, 2018). By 2050, the share of low carbon investment
needs to increase to around 80% of total energy investment. Non-bioenergy renewable investment needs
to nearly double, energy efficiency investments need to more than double and electricity system
transmission and distribution investments need to increase by almost 50%.
Energy investment needs are uncertain, and the cost of decarbonization will depend on how climate
policies are designed. For example, changes in the path of energy efficiency improvements or the cost of
low carbon technologies could increase or decrease the quantity of energy investment needed. The
estimates presented above estimate energy investment needs for a “middle of the road” scenario of
population and economic growth. Increases in either population or economic growth could increase
energy demand and energy investment needs. There is also uncertainty in the modelling of future energy
investment needs. The estimates shown in Figure above represent the average of six Integrated
Assessment Models. Individual models produce varying global estimates of global additional energy
investment needs, based on assumptions around the capital cost of low-carbon technologies, energy
efficiency improvements and demand management, and the extent to which the transition results in
stranded assets. As a result, some models suggest lower investment requirements in the climate change
mitigation scenario compared to baseline (Rozenberg and Fay, 2019).
1.5.4 Adaptation investments
In addition to low carbon energy, there is an opportunity to invest in climate-resilient infrastructure to
improve adaptation and avoid further losses. The Global Commission on Adaptation estimates that $1
trillion of investment is needed globally between 2020 and 2030 to make infrastructure more climate
resilient (Hallegatte et al., 2019). Benefits of such investments are estimated to be four times the costs.
The Commission estimates that upgrading infrastructure to be more climate resilient typically only adds
around 3% to upfront costs. Yet, climate-resilient infrastructure pays a triple dividend by avoiding losses,
reducing risks to existing infrastructure and by safeguarding non-market benefits. For example,
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investments in mangrove forest preservation and restoration can generate benefits that are 10 times the
cost once avoided economic and mortality losses from coastal flooding and non-market benefits
associated with fisheries and forestry are considered.
1.6 Mitigating climate change: benefits and co-benefits
Increased ambition of climate policy could mitigate the direct economic losses due to climate change and
bring a range of other significant benefits. By 2050, improved air quality resulting from a transition to a
low-carbon economy might reduce deaths by around 500,000 per year across the APEC region. By 2100,
limiting warming to below 2°C is expected to reduce annual deaths related to extreme temperatures by
380,000 deaths per year. Revenues from carbon taxation are expected to be significant and enable
government to reduce labor and other tax rates. Carbon taxation can also encourage the reallocation of
economic resources from the informal to the formal sector, increasing government revenues and GDP.
Reducing emissions to levels compatible with the Paris Agreement has both primary benefits (the avoided
physical impacts and resulting economic losses) and co-benefits (the secondary impacts of climate policy),
outlined in Table 3 and described below.
Table 3. Major co-benefits of climate action
Included in
Benefits and co-benefit
analysis
Avoiding economic losses from climate change X
Avoiding damages to human health from climate change X
Reduced damages to health by air pollution X
Increased labor productivity linked to reduced air pollution exposure -
Increased ecosystem service provisions and enjoyment of environmental amenities -
Revenue-recycling effect: environmental taxes generate revenues that can be recycled
X
through cuts in pre-existing marginal tax rates
Potential for 'green jobs' -
Agricultural productivity increases from better soil carbon and reduced ground-level ozone -
Decrease in informal-sector activity and increase in formal sector activity X
Increased biodiversity -
Source: Hamilton et al. (2017), Vivid Economics
1.6.1 Avoided physical impacts
Fulfilling the Paris Agreement is expected to limit physical impacts of climate change, including the
number of days with dangerous heat, sea level rise, extreme precipitation events and the likelihood of
drought. Differences in climatic conditions between the baseline and the Paris-compatible scenario are
much more significant in 2100 compared to 2050. In 2100, limiting global warming to below 2°C could
reduce the number of days with extreme heat by 50 or more days in Brunei, Hong Kong, Indonesia,
Malaysia, the Philippines, Thailand, Singapore and Viet Nam by 2100. The difference in sea level rise is
more modest between the two scenarios, since sea levels react with significant lag to emissions and
temperature rise. Limiting global warming to below 2°C can also significantly reduce impacts of global
warming on extreme rainfall patterns and drought. For example, limiting climate change is expected to
reduce the annual probability of severe drought by 25 percentage points in Chile.
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1.6.2 Health benefits
Improvements in air quality resulting from a reduction in emissions could avoid 500,000 deaths per year
by 2050 across the APEC region. Figure shows the expected potential benefits from reduced air pollution
across member economies in both 2050 and 2100. In absolute terms the benefits are largest in China,
where 390,000 deaths are expected to be avoided in 2050. Avoided deaths are lower in 2100, since here
technological progress and declining populations are expected to lead to a significant reduction in
consumption of polluting energy sources even under the baseline scenario. The findings are consistent
with prior studies that have identified reductions in the health damages from air pollution as the largest
co-benefit from climate policy (Hamilton, Brahmbhatt, & Liu, 2017). Nonetheless, deaths from air
pollution are not expected to be eliminated completely, since some fossil fuel consumption is expected to
continue and natural air particulate matter, such as fine dust particles, will remain in the atmosphere.
Limiting temperature increases could avoid nearly 400,000 deaths per year caused by extreme
temperatures by 2100. Figure presents the benefits from Paris compatible policy and highlights member
economies that could experience the greatest potential benefits. Mexico and Indonesia could accrue the
largest benefits from Paris-compatible policy. The benefits of action to reduce global warming on deaths
from extreme temperatures are significantly greater in 2100 than in 2050. A reduction in the number of
extremely cold days is expected in the middle of the century, which reduces some mortality from extreme
cold. However, by the end of the century, this positive effect of warming is eclipsed by an expected
substantial increase in the number of deaths from excess heat.
Figure 11. Benefits of emissions reduction in avoided mortality from air pollution
Source: Vivid Economics
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CHAPTER 1: MACRO-ECONOMIC IMPACTS
Figure 12. Avoided mortality from extreme hot and cold days
from Paris compatible policy compared to baseline
Source: Vivid Economics
The direct health benefits of avoiding increased coastal and river flooding are modest compared to the
human health benefits from reduced air pollution and fewer days of extreme heat. Limiting global
temperature increase to less than 2°C might reduce coastal flood mortality by around 2,000 deaths per
year across APEC member economies. Additional figures in Appendix A show the direct benefits from
Paris compatible policy relative to baseline for the APEC region and the member economies that could
benefit most from policy. Across the APEC region, projections suggest that around 700 deaths per year
from river flooding might be avoided if climate change is limited.
1.6.3 Revenues from carbon taxation
Enacting a carbon tax could result in significant revenues for central governments by 2050. Carbon taxes
are a key potential policy instrument to reduce greenhouse gas emissions. Revenues from carbon
taxation can be used to reduce labor or other taxes or for climate mitigation, pursuit of other
development objectives or debt reduction (World Bank, 2019). Currently, national carbon taxes are
implemented in the Canadian, Chilean, Mexican and Singaporean APEC member economies, although at
rates below those required to reduce emissions to levels compatible with the Paris agreement (World
Bank Carbon Pricing Dashboard). Figure 3 shows projected revenues as a share of 2050 GDP for each
member economy if policies to achieve Paris compatible emissions reductions are put in place, based on
modelling with GTAP-IAM.7 Projected revenues from carbon taxes are typically higher in more developed
economies due to higher emissions in these countries, though actual revenues depend on the carbon
intensity of a specific economy and the cost of available low carbon options. GTAP-IAM includes a stylized
7 Themodel solves for the necessary carbon tax rate in order for each member economy to achieve emissions reductions
consistent with a below 2°C pathway. Revenues from carbon taxation are therefore endogenous to the model. The model
assumes that energy efficiency continues to improve in line with recent trends. If improvements in energy efficiency are slower
than assumed, a higher carbon tax will be required in order to achieve the same emissions profile, leading to higher revenues.
Emissions trade between countries is not modelled, so the modelled carbon tax varies across member economies. The range of
modelled carbon taxes in 2050 is $16 to $174 USD.
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carbon price. In practice, the price design of carbon taxes should consider sustainable revenue objectives
and equality considerations.
In addition to raising revenue, carbon taxes and other carbon pricing mechanisms can otherwise help
increase investment in renewable energy (discussed in chapter 3).
Figure 13. Predicted revenues from carbon tax in 2050 as share of GDP
under emissions reduction scenario
Source: Vivid Economics
1.6.4 Benefits of carbon taxation in the presence of an informal sector
Carbon taxation can lead to a reallocation of economic activity from the informal to the formal economy,
a major benefit of carbon policy for many APEC member economies. Most economic models expect the
imposition of a carbon tax to lead to reductions in economic output due to the effective increase in the
cost of energy. However, many APEC member economies have large informal sectors, something that
these models fail to consider.
Taxing emissions can lead to a reallocation of economic activity from the informal to the formal sector
(Bento et al., 2018). There are two channels through which this happens. Firstly, informal firms indirectly
pay carbon taxes through purchases of formal energy commodities. Secondly, revenues from a carbon tax
enable reduction of labor taxation, making the formal sector relatively more attractive, encouraging a
transfer of resources away from the informal sector. Where the informal sector is large enough, imposing
a carbon tax can result in an increase in the size of the formal economy, since these channels can
dominate any negative effect from the imposition of a carbon tax.
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CHAPTER 1: MACRO-ECONOMIC IMPACTS
Figure shows that imposing a carbon tax might cause increases in formal sector activity in most APEC
member economies. These results are based on a model of the impact of carbon pricing in the presence
of both informal and formal sectors presented in Bento et al. (2018). The model has been calibrated
individually for each APEC member economy using data from the Global Trade Analysis Project. A full
model description is provided in Appendix A. The figure shows the implications of the imposition of a
carbon tax which reduces emissions by 25% within each APEC member economy. For all countries apart
from the USA (which has the smallest informal sector), imposing a tax on emissions within the model
causes a positive increase in GDP. Russia and Thailand, which both have large informal economies, see
sizeable increases in the formal economy of 4%.
Figure 14. Estimated increase in formal sector economy
due to a carbon tax which reduces emissions by 25%
Source: Vivid Economics
1.6.5 Comparing economic costs and benefits of emissions reduction
The direct economic costs and benefits of emissions reductions are compared assuming global action to
reduce emissions. If emissions reductions are not coordinated, a member economy could experience
both the costs of emissions reduction and the economic costs associated with higher temperatures
described in Section 1.4, though such a member economy will nonetheless likely benefit from the air
pollution health co-benefits described above. The cost and benefit comparison examines the economic
benefits from avoiding the physical damages described in Section 1.3.2 with the costs described in
Section 1.5.2. The comparison does not account for the benefits of carbon taxation in terms of reducing
informal sector activity, for reduced mortality from air pollution and the other co-benefits already
identified as outside the scope of this analysis in Table 3.
By 2100 the direct economic benefits of mitigating climate change are greater than the costs of emission
reductions required to do so in most APEC countries. Achieving Paris-compatible emissions is expected to
cost an average of only 3.4% of GDP across APEC member economies, with the costs lowest in developed
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economies and highest in energy exporting economies. In 2050, the economic costs of emissions
reductions are generally larger than the economic losses caused by unabated climate change. However,
by 2100, the economic benefits of lower temperatures are larger than the costs of emissions reduction in
most APEC member economies. In Singapore, benefits from avoided climate change as a share of GDP are
12 percentage points higher than costs, with economic costs significantly higher than benefits only in
Mexico, Russia and Brunei Darussalem.
Figure sets out the results at the member economy level.
Figure 15. In 2100, benefits of lower temperatures are larger than the costs of emissions reduction
in most member economies
Note: Chart shows the combined economic costs and benefits (through reduced temperatures) of achieving
emissions compatible with Paris goals, with no adaptation. Numbers above zero indicate that the benefits are
larger than the costs.
Source: Vivid Economics
1.7 Summary
Climate change poses severe human life and economic consequences for APEC member economies.
Temperature increases of more than 3oC over preindustrial levels could generate economic losses
equivalent to an average of 7.3% of GDP by 2100, with lower middle-income member economies located
near the equator expected to feel these effects most acutely.
Yet there are many estimated benefits for APEC member economies to limiting global warming to well
below 2°C in line with the Paris Agreement goals and to limiting the frequency and intensity of days of
extreme heat and natural disasters. Beyond reducing deaths across the region by an estimated 500,000
per year by 2050, preventing extreme climate change could also save money. In fact, the costs of
transitioning to a low-carbon economy is estimated to be the equivalent of only 2.6% of GDP in 2050 and
3.4% of GDP in 2100, lower than the economic losses associated with maintaining the status quo. Strict
climate policy could also generate as much as $470 billion in new energy investment opportunities across
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the region per year by 2050. Further, carbon taxes could raise revenues by an average of 0.6% of GDP
across APEC member economies by 2050.
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
Chapter 2.
The Impacts of Climate Change on Financial Institutions
Last January, Pacific Gas and Electric Company (PG&E), California’s largest utility, filed for bankruptcy,
citing liabilities of $30 billion or more from wildfires. The Wall Street Journal dubbed this case “the first
climate-change bankruptcy” and warned that this failure will not be the last.8 Financial regulators,
including the Bank of England’s Governor Mark Carney, also sounded the alarm and recently predicted
that “companies that don’t adapt [to climate change]—including companies in the financial system—will
go bankrupt without question.” But the central banker also expects “great fortunes [to be] made along
this path aligned with what society wants.”9
These two examples illustrate the profound transformation that is taking place in the perception of
climate change inside financial institutions and financial regulators. “Climate change is a source of
financial risk” is the message conveyed by more than 40 central banks and financial regulators grouped
into the Central Banks and Supervisors Network for Greening the Financial System. But as the members of
this network and many others underline, the massive amounts of capital and the new financial products
required to fund the transition to a low-carbon economy ($470 billion in annual new energy investment
needs by 2050 in APEC member economies alone), also constitute an opportunity for financial
institutions. Everybody agrees on one conclusion: climate change will profoundly transform global
economies and financial institutions must be ready to face the costs that it will generate, as well as seize
the business opportunities that it will create.
This chapter describes the financial risks of climate change, discusses the regulatory initiatives that are
currently on the table regarding climate financial risk management, and presents the recent
developments in green credit markets, of which growth represents an opportunity for financial
institutions. It solely focuses on the financial risks stemming from climate change for financial institutions
and does not address the issue of the impact of financial institutions’ capital allocation decisions on
climate change (i.e., their alignment with the transition to a low-carbon economy). Similarly, it describes
the measures and policies that can mitigate these risks, without discussing their alignment with the
transition. However, measures and policies that aim to reduce financial institutions’ exposure to
transition risks are generally also aligned with the transition – because the economic activities that are
the most exposed to transition risks are, by definition, the ones that are the less aligned with climate
goals.
2.1 Climate change as financial risk
“Climate-related risks are a source of financial risk”: the opening sentence of the first comprehensive
report by the Central Banks and Supervisors Network for Greening the Financial System (NGFS, 2019) is a
wake-up call for most investors. The message conveyed by more than 40 central banks and supervisors is
crystal clear: climate change and the transition to a low-carbon economy that is necessary to mitigate it
will have some consequences for investors’ portfolios.
2.1.1 From climate change to climate financial risk
8 “PG&E: The First Climate-Change Bankruptcy, Probably Not the Last”, Wall Street Journal, January 18, 2019.
9 “BoE's Carney warns of bankruptcy for firms that ignore climate change”, Reuters, July 31, 2019.
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Climate-related costs impact equity and debt market value through different channels. In short, the
market price of a financial asset is equal to the expected present value of its future payoffs plus a risk
premium. For equity instruments, payoffs are equivalent to the dividends paid by the firm issuing the
equity. For debt instruments, they are the interest and the repayment of the principal paid by the
borrower. If the issuer of a financial instrument defaults, the payoffs also include the liquidation value of
the assets owned by the issuer – for equity instruments – and the value of the assets posted as collateral
by the issuer – for debt instruments. The physical costs generated by climate change and the transitions
costs induced by a move to a low-carbon economy reduce asset payoffs and the value of the assets
owned by the issuer of financial instruments.
Physical costs
Physical costs correspond to the potential economic and financial losses caused by climate-related
hazards (as described in chapter 1). They include acute hazards resulting from increased droughts, floods
and storms, and chronic hazards resulting from progressive shifts in climate patterns such as increasing
temperatures, sea-level rise and changes in precipitation. Each has both direct impacts (e.g., property
damage) and indirect impacts (e.g., supply chain disruptions).
Physical costs can reduce revenue from decreased production capacity (e.g., from supply chain
interruptions and worker absenteeism) and lower sales (e.g., from demand shocks and transport
difficulties) and can increase operating costs (e.g., from the need to source inputs from alternative more
expensive suppliers) and increased capital costs (e.g., from damage to facilities). They can also reduce the
value of issuers’ assets both through direct damages (e.g., to houses and factories during), but also
through write-offs of assets situated in high-risk locations.
Transition costs
Transition costs are the costs of economic dislocation and financial losses associated with the process of
adjusting toward a low-carbon economy. They come from changes in policy (e.g., carbon prices or
emissions caps), technology (e.g., low-carbon technologies becoming more competitive than carbon-
intensive ones) and market preferences (e.g., households switching toward greener consumption). All
three types of change require that firms adapt their business models to the new economic conditions.
Not all sectors and firms will be equally impacted by these costs given things like the availability of low-
carbon alternatives to a sector and the preparedness of individual firms.
Transition costs can affect payoffs in several ways, including: research and development expenditures in
new and alternative technologies, costs to deploy new practices and processes, reduced demand for
carbon-intensive products and services, and increased production costs due to changing input prices
(e.g., for energy and water) and output requirements (e.g., for carbon emissions and waste treatment).
The transition to a low-carbon economy can also significantly affect the value of equity and debt issuers’
assets: re-pricing of stranded fossil fuel assets is a case in point, as is changes in real estate valuation due
to stricter energy efficiency standards.10
Climate change and market expectations
10 Inthe Netherlands, for example, the price difference between low-energy homes and others can be explained by the costs
involved in making them more energy-efficient, which is mandatory now under European legislation (see DNBulletin, “Energy
efficiency is factored in well in the Dutch housing markets”, September 12, 2019).
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
When payoffs are not known in advance, investors must rely on their forecasts to assess them and value a
financial asset. Expectations about future payoffs thus play a pivotal role in determining the market price
of financial assets. Expected dividends, expected probabilities of default and expected values of liquidated
assets and of collaterals underpin all financial asset prices. In financial markets, asset price movements
are thus highly dependent on the evolution of investors’ expectations. Their revision can lead to sharp
price movements (see Cambridge Institute for Sustainability Leadership, 2015).
There are two situations in which climate-related events can trigger such expectations revisions. First, a
change in expectations can result from the occurrence of exogeneous events. A storm, for example, can
seriously damage buildings and drastically reduce their value as collateral. In reaction, as investors
integrate this new collateral value in their payoff expectations, the price of the debt instruments that are
backed by these buildings decreases. The realization of transition risks can have similar effects. The
introduction of a carbon tax, for example, will impact the profits of firms using carbon-intensive inputs.
Financial analysts will integrate this fact in their payoffs forecasts when it becomes clear that the
government is likely to introduce such a policy (i.e., when the government credibly commit to its
introduction) and revalue assets accordingly. When the uncertainty about government’s commitment to
a policy increases and the risk of a policy reversal become large, one can expect more volatility in
expectations, and therefore in prices.
Note that the realization of a climate-related risk can trigger significant and rapid change in asset prices
because, when such a shock happens, investors revise their expectations for the entire stream of future
payoffs. Changes in costs that occur over relatively long periods of time are thus immediately integrated
and cumulated in investors’ expectations, and thus into market prices.
Second, expectations revisions can also be endogenous. This happens, for example, when financial
analysts change their forecasting models or update their parameters to reflect new developments in
forecasting techniques (e.g., when better models to forecasts climate-related costs become available).
The introduction of new sources of costs into a forecasting model is a case in point for such endogenous
expectation revision. This case is particularly relevant for climate-related costs. Indeed, for long, these
costs have been ignored or understated by financial analysts. Standard financial forecasting models were
simply not integrating them. The situation is changing as the awareness of climate-related costs grows in
the society. Models that integrate climate-related costs in asset valuation are now available (see, e.g.,
Monnin, 2018) and an increasing number of investors are starting to use them. This might lead to a
significant revision of investors’ expectations.
A key question for the likelihood of expectation revisions is whether climate-related costs are sufficiently
reflected in current financial market forecasts. If they are not, then there is a risk that investors
significantly revise down their payoffs expectations once they start integrating climate-related costs in
their forecast. This could trigger large downward revaluations of asset prices and thus constitute a risk for
the financial sector.
Amplification mechanisms on financial markets
Downward price movements triggered by the revision of investors’ expectation can then be exacerbated
by the structure of financial markets and the way they are functioning. There are several channels by
which asset price movements can be amplified on financial markets (herding behavior, speculation,
financial frictions, etc.). Considering amplification mechanisms on financial markets is important because
even if the direct financial risks posed by climate change might seem manageable at first sight, the asset
price revaluations that such mechanisms can trigger are much larger than the initial shock. The last
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
financial crisis illustrates this well: apparently small and insignificant initial losses on the subprime
mortgage market generated effects that threaten the stability of the entire financial system.
Network effects are an example of amplifying mechanisms on asset markets. Such effects imply that
initial losses due to climate-related events in one sector or for one financial institution can percolate
through the entire economy or through the entire financial system. At the economic level, firms are not
only affected by the consequences of climate change on their own activities but also by its effects on their
supply chains or on their customers. Cahen-Fourot et al. (2019), for example, show that a cap on coal
production would strand assets in the mining sector, but also trigger waves of asset stranding in other
sectors – like electricity and gas, coke and refined petroleum products, basic metals and transportation –
through the input-output structure of the economy. At the financial level, financial institutions that are
exposed to climate risky assets will directly be impacted by a decrease in the price of these assets. But
financial institutions that are not directly exposed to them might also suffer losses through their
exposures to other financial institutions. Battiston et al. (2017), for example, show that the indirect
exposure of European banks to climate-policy-relevant sectors is as large as their direct exposure.
2.1.2 The impact of climate change on financial institutions: existing evidence
The bulk of climate-related costs is yet to materialize but some early empirical evidence of their effect on
financial assets is already available.
Impact of physical risks on asset prices
There are several studies that show that the occurrence of climate-related hazards – i.e. the
materialization of physical risks – significantly impact financial asset returns or the payoffs that underpin
them. Kruttli et al. (2019), for example, find that within the 120 trading days after the landfall of
hurricanes, the stock returns for firms operating in the disaster region is significantly lower than the
returns of other firms in the US. Droughts are another case in point: Hong et al. (2019) show that stock
returns in the food industry are significantly lower in countries that experience increasing drying weather
conditions than in other countries. Other studies find that physical costs affect firms’ profits – i.e., the
payoffs of financial assets – and thus potentially their market price. Higher temperatures, for example,
negatively impact firms’ profits in some specific sectors (Addoum et al., 2019 and Hugon and Law, 2019).
Physical damages from extreme weather events associated with climate change also affect the ability of
borrowers to service their debt. Noth and Schüwer (2018), for example, find that, in the U.S., banks
operating in regions hit by weather-related disasters observe higher non-performing loans and higher
foreclosure ratios than others. This significantly increases the default probabilities of these banks. Klomp
(2014) finds similar results for a sample off banks in 160 countries over the period from 1997 to 2010.
Impact of transition risks on asset prices
Evidence on the impact of transition costs are scarce as the transition to a low-carbon economy is yet to
happen. However, Bernardini, et al. (2019) provide some insights on how such a transition can impact
firms’ profits within a specific sector. They study the case of European electric utilities and show that,
following the progressive introduction of economic incentives by the European Union to stimulate
investment in renewable energy, like a policy shock, the profit of electric utilities companies using non-
renewable energy as input fell sharply whereas it stayed constant for companies using renewable energy
as input.
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
There is also evidence that transition costs impact borrowers’ financial soundness. The measures taken by
Chinese authorities to foster the transition to a low-carbon economy provide a useful case study to
highlight the impact of policy-triggered transition risks on debt instruments. Huang et al. (2019), for
example, show that after the implementation of the Clean Air Action launched by the Chinese
government in 2013, default rates of high-polluting firms rose by around 50%. In the same context, Cui et
al. (2018) highlight that Chinese banks with a higher green credit ratio – i.e., banks that are less exposed
to loans to polluting firms – experience lower non-performing loans.
Do financial markets adequately reflect the risks of climate change?
The question whether financial markets currently adequately reflect climate risk is important; if they do
not, then the likelihood to observe sharp expectation revisions due to climate-related costs is significant.
The empirical evidence on this question is not clear-cut, but it provides strong suspicion that financial
markets currently underprice climate risks.
Empirically, there are several ways to shed light on the question of whether climate financial risks are
already priced-in in current markets. First, in efficient markets, if investors integrate future climate costs
in their forecasts, then current information about such costs should not be able to forecast future
returns. Several examples show that this is not currently the case. Hong et al. (2019), for example, find
that the trend in droughts in a country forecasts the stock returns for companies in the food industry.
Kumar et al. (2019) find that firms’ sensitivity to temperature anomalies forecast their stock returns. Both
studies conclude that this return predictability is consistent with asset prices underreacting to climate
change risks.
Second, if analysts correctly understand the impact of climate events on asset payoffs, they should revise
their payoff forecasts once such an event occurs. Addoum et al. (2019) find no evidence that analysts
adjust their earnings forecasts after firms have experienced an extreme temperature event that affects
their profits. This suggests that analysts do not fully integrate the impact of climate change in their
expectations. Griffin et al. (2015) provide a counterexample of analysts’ forecasts revision after receiving
news on transition risks: they find that stock markets reacted after the publication of a 2009 paper in
Nature, which concluded that only a fraction of the world's existing oil, gas, and coal reserves could be
emitted if global warming by 2050 were not to exceed 2 °C above pre-industrial levels. This result hints
that investors revised their payoff forecast downward after becoming aware of possible stranded assets
in the oil and gas sector. The small magnitude of the reaction contrasts however with the predictions of
some analysts and commentators of a substantial decline in the shareholder value of fossil fuel
companies from a carbon bubble. This small reaction could be explained by the current lack of political
consensus around climate policies and thus the low probability that such policies will be implemented
soon.
Third, if investors price-in climate risks, then assets exposed to these risks should trade with a premium.
Bansal et al. (2016) and Balvers et al. (2017) finds that stocks that are more exposed to temperature
shock – i.e., to physical risks – entail a significant risk premium. In contrast, Görgen et al. (2019) find that
stocks that are more exposed to transition risk deliver lower returns than others, which is inconsistent
with a risk premium. Evidence that green bonds (bonds that are less likely to be exposed to transition
risks), trade at higher price or lower yield than non-green bonds with similar characteristics (evidence of a
“green bond premium”), is mixed for corporate bonds.11 Finally, Delis et al. (2019) and Huang et al. (2019)
11 Gianfrateand Peri (2019) estimate the green bond premium to 20 bp over a period from 2013 to 2017 for European corporate
issuers. Nanayakkara and Colombage (2019) highlight a green bond premium of 63 bp on corporate green bonds over the
period 2016 to 2017 in a sample of 25 countries. In contrast, Zerbib (2019) and Hachenberg and Schiereck (2018) find that the
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
find evidence that banks charge a risk premium for loans that are exposed to transition risks. However,
the economic significance of this risk premium is rather small and is very unlikely to match the potential
losses from transition costs. This premium may also reflect reputational risks rather than transition risks.
2.1.3 Climate change and financial institutions: what lies ahead?
Several studies provide an assessment of the impact of future physical and transition costs on asset
prices. Campiglio, Monnin and von Jagow (2019) review them. Among all available methodologies, they
argue that stress-tests are more able to give an accurate picture of the climate risks that investors face in
the short and medium term. According to their review, Vermeulen et al. (2019) give the most
sophisticated estimation of transition risks currently available. These authors show that, in the case of a
transition triggered by both a policy and a technological shock, the portfolios held by Dutch insurers and
pension funds, which include equities, bonds and loan instruments, could lose up to 10% of their value
within five years. The Cambridge Institute for Sustainability Leadership (2015) gives similar figures but
estimate that a 10% loss in diversified asset portfolio could happen within one year if investors integrate
future transition costs in their expectations. The same authors also estimated the impact of physical costs
on asset prices in the case of a no-transition scenario. In such a case, a diversified portfolio – i.e., a
portfolio mixing equity and debt instruments – could lose up to 40% of its value within 18 months after
investors adequately reflect future physical costs in their expectations.
Note that these studies do not assume any second-round, amplification effects on financial markets after
the initial losses. Battiston et al. (2017) explore this hypothesis. They find that such second-round effects
could more than double the impact of the initial shock due to cross-exposures between financial
institutions.
The results presented above, together with others, can then be used to inform the definition of” climate
stress tests” that investors can use to assess the impact of climate risk on their portfolios. They can also
help financial regulators in establishing the stress test scenario that they could ask financial institutions to
run.
2.2 Financial regulators’ responses to climate risks
Financial regulators (e.g., governments, insurance industry and pension fund regulators and corporate
governance entities) are widely acknowledging that climate change is a source of financial risk (see NGFS,
2019). This also represents a challenge for their supervision and regulation activities (see Campiglio et al.,
2018) and pressure is increasing on them to integrate climate financial risk in financial supervision and
regulation (see Tooze, 2019). Some of them are beginning to act by seeking to evaluate the climate risk
management practices of financial institutions and to check whether they are adequate responses to the
financial challenges associated with climate change. The work done by regulators to manage climate risk
importantly enables successful integration of climate risk into institutional investors’ investment analyses,
which is discussed in chapter 3.
2.2.1 The NGFS recommendations
The NGFS is a network of central banks and financial regulators, which aims to accelerate their work on
climate and environmental risks. It was funded in 2017 and currently counts more than 45 members from
countries on all continents. The countries represent over half of the global GDP, 45% of the global
green bond premium is small and only marginal for corporate bonds. Finally, Tang and Zhang (2019) do not find any consistently
significant green premium in a sample of 28 countries.
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greenhouse gas emissions and, more importantly, supervise two thirds of the global systematically
important banks and insurers. APEC economies are represented in the NGFS by the Reserve Bank of
Australia, the Bank of Canada, the Japan Financial Services Agency, the Bank Negara Malaysia, the
Reserve Bank of New Zealand, the Monetary Authority of Singapore, the Bank of Thailand, the Hong Kong
Monetary Authority, the People’s Bank of China, the Banco de México and the Comisión Nacional
Bancaria y de Valores (Mexico).
After some initial stock-taking background work, the NGFS recognizes that “there is a strong risk that
climate-related financial risks are not fully reflected in asset valuation” and that “there is a need for
collective leadership and globally coordinated action” (NGFS 2019, p. 4). Against this background, the
NGFS published six recommendations for central banks, financial supervisors, policymakers and financial
institutions to enhance their role in the greening of the financial system and the managing of
environment and climate-related risks. These recommendations, described below, are primarily aimed at
central banks and supervisors, but they can also directly or indirectly be relevant for financial institutions
(discussed in chapter 3).12
Integrating climate risk into macro and micro-supervision
The NGFS recommends to its members to better integrate climate risk into financial stability monitoring –
i.e., into macro-supervision – and into micro-supervision.
Macro-supervision. Concretely, for macro-supervision, the recommendations aim at a better
understanding of the climate risk channels to financial risk and a better size of its impacts on the stability
of the financial system. The NGFS emphasizes the need to proceed to quantitative assessments of climate
financial risks. To do that, the various NGFS subgroups will work on developing a consistent and
comparable set of data-driven climate scenarios. Such a set aims at enhancing the comparability of
different analyses. Further work is also expected to translate these economic scenarios into financial risk
parameters for financial stability analysis. The work done by the Dutch central bank is a good example of
how to carry out such an analysis (see Schotten et al., 2016; Regelink et al., 2017’ and Vermeulen et al.,
2018 and 2019). The Bank of England also announced that it will conduct a climate stress test for selected
financial institutions in 2021, to help mainstream climate risk management (Bank of England, 2019), and
World Bank Group and International Monetary Fund are developing a climate stress test model for
incorporation in Financial Sector Assessment Programs.
The work of the NGFS on defining climate scenarios and sizing their impact on financial stability is
important for financial institutions for at least two reasons: first, the scenarios defined by regulators, as
well as the models to translate them into financial costs, are likely to become the standards for the
financial industry when it comes to climate financial risk analysis. Regulators might choose the option to
ask financial institutions to run the stress tests that they have defined and aggregate the results to gain
insight on their impacts on the broader financial system. In that case, financial institutions would need to
adapt their internal stress methodologies to make them compatible with financial regulators’
requirements. Second, the results of these stress test will determine the response of financial regulators
in terms of macro-prudential regulation. If climate risk is deemed relevant by them, then they could
choose to introduce new macro-prudential measures, such as additional capital buffers.
12 Notethat in this section, we are not discussing the NGFS recommendations on the management of the portfolio of central
banks.
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Micro-supervision. The NGFS recommends to its members to actively engage with firms to insure that,
first, climate-related risks are understood and discussed at board level, considered in risk management
and investment decisions and embedded into firms’ strategy. This recommendation is like the
recommendation of the Financial Sustainability Board’s Task Force on Climate-Related Risk Disclosures
(TCFD) regarding climate-related risk and governance issues (TCFD 2017, p. 19). Second, this engagement
with firms must ensure that climate financial risks are clearly identified, analyzed, managed and reported
at the firm level. Supervisors are also recommended to set supervisory expectations to provide guidance
to financial firms. Such measures will compel laggard financial firms to revise and adapt their organization
at the board level and the risk management level to comply with regulatory requirements.
In addition, the NGFS leaves the door open to the implementation of mitigating measures by financial
regulators, when needed. It suggests mitigating measures like, for example, applying capital measures in
Pillar 2 for firms that do not meet the supervisory expectations or with concentrated exposure, or, based
on risk assessments, integrating climate risk into Pillar 1 capital requirements. Such measure would
significantly impact the funding costs of financial firms.
Bridging the data gaps
The NGFS recommends to its members that appropriate public authorities share data that are relevant to
the assessment of climate financial risks, and whenever possible, make them publicly available. Public
data repositories would also help financial firms in assessing their own financial risks. Chinese firms, for
example, welcomed the creation of public database on climate costs by Chinese authorities and used
them extensively in the development of their own climate risk assessment systems.
Achieving robust and internationally consistent climate-related disclosure
The NGFS supports the initiatives aiming at creating an internationally accepted disclosure framework
and emphasizes the importance of the TCFD as a basis for this framework. For supervisors, the benefits of
such a framework is to facilitate the surveillance of the financial system across various jurisdictions, to
enhance market discipline, to allow policy to quickly identify environmentally sustainable opportunities
and to harmonize the level playing field across jurisdictions. Several important NGFS representatives have
spoken in favor of making disclosure, within the TCFD framework, mandatory for firms. The support of
the NGFS, and of its members, for disclosure requirements obviously increase the pressure on firms to
implement such frameworks.
Supporting the development of a taxonomy of economic activities
The NGFS encourages policymakers to develop a taxonomy of economic activities to identify, first, those
activities that contribute to the transition to a low-carbon economy and second, those that are exposed
to climate risk. According to the NGFS, a taxonomy would facilitate the identification, assessment and
management of climate financial risk and mobilize capital for low-carbon investments. On the one hand,
such a taxonomy is an opportunity for financial firms, as it would help them manage climate risk, but also
identify economic activities that constitute opportunities for the development of their business. On the
other hand, a taxonomy is also a key element for the implementation of new regulatory measures to
mitigate climate risks.
China has already implemented such a taxonomy and the European Union (EU) is currently developing its
own version. The aim of the EU taxonomy, which is likely to become the reference point for others, is to
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provide practical guidance for policy makers, industry and investors on how best to support and invest in
economic activities that contribute to achieving a climate neutral economy. Experts have already
identified low-carbon activities but also transition activities in order to compile the most comprehensive
classification system for sustainable activities to date (EU Technical Expert Group on Sustainable Finance,
2019). The proposal by the EU Commission awaits agreement by other co-legislators.
2.2.2 The Bank of England: a leading example in developed economies
The Bank of England, through the Prudential Regulation Authority (PRA), is the regulator of the UK
financial sector. The PRA supervises and regulates banks, building societies, credit unions, insurers and
other financial institutions. Under the leadership of its governor Mark Carney, the Bank of England can be
considered as a pioneer in analyzing the impacts of climate change on financial institutions and their
consequences for financial regulators.
Initial initiatives by the PRA regarding climate financial risks
The sheer size of the insurance sector in the UK and the clear link between climate-related hazards and
insurance sector’s profitability was a key trigger for the PRA to start analyzing the links between climate
financial risks and the financial sector (Carney, 2015). The PRA thus focused its initial analyses on the
insurance sector by conducting a survey of insurer’s practices related to climate risks (PRA, 2015). The
lessons learned with the analysis of the insurance sector led the PRA to extend its focus on the banking
sector (PRA, 2018). One of the main conclusions of the study on the UK banking sector is that only 10% of
UK banks are having a strategic approach to manage climate financial risks, whereas 60% have a
responsive approach and 30% a responsible approach (see Figure 16). In a strategic approach, banks are
(a) deepening their understanding of climate risk by leveraging enhanced disclosure and scenario analysis,
(b) agreeing on a board level, firm-wide strategic response to climate risk and (c) integrating climate risk
factors into present day risk management. The PRA consider that only the strategic approach corresponds
to an adequate response from banks to climate risk challenges.
Figure 16. UK banks approach to climate financial risk
Source: PRA (2018)
PRA expectations for financial institutions regarding climate financial risks
After these initial stock takings for the insurance and banking sector, the PRA published its expectations
for insurances and banks regarding how they should manage the financial risks from climate change (PRA,
2019a). PRA’s expectations concern four domains: governance, risk management, scenario analysis and
disclosure. The PRA expected financial institutions to:
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
• Embed the consideration of the financial risks from climate change in their governance
arrangements, which means, for example, that financial firms’ boards must understand and
assess the financial risks from climate change that affect the firm and be able to address and
oversee these risks within the firm’s overall business strategy and risk appetite. The PRA expects
to see evidence of how the firm monitors and manages the financial risks from climate change.
• Incorporate the financial risks from climate change into existing financial risk management
practice, which means, for example, that financial firms must identify, measure, monitor,
manage, and report on their exposure to climate financial risks. Again, firms should be able to
evidence this in their written risk management policies, management information, and board risk
reports.
• Use (long-term) scenario analysis to inform strategy setting and risk assessment and
identification, which means, for example, that financial firms should use climate scenarios to
understand the impact of the financial risks from climate change on their solvency, liquidity and,
for insurers, their ability to pay policyholders.
• Develop an approach to disclosure on the financial risks from climate change, which means, for
example, that financial firms should disclose how climate-related financial risks are integrated
into governance and risk management processes, including the process by which a firm assesses
whether these risks are considered material.
2.2.3 Chinese financial regulators: a comprehensive agenda
Chinese financial authorities are also pioneering in terms of regulatory measures taken to ensure that
financial institutions integrate climate risk in their risk management (see Box 2). The various policy
measures implemented by Chinese regulators to incentivize financial institutions to proceed to this
integration must be considered in the more global Chinese context: first, environmental issues have been
at the top of Chinese authorities’ concerns since the beginning of the century and they triggered a
deliberate effort from the government to implement a broad range of policy measures. Financial
regulation measures are only one part of this agenda. Second, several governmental are involved in the
implementation of these measures, which requires a consequent coordination between them. This
coordination is only possible with a constant and declared support from the government.
Chinese authorities implemented a series of measures over time to incentivize financial institutions to
integrate climate risk in their risk management framework. As mentioned above, the implementation of
these measures followed three guiding principles: the progressivity of the measures in terms of
stringency, the coordination between the governmental bodies, and the complementarity of measures in
the sense that the introduction of new regulation and standards was usually accompanied with new tools
or databases available to financial institutions to help them adapt to the new regulatory requirements.
The following examples illustrate this complementarity:
• The Green Credit Policy in 2007 prohibits banks form lending to firms blacklisted by the Ministry
of Environmental Protection (MEP) for environmental violations but is also provides
recommendations on how to include environment and social (E&S) risk assessment in their loan
origination processes and starts the collection information on environmental violations.
• The Green Credit Guidelines in 2012 requires E&S risk ratings to identify high E&S risk clients, but
it also provides operational guidance on E&S risk management and starts collecting key
performance indicators for green loans.
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• The Green Credit Statistics System in 2013 provides a standardized definition of green loans,
based on consensus within industries and develop tools for banks to calculate environmental
benefits of loans. It also tracks data on loans with compliance issues on environment and lists
technologies to be phase out.
• The Green Credit Key Performance Indicators in 2014 provides a list of quantitative and qualitative
key performance indicators that banks can use but also requires them to report on E&S risks
twice a year.
The measures taken by Chinese authorities is perceived as very positive by Chinese banks (see Frisari and
Monnin, 2019). Banks underline that:
1. The different authorities provided useful data to integrate climate risk in banks’ risk management
framework’ methodologies. Data on major factories and utilities assets in heavy industries as well
as data on compliance, emissions, regulation limits, air pollution and water pollution that the
MEP shared with banks were particularly useful for Chinese banks. Official and freely available
data are key for small financial institutions with limited resources to develop their own inhouse
methodology.
2. The guidance given by authorities was very useful for banks to have a clear view of the
governmental environmental policies ahead. Guidelines helped banks better understanding what
governmental authorities will consider as green finance, as well as developing the methodologies
to responds to authorities’ expectations. Governmental measures also convinced banks’ top
management about the resoluteness of the government in implementing environmental policies
and about the pace at which it will do so. This led top-management to put environmental credit
risk on top of their agenda, particularly because it convinced them that environmental regulation
will have material financial consequences for their loan operations.
3. The feedback loops between authorities and banks were also important to progressively develop
and implement methodologies. The ICBC, for example, started to develop its methodology after
Ma Jun, Chief economist of the PBoC Research Bureau at the time, suggested that they could set
an example for the rest of the banking sector. This methodology was then used by authorities as
a starting point for discussions on which tools could be used for banks’ reporting.
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Box 2: Chinese financial authorities
Until recently, the Chinese financial regulatory system has been fragmented. Before 2017, the People’s Bank of
China (PBoC) and three commissions had been responsible for the regulation of financial markets and of
financial institutions, with equal power. (1) The China Securities Regulatory Commission (CSRC) supervised the
issuance, listing, trading, custody and settlements of stocks, bonds (incl. green bonds), and other securities; it
monitored market behaviors, investigated activities and penalized conduct in violation of the relevant securities
and futures laws and regulations. (2) The China Banking Regulatory Commission (CBRC) conducted regulation
and supervision over all banking institutions and their business activities in China; it promoted the safety and
soundness of the banking industry, improved its competitiveness and used prudential supervision to protect the
interests of depositors and consumers and to boost market confidence. (3) The China Banking and Insurance
Regulatory Commission (CBIRC) formulated policies and rules concerning commercial insurances.
Over the years, banks and financial institutions increasingly took advantage of the discoordination and evaded
regulations. In 2017, the government established the Financial Stability and Development Committee (FSDC)
oversee the coordination of the financial regulatory bodies. The FSDC is mandated to break potential deadlocks
between the financial regulators and to exert greater authority over local governments to ensure an overall
consistency in financial policymaking. Operated by PBoC, FSDC is expected to gain a considerable expansion of
its mandate. The fusion of the CBRC and the CIRC into the China Banking and Insurance Regulatory Commission
(CBIRC) in April 2018 constitutes a step to create a more coherent regulatory system that closes on regulatory
loopholes.
In addition, The Ministry of Ecology and Environment (MEE), established in 2018, also plays a significant role for
financial institutions when it comes to environmental issues. The MEE embodies a considerable expansion of
regulatory power and its mandate covers regulatory functions previously exercised by seven separate ministries.
These include formulating and enforcing national environmental policy and conducting environmental impact
assessment in areas of climate change; air, water, and soil pollution; ecological and marine conservation; nuclear
safety and radiation safety, and environmental protection among project execution. The MEE is mandated to
require and evaluate environmental information disclosure from corporate enterprises and public institutions.
Chinese authorities also cooperate with experts, think tanks, and regulatory institutions at home and overseas.
In 2015, they created the Green Finance Task Force (GFTF). The GFTF has proposed a preliminary framework and
14 specific recommendations for building China’s green finance system. Considered as a step-by-step roadmap,
the GFTF recommendations covered issues including green banks, green bonds, green insurance, green IPOs,
green credit rating, environmental liabilities of banks, green information disclosure, a green database and a
green investor network. The recommendations also gave clear instructions to task assignment between
regulatory agencies. Since then, most recommendations of the GFTF have been implemented, promoting a
clearer division of task among the regulatory agencies and interdepartmental cooperation.
Source: Frisari and Monnin (2019)
2.2.4 Options currently discussed by financial regulators
The road followed by the Bank of England and Chinese authorities to incentivize financial institutions to
integrate climate risk in their risk management framework is likely to be adopted by other financial
regulators. Other options are also discussed and sometimes implemented in other jurisdictions. Three of
them are likely to receive greater attention from financial regulators soon: the integration of climate risk
in capital requirements; the introduction of preferential refinancing rates by central banks for banks that
lend to environmentally sustainable economic activities; and the implementation of maximum or
minimum credit quotas to high-carbon and low-carbon sectors.
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Climate financial risk and capital requirements
There is currently an active discussion about the integration of climate financial risk consideration into
the capital regulation framework for financial institutions defined in the Basel agreement. In this
framework, financial institutions must match a proportion of their assets, including loans, with some
capital. The proportion of asset to be backed by capital is a function of assets’ risk. As climate risk is a
financial risk, it should also be considered in the assessment of the financial risk determining capital
requirements (Alexander and Fisher, 2018). In practice, however, the methodologies used to compute
capital requirements do not formally integrate climate risk. This might change once regulators legally ask
financial institutions to assess their exposure to climate financial risk.
Some propositions go one step further than reflecting climate risk in capital requirements and suggest
introducing a so-called green supporting factor (GSF) in capital requirements (European Banking
Federation, 2017). Such a GSF implies that financial institutions would have to match their loans to green
activities with less capital than for other loans. The supporters of this proposition argue that lower capital
requirements would result in lower funding costs for commercial banks and thus encourage lending to
green economic activities. Opponents highlight that a GSF would reduce banks’ capitalization and thus
fragilize them (see Matikainen, 2017 and Ford, 2018). They propose a brown penalizing factor (BPF) – i.e.,
higher capital requirements for high-carbon loans – which would increase the funding costs for banks
associated with environmentally unsustainable loans and thus discourage the funding of high-carbon
economic activities. They further emphasize that a BPF would increase banks’ capitalization and thus
foster their financial soundness.
The possibility of differentiated capital requirement is currently discussed in the European Union. The
banking associations have intensively lobbied for the adoption of a GSF. Central banks and regulators
consider that a GSF goes against the stability of the financial sector and prefer a BPF that would align
environmental and financial stability goals (see Villeroy de Galhau, 2018 and Dankert et al., 2018).
Preferential refinancing rates
To incentivize commercial banks to lend to specific sectors, central banks can use different refinancing
rates. For example, banks extending credit to low carbon investment could get preferential rates when
they seek refinancing at the central banks. Another possibility for central banks is to adjust the rate at
which they discount bills posted by commercial banks in exchange of liquidity. In such a case, financial
institutions could be compensated partially, fully or even overcompensated for lending to low-carbon
economic activities.
Some central banks have already implemented such schemes. The Bangladesh Bank, the central bank of
Bangladesh, for example, has introduced preferential refinancing rates for the green sector in 2009. The
People’s Bank of China has also introduced a mechanism that incentivize green lending in its refinancing
rate policy. In China, the interest rate that commercial banks get on central bank reserves is a function of
a score – the so-called Macro Prudential Assessment (MPA) score. The higher the MPA score, the higher
the interest rate they get. The MPA score depends on several dimension of banks’ activities such as, their
capital adequacy ratios, their liquidity conditions, the quality of their assets, their competitiveness
behavior, etc. (Zheng 2018). The amount of green loans that a bank provides positively impacts its MPA
score. The People’s Bank of China also introduced a scheme that allow commercial banks to pledge green
bonds as collateral at preferable conditions in exchange of central bank’s liquidity.
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
Credit quotas
Financial regulators can steer credit allocation in the economy with credit guidance (see Bezemer et al.,
2018). Setting minimum and maximum credit quotas to specific economic sector is one way to implement
such credit guidance. Minimum credit quotas (or floors) are set by financial regulators or by central banks
and require commercial banks to allocate a minimum percentage of their loan portfolio to a specified
sector, area or cause. Priority sector lending programmes have a long history in developing and emerging
economies (see, e.g., World Bank 1993). In contrast, maximum credit quotas (or ceilings) are used to limit
commercial bank lending to specific sectors. Credit ceilings can be used to limit the exposure of financial
institutions to climate-sensitive sectors of firms. Currently, such ceilings are commonly used in advanced
economies to suppress credit to certain sectors (in particular, the real estate sector) following the 2008
financial crisis.
Credit quotas can be used to steer credit toward low-carbon activities and away from carbon-intensive
ones (Dikau and Ryan-Collins, 2017 and Dikau and Volz, 2019). Two examples of implemented credit
quotas for green activities are found in Bangladesh and India. Bangladesh Bank, the central bank of
Bangladesh, has introduced minimum credit quotas to green sectors (5%) in 2016. The Reserve Bank of
India (RBI) requires that 40% of commercial bank lending flows to priority sectors. In 2012, the RBI include
some off-grid renewable energy solutions into the list of priority sectors. In 2015, The RBI extended the
list again to other renewable energy projects.
Note however, that the use of credit quotas is not always well perceived in economic circles. Mainstream
economists and central bankers consider this practice as distortionary and sub-optimal and thus do not
recommend its usage. In practice, credit quotas are regularly implemented, in particular in developing
countries.
2.3 Green credit markets: an opportunity for financial institutions
The massive amounts of capital, $470 billion per year in new energy investment APEC member
economies by 2050 alone, and the new financial products that will be needed to fund the transition to a
low-carbon economy constitutes an opportunity for financial institutions. Banks can expand their credit
activities to provide loans to environmentally sustainable projects and financial institutions in general can
benefit from growing prospects in activities related to the issuance, the intermediation and the
management of environmentally sustainable financial assets.
2.3.1 The rapid growth of green credit markets
Green credit instruments are specific types of environmentally sustainable credit instruments. They
constitute the most visible part of sustainable credit but not its entirety: some credit instruments are
environmentally sustainable but are not labelled “green,” either because their issuer did not want to go
through the labelling process or because they use alternative sustainable labels. In the sustainable bonds
market, we can distinguish between green bonds, sustainability bonds, SDG bonds, blue bonds, forest
bonds, etc. Green bonds represented about 75% of the issuances of sustainable bonds in 2018.13
Green bonds: the state of the market
13 Unless stated otherwise, the source for all green bonds figures is Climate Bond Initiative (2019).
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Green bonds issuances have been constantly increasing over the last five years, reaching $168 billion in
2018 (see Figure 17), which represents about 3% of global bond issuances. The top two issuers are the
U.S. ($34 billion) and China ($31 billion). The green bond market is growing in other APEC economies, too;
this notably includes countries in south east Asia (see Figure 18), reflecting the very recent opening of
these countries to green bond markets. Europe is the fastest growing region in terms of issuances. Note
that if the pace of the green bond issuances slowed in 2018, other types of sustainable bonds continue to
grow steadily.
Figure 17. Issuances of green bonds worldwide Figure 18. Issuances of green bonds
in South East Asia
Source: Climate Bonds Initiative (2019)
Development banks and government-backed entities have been traditionally the largest issuers of green
bonds. However, in 2018, financial institutions became the largest issuers worldwide, more than doubling
their issuance compared to the precedent year (see Figure 19). Commercial banks were the most active
of all financial institutions. Property banks and real estate investment trusts were also very much active in
2018.
About 40% of the green bonds issuance by financial institutions are stemming from Chinese banks. The
Industrial Bank (China) is the second largest global issuer. However, the role of financial institutions in the
green bond market is not restricted to issuing
bonds. Financial institutions play a key role as
structuring agents and underwriters, actively Figure 19. Issuances of green bonds by types of
supporting other issuers in coming to market. institutions
They also fulfill an important function as green
asset managers. The rise of different types of
green bonds is also an opportunity for financial
institutions. Until now, senior unsecured bonds
have been the most common types of green
bonds, with about 60% of the green bonds
market, but other forms of bonds, such as asset-
backed securities, mortgage-backed securities
and covered bonds are emerging. Such new
bonds require the expertise of financial
institutions in their conception, structure and
Source: Climate Bond Initiative (2019)
launch on financial markets.
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
The prospects for green bonds market growth are also promising. Currently, green bonds trade at a
premium – i.e., with higher price and lower yield than other bonds (see Gianfrate and Peri, 2019;
Nanayakkara and Colombage, 2019; and Zerbib, 2019). This premium means that firms issuing green
bonds get funding at a lower price than when they issue traditional bonds. Cheaper funding is an
incentive for firms to continue issuing green bonds. Furthermore, several analysts argue that the
premium for green bonds reflects a lack of supply of such assets (see, e.g, Pielichata, 2019and S&P Global,
2018). Currently the demand for green bonds seems to be larger than its supply. This excess demand is
also a positive condition for a sustained growth of green bond market.
Green loans: a growing niche
Green loans markets are not as developed as green bonds markets. Green loans are important, however,
for banks because they involve the core business—i.e., providing loans to their clients. Like green bonds,
green loans have been growing steadily over the last six years (see Figure 20). Global green loan issuance
amounted to some $60 billion in 2018, up over 30% from 2017. The U.S., the U.K., Spain, and India are
the largest issuers of green loans, accounting for over 40% of global issuance. In 2018, outstanding green
loans amounted to $278 billion, which represents less than 1% of total bank loans worldwide. This figure,
however, is likely to underestimate the real amount of environmentally sustainable loans because it only
includes loans that are officially labeled as
green—not all loans to environmentally Figure 20. Issuance of green loans worldwide
sustainable activities.
Green loans constitute an opportunity for
financial firms. First, as described below,
green loans could be a useful tool for
financial institutions to manage their risk
exposure: evidence in China shows that green
loans have lower non-performing ratios than
other types of loans. Second, green loans can
be used by newcomer banks as an entry point
to develop their business. China Industrial
Bank, for example, used this strategy to
distinguish itself from more established
Source: Institute of International Finance (2019)
Chinese banks (see Frisari and Monnin 2019).
The green loan market is likely to develop at a fast pace in the next years because several significant
international initiatives regarding green loans have been adopted recently. In March 2018, the Loan
Market Association, together with the Asia Pacific Loan Market Association and with the support of
International Capital Market Association, launched the Green Loans Principles. These principles create a
high-level framework of market standards and guidelines for environmentally sustainable loans. They
define how funds should be used, the process of evaluation and selection of projects, how funds should
be managed and the reporting standards. In September 2019, 130 banks from 49 countries launched the
Principles for Responsible Banking. With these principles, banks commit to strategically align their
business with the goals of the Paris Agreement on Climate Change and scale up their contribution to
achieving the goals.
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2.3.2 Green credit and financial risks
Environmentally sustainable credit instruments are useful not only in financing the transition to a low-
carbon economy. They could also be valuable tools for financial institutions to reduce their exposure to
climate risks.
In a nutshell, green credit instruments, whether bonds or loans, fund projects and firms that are the most
aligned with low-carbon standards. They are thus less exposed than other projects and firms to transition
risk. Indeed, transition risk stems from the costs of economic dislocation and financial losses associated
with the process of adjusting toward a low-carbon economy. As projects and firms funded by green credit
are already adjusted to low-carbon standards, they will not suffer substantial losses when the transition
materializes, whether through a policy change, a technology change or a change in consumer
preferences. Such projects and firms are clearly more likely to be among the winners of the transition.
Because financial institutions engaging in green credit activities face fewer transition risks, they are likely
to experience lower non-performing loans and less defaults on bonds in the future than institutions that
finance non-sustainable activities. Some empirical evidence of such effects is already available in China.
Chinese authorities have started early to implement political, regulatory and financial measures to foster
the transition to a sustainable economy. These actions already impact the performance of credit
instruments. Based on a five-year dataset of 24 Chinese banks, Cui et al. (2018) find that a higher green
loan ratio in a bank’s portfolio reduces the non-performing loan ratio of the bank. Guan at al. (2017) find
similar results with an approach that takes the opposite angle: they measure the carbon intensity of the
loans for 16 Chinese commercial banks during the period from 2007 to 2014. This measure gives a sense
of the “brownness” – instead of the “greenness” for Cui et al. – of a bank’s loan portfolio. They show that
the higher the carbon intensity of a bank’s loan portfolio, the higher its non-performing loans ratio.
Huang et al. (2019) provide additional evidence of the impact of a transition triggered by a policy shock
on credit instrument performance. They find that after the implementation of the Clean Air Action
launched by the Chinese government in 2013, default rates of high-polluting firms rose by around 50%,
which is indirect evidence of the higher resilience to transition shocks of environmentally sustainable
firms, and thus to the credit instruments linked to them.
These examples show that, through their lower exposure to transition shock, green credit instruments
can be effective tools for financial institutions to manage their credit risk.
2.3.3 Fostering the development of green credit markets
Green credit markets are an important component for the financing of low-carbon, climate-resilient
investments. Developing these markets, however, requires the involvement and the collaboration of
several public and private institutions.
The Sustainable Banking Network recommendations
The SBN is a network of financial regulators and banking associations that have an interest in policies,
guidelines and related initiatives to support the financial sector to adopt environmental and social risk
management and green lending. The SBN currently has 48 members, mostly from emerging economies:
28 are regulators and 20 are banking associations. Last year, the SBN published a review of best practices
to create green bonds markets, with a focus on emerging economies (SBN, 2018).
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
Case studies analyzed by the SBN show that developing green bond markets requires a combination of
policy leadership and market-based actions. Initiatives taken by local financial institutions are one driver
of local green bond market development. Two components seem to be particularly important to ensure
the sound development of a local green bond market: 1) harmonized definitions and 2) guarantees of
market integrity and credibility. Policymakers can significantly contribute in these two ways by issuing
clear guidelines, developed in collaboration with private stakeholders.
Harmonized definitions of green bonds and loans should be based on international standards to ensure
that local definitions are compatible with investors’ needs. The Green Bond Principles and the Climate
Bond Standards are reference points in this context. Public authorities should also make sure that their
local definitions are aligned on national climate and infrastructure targets. Aligning national definitions
with international good standards is also a way to leapfrog and accelerate local green bond market
development.
Market integrity and credibility are also essential for successful green bond markets. National authorities,
in coordination private institutions, should therefore include tools for the quality of green bonds. For
instance, they could ask for external reviews from experienced and credible entities to limit the risk of
“greenwashing” and insure investors of the green credentials of bonds. Applying good international
practices in this domain is one way to provide this credibility.
Lessons from China’s green credit market
China’s green bond market is an example of a fast-developing credit market. It can serve as a template for
the implementation of other national green bond markets. The case offers several useful lessons for
policymakers in other countries—despite the specific context of China, where all authorities are involved
in implementing measures to drive economic actors to make the transition to a low-carbon economy.
In China, measures taken by financial authorities and others played a key role in the rapid development of
the green bond market. Describing the full set of measures taken by Chinese authorities is beyond the
scope of the chapter (see Frisari and Monnin, 2019, for a more complete analysis), but it is important to
note that all the measures focused on two goals: first, decreasing the cost of issuing green bonds and,
second, increasing green bond market integrity and credibility.
To decrease the issuance cost of green bonds, Chinese authorities issued several guidelines providing
clear mandatory criteria for the use and management of proceeds of green bonds as well as the
identification of eligible projects. Such guidelines were expected to dispel misconceptions regarding the
costs and the complexities of green debt issuance. The setting of clear standards for green bonds also
aimed to reduce transaction costs by providing a clear and easy-to-adopt framework for banks willing to
issue green bonds. In addition, authorities implemented different subsidy schemes for green bonds,
including the opening of the central bank’s collateral framework to green bonds of lower quality, which
increase their value on financial markets. Finally, the different “fast-track” procedures implemented for
the issuance of green bonds are also contributing in reducing their issuance costs.
To increase the integrity and credibility of the green bond market, Chinese policymakers issued guidelines
to ensure the quality of external verification. Several verification agencies were created. National
guidance was also essential in setting high standards of transparency. The expansion of the central bank’s
collateral framework to green bonds also contributed to consolidate their attractiveness for financial
investors. Finally, multiple green bond indexes such as the Shanghai Stock Exchange Green Bond Index
were implemented to provide investors with performance benchmarks as well as new targets for green
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CHAPTER 2: IMPACTS ON FINANCIAL INSTITUTIONS
investments, which strengthen the trading of green bonds. Chinese authorities also aligned their
guidelines with international standards to gain credibility for international investors.
2.4 Summary
Climate change risks are financial risks. The risks of climate change are converted into risks for financial
institutions through the increased physical and transactions costs of climate change, the uncertainty
climate change injects into the market, and the amplification effects climate change has on the
interconnected financial system. Current evidence suggests that financial markets are currently
underpricing climate risks.
To mitigate these risks, financial regulators are evaluating the climate risk management practices of
financial institutions and providing recommendations. These recommendations include things like data
sharing, climate-related disclosure, and identifying which economic activities could help transition to a
low-carbon economy and/or which are most exposed to climate risk. The Bank of England and Chinese
financial authorities provide useful models in this area.
Green credit markets represent an opportunity for financial institutions to fund the transition to a low-
carbon economy and to reduce their transition risks. These markets include things like green bonds,
green loans, and sustainability bonds.
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Chapter 3.
Mobilizing Institutional Investors in APEC to Address Climate Change
Climate change is a first-of-its-kind challenge for institutional investors in APEC member economies. It
poses unique and uncertain risks to their investment portfolios. These institutional investors are
responsible for ensuring the present and future solvency of more than $42 trillion in pension, insurance,
and sovereign wealth assets across the region (representing the equivalent of more than 100% of GDP in
some countries) (Table 4). They include some of the largest institutional investors in the world (Box 3).
The size of these investment portfolios provides institutional investors in APEC member economies a
unique opportunity to influence broader climate-related market behaviors. Their long-term investment
horizons uniquely position them to
capitalize on the $470 billion in new Box 3. Institutional investors in APEC that are among the 25
annual energy investment largest in the world (millions USD 2016)
opportunities in APEC that could
result from adoption of strict Size
Organization Economy AUM
rank
mitigation policies (to say nothing of
Government Pension
additional opportunities to invest in 1 Japan $1,443,554
Investment Fund, Japan
climate-resilient infrastructure and 3 China Investment Corporation China $900,000
other adaptation measures). 5 National Pension Korea $582,938
7 Federal Retirement Thrift U.S. $531,489
But institutional investors can Hong Kong Monetary Authority Hong
comprehensively address climate 10 $456,600
Investment Portfolio Kong
risks and scale up their contributions 11 SAFE Investment Company China $441,000
to climate finance only if 12 GIC Private Limited Singapore $359,000
policymakers create the requisite 13 National Social Security China $341,361
enabling environment, regulators 14 California Public Employees U.S. $336,684
provide needed support, and capital 16 Canada Pension Canada $283,454
markets provide them with 17 Central Provident Fund Singapore $269,133
investment-grade climate finance 19 Temasek Holdings Singapore $230,310
products and tools. Addressing 21 California State Teachers U.S. $216,193
climate risks and scaling up 23 Mercer U.S. $211,971
24 Local Government Officials Japan $209,880
investments in climate finance not
25 New York State Common U.S. $201,263
only serves institutional investors’
Source: Thinking Ahead Institute, Willis Towers Watson (2018); reports
financial interests, but it will also AUM as of December 31, 2017; March 31, 2018; or August 31,
positively influence broader market 2018
activity and help to fortify regional
economies.
This chapter outlines ongoing efforts made by institutional investors in APEC to manage climate risks and
contribute to climate finance. It then focuses on how these investors—with support from policymakers,
regulators, and capital markets—can develop and improve their climate risk analyses and can increase
their contributions to climate mitigation and adaptation. It concludes with a profile of Chile, an APEC
member economy that has combined various regulatory, policy, and market solutions to help investors to
manage climate risks while creating a renewable energy market that might be attractive to institutional
investors.
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Table 4. Pension fund and insurance corporation assets
in select APEC member economies, 2018 (millions)
Insurance corporations +
Insurance corporations Pension funds
pension funds
$ % GDP $ % GDP $ % GDP
Canada $694,704 41% $1,438,549 84% $2,133,253 125%
Chile $55,933 19% $193,110 65% $249,043 84%
Japan $4,399,809 89% $1,400,143 28% $5,799,952 117%
Korea, Republic of $1,115,647 69% $191,041 12% $1,306,688 81%
New Zealand – – $54,409 27% – –
Russia $38,107 2% $58,518 4% $96,625 6%
United States $9,977,329 49% $22,412,974 109% $32,390,303 158%
Source: OECD (2019)
3.1 Trends in institutional investors’ contributions to climate finance in APEC
Investors—including institutional investors and those in APEC member economies—are increasingly
acknowledging that climate change poses serious risks to their securities and portfolios and are adopting
sustainable investing approaches to help them to manage those risks. Available data indicates, however,
that few institutional investors in APEC (or elsewhere) are allocating assets to climate finance, such as
mitigation activities (e.g., renewable energy investments) or adaptation activities (e.g., climate-resilient
infrastructure).
3.1.1 Existing efforts to manage climate risks
Membership in industry groups that promote ESG integration
Each year, a growing number of investors sign on to the Principles for Responsible Investment (PRI), an
internationally recognized network that guides investors in managing Environmental, Social, and
Governance (ESG) risks to their investments to protect and enhance returns. Among PRI’s central
objectives is guiding investors in tracking and addressing risks related to their exposure to fossil fuels and,
most recently, to the “Inevitable Policy Response” to climate change (i.e., the impending policy response
to climate change that will generate substantial transition risks for companies, financial markets, and
economies).
The number of PRI signatories grew exponentially in its first thirteen years, from just 88 in 2006, to 1,399
in 2016, to nearly 2,500 today (Figure 21). More than two-thirds of these investors are from APEC,
including 166 institutional investors and 695 of the asset managers that analyze securities and construct
portfolios (Figures 22a and 22b). As of 2019, PRI’s board includes the chief investment officer of Japan’s
Government Pension Investment Fund (GPIF), the largest asset owner in the world; and the chair of the
board of the California State Teachers' Retirement System (CalSTRS), the 9th largest institutional investor
in APEC and 14th largest in the world ($216 billion AUM).
Support for climate-related financial disclosures
Increasing numbers of institutional and other investors are also supporting the Financial Sustainability
Board’s (SASB’s) Task Force for Climate-Related Financial Disclosures (TCFD), which develops climate-
related financial risk disclosures for corporations to use in reporting to their investors. Support for TCFD
grew more than 50% between late-2018 and mid-2019, from 513 to 833 organizations (TCFD, 2019b). At
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
least 129 asset owners formally and publicly support TCFD, including at least 45 from APEC and some of
APEC’s largest and most influential institutional investors: GPIF; Canada Pension Plan Investment Board;
Ontario Teachers' Pension Plan; California Public Employees' Retirement System (CalPERS); New York
State Common Retirement Fund; and AustralianSuper (TCFD, 2019b).
Figure 21. Growth in total PRI signatories over time, from APEC member economies and elsewhere
2500
2000
1500
1000
500
0
All signatories APEC signatories Non-APEC signatories
Source: Principles for Responsible Investment (2019)
Figure 22a. APEC member economies with Figure 22b. All other APEC member economies with PRI
100+ PRI signatories, by type of signatory signatories, by type of signatory
400 45
350 40
35
300 30
250 25
200 20
15
150 10
100 5
50 0 Republic of…
Hong Kong
Vietnam
New Zealand
Chile
Malaysia
Singapore
Japan
Peru
China
0 Russia
Indonesia
Thailand
Mexico
Australia Canada United
States
Asset Investment Service
owners managers providers
Source: Principles for Responsible Investment (2019)
Sustainable investing
Many institutional investors are not only acknowledging the environmental risks to their investments or
supporting related industry groups. They are also increasingly acting on these and other ESG concerns
and adopting sustainable investing approaches. These investors are proactively avoiding investments with
poor ESG performance or that disregard widely accepted ESG norms and standards, emphasizing
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
investments with positive ESG practices or that solve ESG challenges or engaging with funds and
companies to encourage ESG improvements and risk mitigation (Burckart and Ziegler, 2019).
As of 2018, more than one-third of professionally managed assets worldwide were invested using
sustainable approaches ($30.7 trillion), 75% ($23 trillion) of which were owned by institutional investors.
Sustainably invested assets in four major markets in APEC (Australia/New Zealand, Canada, Japan, United
States) totaled $16.6 trillion in 2018, an increase of nearly 54% since 2016 and more than 120% since
2014 (GSIA, 2019). In all, four of these markets, sustainable investment grew both absolutely and relative
to total assets under management (AUM) (Table 5). Sustainable investment grew especially fast in Japan,
where sustainably invested assets increased by more than 300% percent between 2016 and 2018. There
are also indications that enthusiasm for sustainable investment might be on the rise in other APEC
markets (e.g., Latin America) (GSIA, 2019).
Table 5. Sustainably invested AUM in four major markets in APEC, 2014-2018 (billions)
2014 2016 2018
Market Market Market
AUM AUM AUM
share share share
Australia / New Zealand $148 16.6% $516 50.6% $734 63.2%
Canada $729 31.3% $1,086 37.8% $1,699 50.6%
Japan $7 — $474 3.4% $2,180 18.3%
United States $6,572 17.9% $8,723 21.6% $11,995 25.7%
Total $7,456 $10,799 $16,608
Sources: GSIA (2017); GSIA (2019)
3.1.2 Contributions to climate finance
Despite increasingly acknowledging and acting on the risks that climate change poses to their
investments, few institutional investors in APEC member economies or elsewhere are contributing to
climate finance in substantial ways. Available data suggest that few institutional investors are investing in
things like renewable energy or in fortifying infrastructure to adapt to extreme weather events and other
adverse consequences related to climate change. In 2016, institutional investors worldwide contributed
just $2 billion of their more than $42 trillion in AUM to climate finance (CPI, 2018). This represents a near
quadrupling of institutional investors’ contributions to climate finance between 2012 and 2014 but equals
just 1% of all private sector climate finance and less than 1% of total climate finance in 2016 (Figure 23).
Figure 23. Contributions to global climate finance over time, by source (billions)
$469 $452
$359.6 $341 $391
$205 $224
$136 $143 $151
$0.4 $1 $1 $3 $2
2012 2013 2014 2015 2016
Institutional investors Other private sources Public sources
Sources: CPI (2018). CPI (2016); CPI (2013a)
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Climate finance data collection and analysis challenges make it difficult to provide details about which
institutional investors (and other private sector actors) are contributing to climate finance or other
information about their activities. This is particularly true of data on finance for adaptation and energy
efficiency upgrades.14 Nonetheless, available data do provide a sense of the broader universe of climate
finance within which institutional investors operate. Appendix A includes a series of tables that detail
what these data indicate about the who, how much, how so, for what and to where of climate finance
between 2012 and 2016 (the most recent year for which data are available). Notable high-level trends
apparent in these tables include (CPI, 2013a; CPI, 2016; CPI, 2018):
• With exceptions in specific years, climate finance has been steadily increasing over time (from
$359 billion in 2012 to $455 billion in 2016). Some of this documented growth is likely due to
increased data availability, but it is also due to increased investment by national, bilateral, and
multilateral development finance institutions (DFIs). Despite this growth, annual climate finance is
still nowhere near the levels needed to achieve the Paris Agreement goals.
• Driven by steady investment from project developers, the private sector consistently provides
more than half of all climate finance, but public investment has been increasing over time,
absolutely and relatively, and was nearly half of climate finance in 2016 (again, due to increased
contributions from DFIs). Households have also emerged as key contributors to private climate
finance (contributing 20% of private climate finance in 2016).
• Climate finance mostly targets mitigation (e.g., renewable energy), which totaled $472 billion in
2016. New investments in clean energy sources surpassed those for fossil fuels for the first time
ever in 2016. Investment in sustainable transport grew more than 500% between 2013 and 2016,
thanks in part to increases in electric vehicle purchases in China and Europe.
• Most climate finance is sourced and spent domestically. East Asia and the Pacific consistently
receives the highest percentage of climate finance, from both domestic and international
sources.
• Market-rate debt and balance sheet financing (debt, equity) are consistently the most commonly
used climate finance instruments.
14 Climate finance data contain notable gaps and inconsistencies. Data on private climate finance for both adaptation and
mitigation is difficult to obtain and incomplete. It is particularly challenging to collect data on private climate finance for
adaptation and energy efficiency, which private entities are not typically required to report. There are no clear standardized
definitions for what constitute energy efficiency upgrades or adaptation measures or which of such activities align with low
carbon and climate resilient pathways. Further, such data are difficult to disentangle from information about broader project
financing and can be burdensome for private entities to report.
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Although comprehensive granular data on individual institutional investors’ contributions to climate
finance are not available, some individual investors detail their climate finance activities in publicly-
available reports. This includes New Zealand Superannuation Fund (NZ Super Fund), New Zealand’s
sovereign wealth fund with approximately NZ$43 billion in AUM. In 2016, NZ Super Fund announced its
Climate Strategy, a plan to manage the risks that climate change poses to its investments and to increase
its contributions to climate finance (Box 4).
Box 4. NZ Super Fund’s Climate Strategy – a plan for managing climate risks and increasing contributions
to climate finance
In 2016, NZ Super Fund launched its Climate Strategy, a four-pronged plan for addressing the material risks that
climate change poses to its investments.
1. Reduce exposure to companies most at risk from climate change policy due to their emissions or fossil
fuel reserves, with an initial focus on its passive global equity portfolio, and then shifting to its actively
managed holdings. As of 2018, the Fund had reduced its carbon intensity by 18.7% and its potential
emissions from reserves by 32.1%.
2. Analyze climate change risks as part of investment decision-making, which has thus far included
developing a framework for integrating climate considerations into asset valuations and will include
scenario-modeling in the future. The framework establishes methods for examining technology,
resource availability, policy, demand and supply, and liability.
3. Engage with holdings companies, asset managers, and policymakers. NZ Super Fund requires all external
managers to complete an ESG due diligence questionnaire and follow related voting guidelines. It is a
founding member of the One Planet Sovereign Wealth Fund working group, an international
collaboration that encourages integration of climate change considerations into investment decisions.
4. Search for opportunities to invest in climate change mitigation and adaptation. Since 2016, NZ Super
Fund has made a series of new direct investments in climate change mitigation companies and
projects, including investments in:
Longroad Energy Holdings LanzaTech
($25.3 million initial ($87million)
with $100 million potential) Converts carbon waste into high-value fuels and
Renewable energy development and operating chemical (Skokie, IL)
vehicle (Boston, MA)
Sources: NZ Super Fund (2017); NZ Super Fund (2018); Whinerary and O’Conner (2019)
3.2 Increasing institutional investors’ contributions to climate finance in APEC
The growing adoption of sustainable investing approaches that aim to manage climate change risk by
institutional investors in APEC member economies is important and promising to be sure. But these
investors need support if they are to comprehensively manage these risks and contribute to climate
finance at the levels needed to help to achieve the Paris Agreement goals and to hedge climate change’s
worst health and financial consequences.
Systemic structural change is necessary for institutional investors in APEC to comprehensively manage the
long-term risks of climate change and, importantly, to unlock the massive climate financing potential
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
embedded in their more than $42 trillion in assets. This involves meaningfully confronting well-known
policy barriers (i.e., fossil fuel subsidies); ensuring that regulatory frameworks support corporate climate-
related risk disclosures and commensurate analysis, management, and reporting by institutional
investors; and leveraging proven blended finance structures, connecting institutional investors with other
investment-grade products that provide immediate opportunities to contribute to climate finance, and
developing local capital markets (Table 6).
No one solution provides the silver bullet to scaling up institutional investors’ contributions to climate
finance in APEC member economies. But when combined and brought to scale, these efforts will not only
enable institutional investors to better protect the long-term solvency of their assets, but they will also
provide a substantial opportunity to harness their long-term investment horizons, size and influence to
change broader market behaviors and fortify regional economies.
Table 6. Summary of barriers to scaling-up institutional investors’ contributions to climate finance,
and possible solutions
Barriers Solutions
Policy
Policies that disincentive
Policies and other public sectors tools that level the playing field between
investment in climate change
renewable energy and fossil fuels, including carbon pricing, feed-in-tariffs and
mitigation (i.e., fossil fuel
renewable energy auctions.
subsidies).
Regulatory
Regulatory frameworks that • Clarification that climate risk analysis does not conflict with fiduciary duty.
encourage short-termism, • Mandatory corporate climate risk disclosures.
discourage long-termism and are • Standards and guidance that support treatment of climate risks as financial
otherwise inadequate. risks and long-term climate-related analysis, management and reporting.
Market
• Innovative blended finance structures that reduce risk and uncertainty for
institutional investors.
• Connection to immediate opportunities to contribute to climate finance or
otherwise leverage existing investments across asset classes (e.g., fixed
Lack of adequate climate-related income, green bonds); public equities (active ownership to reduce
investment products. emissions); real estate (energy efficiency upgrades); real assets and
infrastructure (e.g., sustainable forestry to combat deforestation);, and
other investment tools (e.g., sustainable Exchange-Traded Funds, climate-
focused indexes and sustainable stock exchanges).
• Local capital market development.
3.2.1 Policy, regulatory, and market barriers
Governments, financial system regulators, and institutional investors in APEC need to confront the
market failures and structural barriers that are preventing comprehensive climate risk-management and
the scaling-up of institutional investors’ contributions to climate finance. This requires tackling the public
policies that lock in global dependence on fossil fuels and disincentivize institutional investment in
renewable energy; addressing perceived conflicts between fiduciary duty and climate risk-management;
fixing the regulatory frameworks that can encourage investors to pursue short-term gains at the expense
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
of long-term considerations; and confronting the lack of climate-focused financial products that align with
institutional investors’ risk and return preferences.
Public policies that disincentivize investment in climate change mitigation
Fossil-fuel subsidies are a major barrier to scaling up institutional investors’ contributions to climate
finance in APEC member economies. These subsidies—which take numerous forms (e.g., direct cash
transfers, tax exemptions and rebates, price controls)—keep the price of oil, gas and coal artificially low
and consumers’ dependence on them high. This decreases the competitiveness of key climate mitigation
industries (e.g., renewable energy) and makes investments in them unattractive (UNFCCC, 2017).
After steadily declining between 2013 and 2016, total global fossil-fuel subsidies increased in 2017 to a
cost of $320 billion and again in 2018 to more than $400 billion (Figure 24). When the estimated costs of
environmental degradation and the resultant greenhouse-gas emissions from fossil fuel consumption
encouraged by the subsidies are included, the true (“post-tax”) cost of the subsidies could be at least $5.7
trillion and 6.5% of GDP in 2017, economists from the International Monetary Fund have estimated
(Coady et al., 2019).
Figure 24. Value of fossil fuel subsidies over time, worldwide (billions)
$600 $519
$465
$500 $427
$400 $317 $319
$276
$300
$200
$100
$-
2013 2014 2015 2016 2017 2018
Source: IEA and OECD (2019)
Some of the countries with the largest fossil-fuel subsidies are in APEC (Table 7). Subsidies in China,
Russia, and Indonesia are among the costliest in the world—with China consistently ranking in the top
three subsidizers between 2016 and 2018 (alongside Saudi Arabia and Iran) and Russia and Indonesia
consistently rounding out the top five (IEA, 2019b). Fossil-fuel subsidies in other APEC member
economies are also high relative to the rest of the world. The U.S. Congressional Budget Office, for
example, estimates that federal fossil-fuel tax preferences cost $4.6 billion in the U.S. in 2016 (Dina,
2017). Total fossil-fuel subsidies in Canada cost in the trillions of dollars and exceed those for education,
job training and healthcare combined. In 2018, Canada ranked last among G7 economies in “ending
support for oil and gas production” (Whitley et al., 2018).
Attempts to increase investment in renewable energy in APEC member economies, including those that
focus on encouraging investment by institutional investors, will be futile so long as fossil-fuel subsidies
persist.
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Table 7. Value of fossil fuel subsidies over time,
in select APEC member economies and worldwide (millions USD)
2013 2014 2015 2016 2017 2018
China $29,385 $25,848 $20,267 $43,734 $40,047 $44,440
Indonesia $33,599 $37,807 $18,302 $18,278 $18,836 $31,344
Korea $172 $155 $167 $163 $128 $83
Malaysia $8,012 $4,963 $343 $1,553 $2,085 $2,296
Mexico $14,474 $7,857 $6,810 $10,832 $11,749 $13,657
Russia $32,632 $33,539 $34,472 $33,368 $21,250 $37,231
Thailand $2,937 $2,015 $957 $551 $864 $1,272
Viet Nam $1,793 $1,116 $79 $107 $471 $612
World $518,764 $465,430 $317,456 $276,356 $318,751 $426,660
Note: Canada and the United States – two of APEC’s largest economies – are not included in the IEA’s
analyses of fossil fuel subsidies, but other sources indicate that they cost in the trillions of dollars in
Canada in 2016 (see G7 fossil fuel subsidy scorecard (2018)) and $4.6 billion in the United States in
2018 (see CBO testimony to Congress 2017).
Source: IEA (2019b)
Regulatory frameworks that discourage institutional investors’ contributions to climate finance
The existence and specifics of institutional investors’ fiduciary obligations vary by APEC member economy
(Table 8), but broadly speaking, such regulations require that institutional investors manage assets
prudently, loyally, and with impartiality, place their clients’ interests above their own, and act in good
faith in the interests of their clients (including current and future retirees), among other things (CIEL,
2016; UNEP FI et al., 2017). In the absence of regulatory guidance to the contrary, institutional investors
in some APEC member economies are unclear about whether integrating climate-related considerations
into their investment decisions conflicts with this duty (Lewis et al., 2016). In short, these investors
contend that their central fiduciary obligation is to maximize returns on their investments, which
prohibits them from considering long-term risks like those posed by climate change.
Some of the attempts by governments and regulators in APEC member economies to indicate that
climate risk (and other social and governance considerations) is material to investment returns—and
therefore aligned with fiduciary duty—have been vague or confusing. In 2016, The U.S. Department of
Labor (DOL), for example, noted that investments that focus on benefits beyond financial returns align
with fiduciary duty. But in 2018, it issued a follow-up memo stating that financial performance is
paramount to fiduciary duty while environmental and social impact is a secondary obligation. Institutional
investors in the U.S.—pension funds in particular—remain uncertain about whether U.S. Labor
Department thinks that ESG issues are material to investment returns and therefore a prudent
investment consideration (Manganaro, 2018).
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Table 8. Fiduciary obligations in select APEC member economies
• Superannuation funds, life insurance statutory funds and managed investment schemes
must exercise reasonable care and diligence; act in good faith in the best interests the
fund; and not use their position to gain an advantage for themselves or the fund.
Australia • Some funds are subject to additional legal requirements including to act honestly,
properly invest funds, tact in the best interests of the beneficiaries and to exercise a
prescribed standard of care, skill and diligence and to give priority to beneficiaries
where there is a conflict of interest. All the above largely also applies to trustees.
Trustees of collective investment schemes established as trusts and of mandatory provident
funds should be loyal (e.g., to avoid conflicts of interest and related-party transactions) and
Hong Kong
prudent (e.g., to monitor fund managers, to conduct due diligence). Trustees are expected
to be” fit and proper” persons and are expected to invest as a prudent person would.
Pension funds must be profitable, support financial stability, act in the public interest,
Korea, maintain liquidity and operate in a transparent manner. All private sector funds and other
Republic of financial actors must act in good faith, not harm investors’ interests while advancing their
own or a third party’s interest and manage conflicts of interest.
Trusts and trustees, agency relationships and directors of companies and statutory
corporations are subject to fiduciary duties. These include the duties of loyalty (e.g., to
Malaysia
avoid conflicts between their duties and personal interests) and prudence (e.g., to exercise
care and skill in discharging their functions).
Fiduciary duty is not a legally defined term, but securities legislation requires that
Singapore
investors avoid conflicts of interest, protect clients’ interests and to act in good faith.
United States Investors have a duty to be loyal and prudent and to diversify investments.
Sources: UNEP FI et al. (2017); UNEP FI (n.d.)
Moreover, despite their long-term investment horizons and mandates, institutional investors in some
APEC member economies devote much of their attention to issues related to short-term accounting (e.g.,
the U.S. and Canada) (Barton and Wiseman, 2014). This short-termism can impede investors (and the
corporations that they invest in) from fully pursuing opportunities to create long-term value, essentially
focusing on today’s beneficiaries at the expense of tomorrow’s (PRI and UNGC, n.d.). In other countries
and regions, regulations otherwise get in the way of institutional investors’ efforts to integrate long-term
value considerations into their analyses (e.g., investment restrictions in Viet Nam, short-term competition
measures for pension systems in Latin America). Specific market dynamics and regulatory and legal
requirements in different APEC member economies propagate short-termism or otherwise inhibit long-
term investment in different ways, but commonly include:15
• Competitive near-term pressure to retain • CEO remuneration structures that tie
beneficiaries and prevent them from compensation to stock price;
switching from one pension fund to
• Selecting asset managers based on short-term
another;
performance; and
• Uncertainty regarding whether beneficiaries
• Requirements that investors report (and in
might elect for early withdrawal;
some cases guarantee minimums) based on
• Restrictions on portfolio diversification, relative returns benchmarked to industry
investible asset classes, and allowable risk; averages.
15
See Bhidé, 2010; Davis et al., 2016; IRI, n.d.; Kay, 2015; Morales et al., 2017; OECD, 2018; SwissRe, 2018; and
UNGC 2019 for more on the information presented in this bulleted list.
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Each of these requirements or objectives can reduce incentives for investors and corporations to pursue
activities and investments related to mitigating and adapting to climate change. They can cause them to
forgo opportunities to invest in climate- and other sustainability-related research, development, and
growth. They can also discourage investments in sectors and technologies that might involve absorbing
near-term risks or up-front costs and attractive returns over a long-term horizon (e.g., renewable energy,
resilient infrastructure, energy efficiency).
Finally, the lack of comprehensive regulatory support and standards related to climate-related disclosure,
data, analysis, and management is also a roadblock to increasing institutional investors’ contributions to
climate finance in APEC member economies. Among the responsibilities of financial system regulators is
helping investors to identify and manage risk and regulating, standardizing and establishing guidelines for
associated activities. Although regulators are increasingly providing guidance related to sustainable
investment, many of these efforts do not specifically or sufficiently help investors contend with the
physical and transitional risks of climate change or help them assess and manage their impacts on the
climate (see Castelli Salman, 2019).
The Securities and Exchange Commission (SEC) in the United States, for example, does not uniformly
mandate that companies disclose climate-risk information. Rather, it only requires that companies do so
when they believe that climate risk is material to their stock price valuation (Williams and Fisch, 2018;
Meagher, 2019; SEC, 2019). Those investors that identify and manage security-, fund-, or portfolio-level
climate risks, do so voluntarily and without consistent data or standards and are commonly must rely on
unregulated third-party sustainability data providers. Their resulting assessments entail any number of
issues, including (Burckart and Ziegler, 2019):
• Some agencies collect data directly from • Voluntarily disclosed data is subject to various
companies or investors, others collect it from biases;
public reports;
• Most climate risk analyses focus solely on
• Data from disparate sources is inconsistent carbon emissions and ignore other material
and not comparable; risks (e.g., physical risks to existing assets) or
the impacts of investors’ behaviors on climate
• Data from certain geographies (i.e., emerging
change;
markets) and sectors, and from privately held
companies (versus publicly listed) is sparse; • Analyses tend to use historical data and
ignore forward-looking and opportunity-
• Different investors and data agencies use
focused considerations; and
different terminology for the same issue;
• Climate risk findings are sometimes bundled
• Ratings agencies and individual investors use
together with other environmental, social and
bespoke analytic methods and ratings
governance (ESG) information and difficult to
schemes;
disentangle.
Moreover, the lack of environmental risk management standards enables widespread “greenwashing”:
asset managers and other investors can manipulate environmental data, analysis, and terminology to
make misleading claims about their environmental impact (Watson, 2016). Reputable ratings agencies—
including The Bloomberg Terminal and Morningstar, for example—both score companies’ environmental
performance for investors but in different ways (Burckart and Ziegler, 2019). Bloomberg analyzes 120
self-reported indicators and ascribes absolute and relative ESG performance and disclosure scores
between 1 and 100 to 9,500 publicly listed companies. Morningstar combines ESG data from
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Sustainalytics data and other sources to assign “globe ratings” between one and five to 20,000 mutual
funds and ETFs. The existence of such rating schemes is encouraging, but without requisite oversight and
guidance to ensure data availability and analysis quality, investors do not have the tools to collectively
manage climate change risks in a consequential way.
Lack of adequate climate finance investment products
Many institutional investors in APEC and elsewhere cite a dearth of attractive, investible climate finance
products as another reason for their lack of contributions to mitigation and adaptation activities (i.e.,
available products do not align with their risk appetites and return expectations or are not large enough
to meet their requirements). One quarter of respondents to a recent survey of asset owners in the U.S.,
for example, reported that they do not purchase “sustainable” investing products, including those that
consider climate-change risks, because they do not understand the selection processes for the underlying
investments and because they believe that the products do not perform well (Lewis et al., 2016). This
sentiment is likely due, at least in part, to the perceived poor financial performance of the very first
“socially responsible” investment funds in the 1980s and 1990s, combined with the failures of many early
clean-tech investments between 2005 and 2010 (Lewis et al., 2016).
3.2.2 Policy solutions
Combined with the elimination of fossil-fuel subsidies, several public policy approaches can help to create
a policy framework in APEC that encourages institutional investors to re-allocate their assets away from
fossil fuels and toward renewable energy and other climate change mitigation and adaptation solutions. It
is primarily within the purview of governments to enact necessary policy reforms discussed above, but
that does not mean that institutional investors must sit on the sidelines and wait for reforms. Rather they
can and should use their size and influence to proactively advocate for requisite government action (see
Box 8 on page 61).
Public policies and tools that level the playing field between renewable energy and fossil fuels
Carbon pricing schemes are policy mechanisms that aim to discourage fossil-fuel consumption. In doing
so, they boost incentives for renewable energy consumption. They also encourage investment in
increasing the supply of renewable energy, and, ultimately decrease carbon emissions. Economists praise
carbon pricing for its simplicity, cost-effectiveness, and flexibility (see CLC, 2019). The most common
carbon-pricing schemes include emission trading systems (ETSs) (“cap-and-trade”) and carbon taxes on
fuels or products generating greenhouse gas emissions.
To be maximally effective, carbon prices should equal between $40 and $80 per ton of CO2 by 2020 and
between $50 and $100 per ton of CO2 by 2030 (as to the single digit prices under some existing programs,
as shown in Table 9) and be implemented alongside complementary mitigation policies (CPLC, 2017).
None of the carbon pricing schemes in APEC member economies are priced accordingly (Table 9).
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Table 9. Carbon pricing mechanisms in APEC member economies
GHG % of global
Subnational
Carbon Tax
National
emissions GHG
ETS
Country Initiative Price
covered emissions
[MtCO2e] covered
Australia Australia ERF Safeguard Mechanism 380.84 0.70% N/A
Canada federal fuel charge 179.73 0.33% $15.13
Canada federal OBPS 82.09 0.15% N/A
Alberta CCIR 124.80 0.23% $22.70
BC carbon tax 42.70 0.08% $30.26
BC GGIRCA 0.00 0.00% N/A
Newfoundland and Labrador carbon
Canada
tax
4.51 0.01% $15.13
Newfoundland and Labrador PSS 4.26 0.01% N/A
Nova Scotia CaT 15.20 0.03% N/A
Prince Edward Island carbon tax 0.92 0.00% $15.13
Quebec CaT 68.85 0.13% $17.67
Saskatchewan OBPS 8.64 0.02% N/A
Chile Chile carbon tax 46.67 0.09% $5.00
Beijing pilot ETS 84.65 0.16% $12.16
Chongqing pilot ETS 97.24 0.18% $1.67
Fujian pilot ETS 200.00 0.37% $2.37
Guangdong pilot ETS 366.30 0.67% $3.33
Hubei pilot ETS 162.09 0.30% $5.62
China Shanghai pilot ETS 169.69 0.31% $5.81
Shenzhen pilot ETS 61.20 0.11% $4.65
Tianjin pilot ETS 118.25 0.22% $1.96
China national ETS (scheduled for
3231.90 5.94% N/A
2020)
Japan carbon tax 999.43 1.84% $2.66
Japan Saitama ETS 7.91 0.01% N/A
Tokyo CaT 13.92 0.03% $5.95
Korea,
Korea ETS 468.29 0.86% N/A
Republic of
Rate 1: $3.00
Mexico Mexico carbon tax 307.33 0.56%
Rate 2: $0.37
New
New Zealand ETS 39.85 0.07% $15.63
Zealand
Singapore Singapore carbon tax 42.02 0.08% $3.63
California CaT 377.69 0.69% $17.67
Massachusetts ETS 14.27 0.03% N/A
USA RGGI 103.14 0.19% $5.07
Washington CAR 57.81 0.11% N/A
Virginia ETS (scheduled for 2020) 36.93 0.07% N/A
Notes: Additional carbon pricing schemes are under consideration in Canada, Chile, Indonesia, Japan, Mexico, Thailand, the United States
and Viet Nam. Prices are not necessarily comparable between carbon pricing initiatives because of differences in the number of
sectors covered and allocation methods applied, specific exemptions, and different compensation methods. Due to the dynamic
approach to continuously improve data quality and fluctuating exchange rates, data of different years may not always be
comparable.
Source: WBG (2019a)
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Given that most carbon pricing schemes are not yet priced adequately to galvanize private investment in
renewable energy in APEC, many countries are turning to innovative project procurement methods to get
renewable energy projects off the ground. This primarily includes feed-in tariffs (FITs) and renewable
energy auctions—widely-used, effective, public policy tools for encouraging private investment in
renewable energy, with more direct impact than through carbon pricing. Through both FITs and auctions,
governments offer long-term (e.g., 20 years) power purchase agreements (PPAs) to renewable energy
project developers to supply energy at a set price. The long-term nature and price stability of FITs and
auctions provide security for project developers, especially those for newer or emerging renewable
energy technologies and for smaller projects, and guaranteed returns over a specified period (IRENA,
2017; Milanés-Montero et al., 2018; WBG, 2019b). This, in turn, attracts private investors—including
long-term institutional investors – to renewable energy projects that would not otherwise align with their
risk appetites and return profiles.
FITs are more popular than auctions, but auctions are quickly gaining popularity worldwide and
developing a promising track record, including driving the costs of solar PV and wind power to record
lows in numerous countries (IRENA, 2019; REN 21, 2019). China, for example, has completed two
renewable energy auctions for solar power generation since 2016, the most recent of which approved
nearly 4,000 projects to install 22.78 gigawatts for an average price of $0.048. China will also begin using
auctions for onshore wind power generation in 2020 (Bellini and Hall, 2019). As of 2018, 111 countries,
states, or provinces had FITs (REN 21, 2019). These included Vietnam, which recently released plans to
continue and expand its successful FIT program that was set to expire in 2019 (Box 5).
Box 5. Plans to expand Viet Nam’s successful FIT
Launched in 2017, Vietnam’s FIT ($0.0935/kWh) has helped to connect 82 solar power plants to power grids and
to generate 4.46GW of solar power—making solar power the source of more than 8% of electrity in Vietnam.
Another 13 plants that generate a total of 630 MW of energy are scheduled to be connected to the grid by the
end of 2019 thanks to the FIT. Vietnam’s Ministry of Industry and Trade recently released draft plans to continue
the FIT through 2021. This second iteration of the FIT contains notable changes that reflect lessons learned from
the first tariff and Vietnam’s evolving energy needs. Namely, it includes a range for the tariff, $0.0667/kWh to
$0.1087/kWh, that varies based on geographic region and technology used. Tariffs would be higher in areas with
lower solar irradiance (i.e., less sunlight) and lower in those with higher irradiance (i.e., more sunlight) and
would vary based on project type (floating, ground-mounted, rooftop, or contain an integrated storage system).
PPAs would last for 20 years.
Sources: Baker Mackenzie (2019); GlobalData Entry (2019)
3.2.3 Regulatory solutions
Among institutional investors’ most effective tools for managing climate risks is data to inform their
climate-related long-term investment decisions and behaviors. Financial regulators across APEC member
economies (e.g., governments, insurance industry and pension fund regulators and corporate governance
entities) can and should play a substantial role in helping institutional investors to collect, analyze, and
use information about long-term climate-related considerations. This includes clarifying their fiduciary
duty vis-à-vis climate risk, and ensuring that they have the information, tools, and guidance required to
effectively and comprehensively assess climate financial risks (physical and transition), avoid investments
that jeopardize their long-term goals and obligations, and pursue those in their long-term interest. As
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
with the policy solutions discussed above, institutional investors should proactively encourage swift
regulatory action along each of these dimensions (see Box 8 on page 61).
Clarifying that consideration of climate risk does not conflict with fiduciary duty
Government and other regulatory entities in APEC member economies responsible for establishing
fiduciary duty rules and regulations should clarify that fiduciary rules, codes and guidance to establish
that climate-related considerations (alongside other social and governance factors) do not conflict with
fiduciary duty. When feasible, they should also specify that fiduciary duty in fact requires that institutional
evaluate ESG considerations, including establishing that ESG considerations are material to risk and return
and explaining that fiduciary duty requires institutional investors and their asset managers to assess long-
term ESG factors and to vote and engage with holdings accordingly (UNEP FI et al., 2017).
Mandating corporate climate risk disclosures
Although the efforts of some institutional investors in APEC to require that their holdings disclose carbon
emissions and other climate-related information to them have helped increase corporate climate risk
disclosures (e.g., GPIF and NZ Super), corporate disclosures overall remain low. Further, disclosures vary
by industry and sector and few of the companies that disclose climate risk information do so in
accordance with recommendations from the internationally recognized TCFD recommendations. That is,
while these corporations provide investors with information, much of it is not useful for the purpose of
making decisions (TCFD, 2019a).
Corporate governance regulators in APEC member economies might therefore establish requisite TCFD-
aligned laws, mandates and guidelines for comprehensive and effective climate risk disclosure. This
means requiring that all corporations across all industries and sectors report climate-related information
in their public financial disclosures, including information about: (a) governance around climate-related
risks and opportunities; (b) the potential impacts of material climate-related issues on the company
(business, strategy, financial planning); (c) how the corporation identifies, assesses, and manages climate-
related risk; and (d) climate-related metrics and targets (TCFD, 2017). Disclosures should outline both
physical risks (acute, chronic) and transition risks (policy and legal, technological, market, reputational)
and an assessment of their potential financial impacts. The Sustainability Accounting and Standards Board
(SASB) provides a suite of tools for identifying material risks for 77 major industry sectors (SASB, 2019).
Corporate reporting should include long-term metrics for integration into examinations of the long-term
performance and health of companies. These metrics vary by industry sector but might include things like
climate-related research and development plans and energy intensity of production over time (Barton
and Wiseman, 2014).
Encouraging and supporting effective management of climate risks
As is outlined in chapter 2, all financial institutions—including institutional investors—should treat climate
risks as pure financial risks. Beyond encouraging the practice, regulators should provide institutional
investors with the technical and capacity-building support and guidelines necessary to ensure that they
adopt best practices for doing so. These best practices include:
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
• Ensuring support from the governing board. Effective integration of climate risks into investment
analyses requires making decisions about things like business objectives regarding climate risk
management, climate risk reporting, and the definitions climate-related exposure limits.
Governing boards play an important role in supporting investors’ integration of climate risk,
making these decisions, and setting commensurate expectations.
• Appropriately assigning ownership of climate risk. Climate risk analysis should not be the
responsibility of a separate specialist unit. Rather, institutional investors should integrate it across
the risk management units that manage all other sources of financial risks (i.e., credit and asset
management units) and might: (a) develop a team specialized in climate risk within the firm, (b)
disseminate climate risk specialists across all teams within the firm and (c) train all employees on
climate risk management.
• Selecting appropriate risk metrics. The development of climate risk metrics is still a work in
progress, however, several options already exist that an institutional investor can leverage to
integrate meaningful climate-risk measures in its risk management (see, for example, UNEP
Finance Initiative’s comprehensive overview of available methodologies). Investors should be
attuned to five core methodological issues when developing climate financial risk metrics (Box 6).
• Choosing the right climate stress test scenarios. Most methodologies for assessing climate
financial risk metrics rely on stress tests that consider the effect of a scenario in terms of financial
cost and likelihood. When choosing stress-test scenarios, investors should consider: (a) the extent
and speed of the transition to a low-carbon economy and the roots of the physical and transition
risks; (b) those risks mostly like to impact their assets in different sectors (e.g., hazards most likely
to occur in their operating area, the transition risks that have major consequences for the output
of the model); (c) the second-round amplifying effects of climate risks; and (d) the impact of
sudden shifts in investors’ expectations about climate risk on financial markets and asset prices.
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Although they are not institutional investors, Chinese banks are early movers in integrating climate risk in
their risk management framework. They and the regulators who support them provide a valuable model
for doing so for the entire financial system (see Box 7).
Box 6. Chinese banks and regulators: a model for climate risk management
The effects of economic activity on the environment has become a major concern in China and has led the
Chinese government to enact measures such as fines on polluters and financial regulators to prioritize things like
environmental risk management. Two of China’s largest banks — Industrial Commercial Bank of China (ICBC))
and China Industrial Bank (CIB) — have subsequently integrated environmental risks into their risk-management
frameworks, in ways aligned with the best practices described in this section and with support from financial
regulators.
Governing boards. ICBC’s governing board supported environmental risk integration after realizing that such
risks had material implications for borrowers’ ability to repay their loans (negatively impacted by environmental
litigation) and the costs associated with switching from carbon-intensive to low-carbon technologies. They also
forecasted that pressure on borrowers to take environmental measures and included environmental risks in
their credit risk assessments. CIB’s board was motivated by a desire to be considered a leader in the assessment
of environmental credit risk that could give them a competitive edge.
Preparation. CIB emphasized the need to ensure that personnel had requisite specialized environmental risk
assessment management expertise before engaging in the market. Both banks underlined the importance of
internal support and that it is important to ensure that changes such as change in leadership do not disrupt early
efforts around research, innovation and monitoring. They also emphasized the importance of cooperation and
coordination with governmental authorities regarding future policy developments that might impact definitions,
classifications, standards, guidelines and requirements.
Risk-assessment methodologies. ICBC developed environmental stress tests, the development of which highlight
three steps in designing an adequate methodology: (a) group industries with similar environmental policy
measures, operational and market conditions, production technologies and resource depletions and apply
specific stress tests to them; (b) focus on high-polluting and high-depleting industries to implement stress test
to achieve the biggest impact on decreasing pollution and resource depletion and to isolate industries that are
likely to be the most impacted by transitions costs; and (c) define scenarios according to the specific conditions
of the industry under scrutiny (e.g., location, production costs, specific environmental laws). CIB uses the
monitoring system developed by the Ministry of Ecology and Environment to assess firms’ environmental risks.
Support from regulators. Chinese authorities indicated their desire for banks to rapidly start integration
environmental risks. Related incentivization measures reflected three core three principles: (a) progressivity in
measures—they implemented their framework progressively through “opinions,” the more formal “guidelines”,
and then “requirements”; (b) coordination between governmental bodies—they replaced a fragmented
framework with a coherent with that requires coordination between the different governmental bodies; and (c)
complementary of measures—they provided tools and data alongside the new regulations that helped banks
adapt to the new standards.
Source: Frisari and Monnin (2019)
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Encourage long-term climate-related analysis, management, and reporting
Institutional investors have near- and long-term beneficiary obligations. As described above, despite their
long-term investment horizons, institutional investors in APEC member economies must devote much of
their attention to short-term considerations (for various reasons, described above), sometimes at the
expense of managing of long-term considerations like climate change. Doing so can lead them to invest in
things like carbon-intense assets and to forgo investments in renewable energy companies, thus
generating unintended consequences like environmental degradation (FCLT, 2018). The answer is not for
institutional investors to ignore their short-term obligations. Instead, regulators (e.g., pension fund and
insurance industry regulators) should encourage and help institutional investors achieve the right balance
between making money for today’s beneficiaries and creating value for tomorrow’s—by integrating long-
term considerations like climate change into their investment management processes (Barton and
Wiseman, 2014).
Notable institutional investors and regulatory entities in APEC have started to embrace and otherwise
endorse long-term value creation. Singapore’s sovereign wealth fund (GIC Private Ltd.), for example,
publicly reports on a 20-year horizon for value creation. GIC provides an example of how consideration of
longer-term risks and rewards can usefully inform asset allocation (Barton and Wiseman, 2014). As of
2014 (and since the mid-2000s), GIC has invested up to one-third of its assets in public and private
companies in emerging markets in Asia and indicated plans to tolerate short-term underperformance of
these investments given their long-term growth potential (Barton and Wiseman, 2014). In 2018, Japan’s
Financial Services Agency (FSA) and the Tokyo Stock Exchange revised the Japanese Corporate
Governance Code to, among other things, encourage corporations and institutional investors to consider
mid- and long-term sustainable value creation (Tokyo Stock Exchange, 2018).
However notable GIC’s long-term horizon and Japan’s integration of long-term value creation into its
corporate governance code, neither takes the important step of explicitly connecting climate-related
considerations with long-term investment management. To date, France is the only country to legally
mandate that financial system participants examine and report on long-term climate-related risk (PRI,
n.d.). Article 173 of France’s Energy Transition Law requires that corporations, institutional investors, and
other financial system participants measure and report on the physical and transition risks of climate
change physical and transition risk. It also requires that they report on efforts to set and meet low-carbon
targets. The law does not prescribe specific analysis and reporting methods but does require that entities
justify the methods used. November 2016, the European Union directed all EU-based pension funds to
assess climate change risk (Guarascio 2016).
The CEO of Singapore’s GIC and representatives from other of APEC’s institutional investors sit on the
board of directors for Focusing on Capital for the Long Term (FCLTGlobal), which develops and
disseminates investor-driven recommendations for long-term value creation and reporting. This includes
tools for predicting the long-term success of corporations, communicating with board members and
other stakeholders about the value of long-term planning, navigating long-term investment in the public
markets, and managing risks across multiple time horizons.
It is primarily within the purview of governments and regulators to enact the various necessary policy and
regulatory reforms discussed above, but that does not mean that institutional investors must sit on the
sidelines in this area (Box 8).
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Box 7. Institutional investors using their influence to advocate for policy and regulatory reform
Institutional investors can influence policy and regulatory action that increases their ability to contend with
climate change risks and contribute to climate change solutions, individually and through investor-led coalitions.
In fact, there are various examples from the past 20 plus years of institutional investors using their collective
influence to force environmental or social change, including helping to end apartheid in South Africa.
In September 2019, a group of 477 institutional investors with more than $34 trillion in assets under
management signed the Global Investor Statement to Governments on Climate Change. In it, they implored
world leaders to take necessary action to achieve the Paris Agreement Goals; urged them to adopt requisite
policy and regulatory reforms that mirror many of those outlined in this chapter; and offered to partner with
governments to make it all happen. Among their requests are:
• Aligning public policies with the Paris • Phasing out thermal coal power;
Agreement goals; • Putting a meaningful price on carbon; and
• Incorporating Paris-aligned climate scenarios • Committing to improving climate-related
into policy frameworks and energy transition financial disclosures in line with TCFD’s
pathways; recommendations.
• Phasing out fossil fuel subsidies;
The signatories asked that these and other recommendations be undertaken with “the utmost urgency,” noting
that they are “vital” to achieving the Paris Agreement goals and maintaining investor confidence and
highlighting an “ambition gap” between the Agreement goals and full implementation of existing Intended
Nationally Determined Contributions.
Sources: The Investor Agenda: Accelerating Action for a Low-Carbon World (2019); US SIF Foundation (2016)
3.2.4 Market solutions
Innovative blended finance structures that reduce risk and uncertainty for institutional investors
Blended finance is a promising approach for attracting institutional investors to climate finance in APEC
member economies. Some climate-related sectors, subsectors and technologies have matured to a point
where they provide investment-grade opportunities at deal sizes and risk levels appropriate for
institutional investors (e.g., photovoltaic solar and wind power companies, renewable energy storage and
technology and low emissions vehicles) (WEF, 2016). But the majority of climate change mitigation and
adaptation projects are still too “early stage,” immature or small for institutional investors to invest in.
This is particularly true of infrastructure projects in developing countries, for which there is a limited track
record of private investment (IFC, 2018).
Using blended finance structures, public and philanthropic entities agree to absorb many of the risks and
uncertainties associated with investing in climate change mitigation and adaptation projects. In doing so,
they galvanize private investment in climate finance projects that institutional and other private investors
might otherwise decline given existing market conditions—that is, risks and uncertainties associated with
investing in new or immature technologies or in developing countries and emerging markets (Blended
Finance Taskforce, 2018).
Blended finance structures commonly include (Brown and Jacobs, 2011; Convergence, 2018):
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• Concessional capital through which the public or philanthropic entity assumes the highest risk for
the same or lower rate of return.
• Loan guarantees and insurance through which public financial institutions protect investors
against default by underwriting project loans, transferring risk (e.g., political or regulatory) from
the lender to the guarantor.
• Technical assistance funds and design stage grants that assist projects in reaching bankability and
financial close.
They might also include: subordinated financing that gives private investors the first claim on the
distribution of profit at a higher priority than payments to public institutions; foreign exchange liquidity
facilities from which project developers can access funds to repay lenders in the event of local currency
devaluation; and pledge funds that enable investors to make defined contributions to a fund over time
but only invest in the specific projects that they want to invest in (CPI, 2013b).
Each of these structures provide frameworks through which public and philanthropic entities can mitigate
these risks for institutional investors and offer them a new opportunity for portfolio diversification
(Blended Finance Taskforce, 2018). Climate Investor One and the Sarulla geothermal project (one of the
largest geothermal projects in the world) in Indonesia (an APEC member economy) provide useful
examples of how public entities are raising and using blended finance to invest in climate change
mitigation and adaptation (Box 9).
National, bilateral and multilateral development finance institutions (DFIs) not only directly provide nearly
half of all climate finance, but they are also adept at mobilizing blended concessional finance—
concessional finance from donors or third parties (e.g., governments or foundations) alongside their own
finance or other commercial finance—to catalyze co-investment from private and other public sources
(DFI Working Group, 2018). In 2017, DFIs leveraged approximately $1.2 billion in concessional funds and
about $3.9 billion of their own funds to mobilize more than $3.3 billion in private sector finance for
sustainable development projects and for projects in developing countries (DFI Working Group, 2018).
DFIs are particularly effective at brokering partnerships between international institutional investors,
policymakers and domestic investors to raise blended finance for climate change projects. Such
partnerships provide structured mechanisms to address information asymmetry and home bias that
international institutional investors typically encounter when investing in developing markets. They also
enable DFIs to support international investors in participating in long-term investments in developing
markets through things like direct co-investment in infrastructure projects and investment in local
infrastructure funds.
This is true, for example, of the partnership between the World Bank Group and the National Association
of Securities Professionals (NASP) that has mobilized $800 million through South Africa’s private equity
industry for infrastructure projects across Africa. NASP provides a useful example of how DFI’s develop
peer-to-peer networks between international and domestic institutional investors and establish blended
finance vehicles to advance things like climate change adaptation. In partnerships like this one, DFIs
provide valuable technical inputs on policy and regulatory reforms, local markets development including
minimum threshold of financial sector development, and asset pipelines, that help inform the investment
focus. They also leverage their convening power, which enables structured policy dialogues, peer-to-peer
relationships with domestic investors, and wide market participation.
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For every dollar that they invested in climate change mitigation and adaptation from 2016 through 2018,
for example, six multilateral DFIs jointly raised between $1.38 and $1.58 in co-investments—$0.87 in other
public finance and $0.62 in private finance, on average (WRI, 2019) (see Figure 25).
Institutional investors have been slower to embrace blended finance than other private sector investors,
but recent market activity indicates that this might be changing. For example, Allianz (the world’s largest
insurance company) committed $110 million to the Emerging Africa Infrastructure Fund in 2018
(Convergence, 2018). Such efforts benefit from the recent publication of blended-finance principles by
organizations like the World Bank Group’s International Finance Corporation, which put forth standards
related to ensuring that the blending of funds achieves several goals—that it fills a gap in the market,
attracts private investment with the minimum required concessionality, is in pursuit of both sustainability
and commercial viability, addresses market failures and distortions, and promotes adherence to high
governance, transparency, and other standards (IFC, n.d.). Attracting institutional investors to blended
finance for climate change mitigation and adaptation will also require scaling up the size of related
investment vehicles from the millions to the billions (Convergence, 2018).
Box 8. Raising and using blended finance for climate change mitigation and adaptation in action –
Climate Investor One and the Sarulla geothermal project (Indonesia)
Raising capital: Climate Investor One. Launched in 2015 by the Netherlands Development Finance Company
(FMO) in partnership with Phoenix InfraWorks, Climate Investor One raises and blends capital for renewable
energy projects in low and lower middle-income countries. It includes three stages (tiers) of investment, each
that uses a different blended finance approach to provide capital for a different project phase with its own level
of risk and expected returns and that raise capital for the entirety of a project’s lifecycle.
Direct investment
Blended finance Expected
Tiers Concessional
structure Private returns
+ public
Tier 1 (20%) First loss $300 million 2% (inflation)
Tier 2 (40%) Subordinated equity $175 million ($225 million 20%
Tier 3 (40%) Senior fixed income guaranteed) 8%
As of June 2019, the fund had raised $850 million which it plans to use to invest in projects that will deliver an
estimated 1,700MW of additional capacity, generating approximately 5,100GWh of electricity per annum and
reduce greenhouse gas (GHG) emissions by 1.9 million per ton of CO2 per year.
Financing projects: the Sarulla geothermal project. Using a political risk guarantee provided by the Japan Bank for
International Cooperation and a 20-year Business Viability Guarantee from the Government of Indonesia, the
Asian Development Bank led an effort to secure $350 million in blended capital to launch the Sarulla geothermal
project. One of the largest geothermal projects in the world, the Sarulla project was fully operational as of 2018
and supplying 330MW of geothermal energy.
Sources: Asian Development Bank (ADB) (n.d.); Blended Finance Task Force (2018); Convergence (2018); Richter (2018); The
Lab (2019)
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
Figure 25. Co-financing mobilized for every $1 spent by multilateral DFIs for climate change mitigation and
adaptation, 2016-2018
$4.00
$3.00 $0.75
$2.00
$0.30
$2.61
$1.00 $1.28 $0.65
$0.62 $1.65
$0.59 $0.46 $0.76
$0.48 $0.19
$-
ADB AfDB EBRD EIB IDBG WBG
from other public sources from private sources
Source: WRI (2019).
Other climate investment products and strategies
The market for investment-grade climate-related investment products is small and still developing, but
various products, tools and other options provide institutional investors with immediate, high-quality
opportunities to contribute to mitigation and adaptation solutions. Further, some climate-related sectors,
sub-sectors and technologies once deemed too new, immature or small for institutional investment (i.e.,
risky) have matured and provide opportunities for larger deals in bankable- and operational-stage
projects (WEF, 2016).
There are potentially profitable investment opportunities or strategies in most asset classes through
which institutional investors can support energy efficiency projects and energy efficient companies,
influence climate change mitigation efforts outside of investing in renewable energy and promote
sustainable cities and public transportation. They include, for example:
• Fixed income investments like green bonds, the market for which has grown tremendously since
the first bond was issued in 2007 – in terms of popularity, capital raised, deal size, market
confidence, among other things. As described in chapter 2, today’s $168 billion green-bond
market largely aligns with internationally-recognized standards and principles (e.g., the Green
Bond Principles and the Climate Bond Standard); has 625 issuers (including financial institutions,
commercial banks, asset managers, and pension funds); and has a median deal size of $129
million. It is expected to continue to grow, with issuances exceeding US180 billion in 2019
(Climate Bonds Initiative, 2019).
• Strategically investing in large climate-focused or -friendly companies through the public markets
or using active ownership and exercising shareholder rights as part of public equities investment
management to pressure holdings to reduce their emissions (Box 10) and divesting from public
holdings when engagement is ineffective.
• Buildings account for as much as 40% of energy consumption in places like the U.S. (UEIA, 2019).
Institutional investors can strategically use real estate investments to promote energy efficiency,
assure environmental health and increase the use of sustainable construction materials. Global
Real Estate Sustainability Benchmark (GRESB), established in 2011 by a group of pension funds
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CHAPTER 3: MOBILIZING INSTITUTIONAL INVESTORS
provides investors a benchmark against which to assess the energy efficiency of their real estate
investments.
• Real assets and infrastructure investments in sectors like sustainable forestry have the potential
to conserve critical ecosystems, prevent deforestation, sequester carbon and generate economic
activity for local communities (GIIN, 2019). On average, institutional investors allocate
approximately 3% of their assets in real assets including infrastructure, timber and agriculture
and achieve average returns between 6% and 8% in this asset class (Ellsworth and Spalding,
2016). For example, Manulife Investment Management, the global asset management division of
Manulife, the Canadian insurance and financial services company, invests in Hancock Timber
Resource Group (HTRG), which develops and manages over 6 million acres (2 million hectares) of
globally diversified timberland portfolios (Manulife, 2019; Hancock, 2019).
There are also various other investment tools and mechanisms that institutional investors can use to
reduce the carbon emissions of their portfolios, including environmentally targeted mutual funds,
Exchange-Traded Funds (ETFs), climate-focused indexes and sustainable stock exchanges:
• In addition to the availability of individual publicly traded stocks in alternative energy and energy
efficiency companies, a growing number of sustainable mutual and ETFs include alternative
energy or climate change considerations as part of their broader consideration of ESG factors.
These pooled funds have steadily increased over time. For example, of the 37 new ETFs launched
in 2018, 18 were sustainable ETFs (Hale, 2019). ETFs are collections of securities (e.g., stocks or
bonds) that typically track an underlying index, and which can be traded throughout the day like
individual stocks. (Investors in conventional mutual funds can only trade in and out of these funds
at the end of each day.) The largest climate-focused ETFs is iShares’ MSCI ACWI Low Carbon
Target ETF, which tracks an index composed of large and mid-capitalization developed, as well as
emerging market equities with relatively low carbon exposure (iShares, 2019).
• Most of the major index providers are increasingly offering sustainable indexes (including MSCI,
Standard & Poor’s/Dow Jones and FTSE/Russell and Thomson Reuters), with some providing
explicitly climate-focused indexes. The latter enable institutional investors to integrate climate
risk considerations into their global equity investment processes. In 2019, for example, MSCI
announced the launch of its MSCI Climate Change Indexes, which re-weight securities based on
their exposure to low carbon transition risks, carbon emissions and renewable energy, thereby
helping investors build climate resiliency into their global equities portfolios. Other indexes
include the Low Carbon 100 Europe Index, based on the performance of the 100 largest
European companies with the lowest carbon (CO2) intensity in their respective sectors or sub-
sectors, and the FTSE Global Climate Index Series (Bernstead, 2019; MSCI, 2019).
Institutional investors with a passive investment strategy can use these indexes to ensure that
they shift their investment allocations away from high-emitters and to low-emitters. Among
these is New York State Common Retirement Fund, which recently doubled its passive equity
investments in an internally managed low emissions index to $4 billion. New Zealand
Superannuation Fund plans to manage its entire passive equity portfolio against a low-carbon
benchmark by 2020 that will reduce its exposure to overall emissions by 20% and to carbon
reserves by 40% (Guyattt and Chatterjee, 2018).
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Box 9. Active ownership to reduce emissions
Some institutional investors engage directly with companies to address ESG challenges, including those related
to climate change. Many do so as an alternative to divesting from problematic holdings, believing that they can
better effect change through engagement than divestment. This engagement goes beyond exercising voting
rights (however important) and emphasizes ongoing dialogue and progress measurement. These actions are
commonly coordinated across shareholders to maximize influence and impact.
Under the leadership of the California Public Employees’ Retirement System (CalPERS), for example, 320
investors—including other of the largest investors in the world (GPIF, APG, PGGM, PIMCO, UBS)—have joined
Climate Action 100+, an initiative focused on pressuring some of the world’s largest carbon-emitting corporates
to reduce their carbon footprint (i.e., greenhouse gas emissions) in line with the Paris Agreement goals.
In 2015, CalPERS—one of the ten largest asset owners in the world with more than $375 billion in assets under
management—used Carbon Disclosure Project (CDP) data to assess the emissions of its public equities portfolio.
It found that approximately 100 of its more than 10,000 holdings generated half of the portfolio’s carbon
emissions. Furthermore, the analysis revealed that these 100 companies are among the top carbon emitters in
the world (including BP and Maersk) and emit 28 gigatons of carbon per year, more than half of the maximum
gigatons (40) at which it is possible to achieve the Paris Agreement 1.5oC goal.
CalPERS subsequently recruited its peers (e.g., GPIF, APG) whose portfolios also include many of these 100
“focus list” companies, and who collectively represent nearly $34 trillion in assets under management, to join
Climate Action 100+ and collaboratively pressure the holdings to: (1) ensure that their governance structures
encourage climate risk accountability and oversight; (2) improve their carbon disclosure; and (3) reduce their
carbon emissions.
According to CalPERS, such collaborative engagement might be one of the most effective ways that they can
help to achieve the Paris Agreement Goals: The emissions trajectory of these top emitters—or systemically
important carbon emitters—is critical to whether the global economy meets the 2 oC temperature-rise limit set
out in the Paris Agreement. According to Anne Simpson, CalPERS’ Director of Board Governance and Strategy, it
is through Climate Action 100+ that CalPERS and others can “get down to the actual companies - not sectors,
that’s where we have ownership rights and can engage.”
The focus list companies have five years to implement their emissions reduction plans, which correspond with
the timeline for achieving the Paris Agreement goals.
Sources: Simpson (2019); Climate Action 100+ (2019); CalPERS (2019); Burckart et al. (2016); Convergence (2018); Richter
(2018); The Lab (2019)
• Sustainable stock exchanges help investors identify companies with favorable ESG ratings and, in
some instances, those with a focus on climate change adaptation and mitigation. Launched in
2009, the Sustainable Stock Exchange (SSE) initiative has helped publicize the utility of stock
exchanges for promoting standards, enhancing transparency, guiding issuers, investors, and
policymakers, and facilitating the growth of climate finance. It focuses on five areas of action,
including: strengthening disclosure (i.e., improving the quality and quantity of disclosure of
environmental and social data); clarifying duties (i.e., guiding investors on the integration of
sustainability into their decisions); strengthening governance (i.e., introducing board
responsibilities related to environmental and social factors); building capacity (i.e., facilitating the
training of market participants on sustainability topics); and facilitating investment (i.e., aiding
investment flows towards achieving the SDGs via financial products) (SSEI, 2017).
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Of interest to institutional investors is the SSE initiative’s promotion of listing standards
mandating ESG disclosure. For example, the Hong Kong Exchanges and Clearing Limited (HKEX),
which has more than 2,200 companies listed on its stock exchange, requires its listed companies
to report ESG information, and provides both written guidance and training on this and other
sustainability-related topics. As of June 2018, The HKEX was the 74th stock exchange to join the
SSE initiative, which now represents nearly 30,000 companies with a market capitalization of $40
trillion (SSEI, 2017).
Local capital market development
Blended finance and each of the investment opportunities, strategies and tools discussed above
represent important steps toward developing local capital markets that transform climate change
investment needs into actual investment opportunities. But more work remains—on the part
policymakers, regulators and investors alike—to develop markets that not only attract institutional and
other private investors to climate finance, but that would also encourage investment in any number of
other sustainable and development issues.
Such local capital market development should focus on: (a) providing investment opportunities for
institutional investors and other financial system actors (e.g., savers) that—depending on risk profile,
liquidity needs and other factors—offer better returns than bank deposits; (b) helping investors diversify
their portfolios and manage risk by giving them access to a wider range of securities and instruments,
which is particularly important for institutional investors like pension funds and insurance companies (IFC,
2017); and (c) improving risk-sharing and the efficiency with which capital is allocated to the real
economy (Laeven, 2014).
In support of these pursuits, regulators and policymakers can develop protections for the rights of
investors and creditors, enact well-designed bankruptcy law, increase the availability of liquidity provided
by sound banks, enable foreign-owned financial firms to compete on equal terms with domestic-owned
firms and enhance the ability to issue internationally recognized safe assets and assets that maintain
liquidity in bad times (i.e. hard currencies like US Treasuries) (Rojas-Suarez, 2014; Dam, 2002).
3.3 Creating a path forward: Lessons from Chile’s policy changes and regulatory
guidance
In just five years, Chile has more than tripled the percentage of energy that it produces from renewable
sources. It has also increased energy investment and lowered energy prices. In doing so, Chile has created
a renewable energy market that is increasingly enabling private investment while reducing the need for
public sector finance.
The Chilean government implemented a series of coordinated policy and regulatory reforms starting in
2014, when the country had some of the highest energy prices in Latin America and was facing a
multitude of energy-supply and transmission challenges. These included: disruption in the gas supply
from Argentina, damage from the 2010 earthquake, droughts, monopolistic practices by utility companies
and public opposition to the construction of new large-scale coal plants (IEA, 2018a; Lenton, 2016).
Chile’s Energy Agenda and subsequent Energy 2050 national energy policy—developed by Ministry for
Energy in consultation with various stakeholder groups (including the energy industry and the public)—
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jointly established Chile’s medium- and long-term energy goals (IEA, 2018a). These included deriving 60%
of its energy from renewable sources by 2035, and 70% by 2050, along with a 30% reduction in carbon
emissions below 2007 levels by 2030. They also established commitments ensuring that Chile’s policy and
regulatory environment effectively advanced these goals. Since 2015, in line with the Agenda and Energy
2050, Chile has, among other things:
• Passed at least seven new energy-related laws, including the Transmission Law (2016), that
created a single independent system of operators and increased the government’s role in
expanding Chile’s energy transmission system (Congreso, 2016; IEA, 2018a; Lenton, 2016).
• Held a series of energy auctions under a reformed system, with 18 bidders in 2014, 28 in 2015, 84
in 2016, and 24 in 2017, emphasizing renewable energy developers (IEA, 2018a).
• Established the first carbon tax in South America (IEA, 2018a).
Notably, these activities have enabled the interconnection of Chile’s two main electrical grids and
subsequent creation of the National Electricity System, as well as the awarding of energy projects to small
wind- and solar-energy developers, including one solar energy plant bid that broke the record for lowest
price received at auction ($0.0291 kWh) (IEA, 2018a).
Chile’s Santiago Stock Exchange (SSE) has also spearheaded a series of reforms since 2015 with the
explicit focus of enabling investment that contributes to the country’s efforts to address climate change.
In 2015, SEE launched the Dow Jones Sustainability Chile Index. In 2016, it published the first Integrated
Annual and Sustainability Report and hosted its first training on responsible investment for investors at
the LatAM Institutional Investor Group’s annual conference. In 2017 it issued its Guide to Responsible
Investment. In 2018 it issued guidelines for the issuance of green and social bonds. In 2019, SSE
partnered with PRI to host a “Ring the Bell for Responsible Investment” event where it announced PRI’s
first Chilean signatories including pension fund AFP Cuprum (SSEI, 2016; SSEI, 2019).
Together, these policy changes and market activities have set the stage for scaling-up climate finance
from the private sector. Once the primary source of renewable energy finance in Chile, DFIs are gradually
phasing out their contributions to make way for increasing investment from commercial banks ($900
million in 2017) and from public utilities (CFLI, 2019). In short, these developments send strong signals
that Chile’s renewable energy market has rapidly matured to the point where its risks and returns align
with institutional investors’ preferences.
69
CONCLUSION
Conclusion
Without more ambitious climate policy, global temperatures are likely to rise by more than 3°C, costing
the APEC region and generate expected economic losses equal to 7.3% of GDP by the end of the century.
Increasing temperatures are likely to reduce agricultural yields and labor productivity, increase sea levels
and flooding, reducing output across the economy and damaging land and capital stock. These impacts
will be particularly severe in lower and lower-middle income economies. If adaptation and mitigation
measures are not taken, Indonesia, Thailand and Viet Nam are expected to lose more than 20% of GDP
from a combination of these impacts by 2100.
Climate change is also expected to cause significant human damages across APEC member economies.
Rising temperatures are expected to increase the number of days of dangerous heat, the frequency of
fatal flooding and the disease burden. By 2100, the APEC region could experience an additional 350,000
deaths per year due to more days of extreme heat if adaptation and mitigation measures are not in place.
The continued combustion of carbon intensive fuels is also expected to continue to degrade air quality,
causing respiratory disease and premature mortality from unsafe levels of air pollution.
Considerable uncertainties in the response of the climate to greenhouse gas emissions and the economy
to climate change remain and impacts could be substantially larger, leading to considerable risks from
inaction. An extra degree of warming, which is a plausible outcome of current policy, could double the
economic losses from declining labor and agricultural productivity. There is also a risk of “tipping points”
in the climate system, where if greenhouse gas concentrations exceed a certain level, small changes in
one variable could lead to large changes in another. Failure to acknowledge and mitigate climate change
risks could lead to substantially more costly to GDP and human health impacts for the APEC region.
Reducing emissions to achieve the goals of the Paris Agreement and transitioning to a low-carbon
economy is likely less costly than the losses from unabated climate change and brings sizeable co-
benefits. Reducing emissions to a level compatible with the objects of the Paris Agreement is expected to
cost an average of 3.4% of GDP across APEC members. The costs as a proportion of GDP are lowest in
developed economies and highest in energy-exporting economies. Mitigation would also reduce coastal
flooding and avoid chronic impacts such as lower agricultural and labor productivity. Importantly,
reducing fossil fuel consumption is expected to reduce deaths from air pollution by 500,000 per year
throughout the APEC region.
Transitioning to a low carbon economy consistent with the Paris Agreement could also offer significant
investment opportunities in low carbon energy and adaptation measures. By 2050, reducing emissions to
levels consistent with the Paris Agreement across the APEC region is expected to require an additional
$470 billion per year in energy investment. In the short term, this will require increasing investment in
energy efficiency, renewable generation and transmission and distribution infrastructure. Commensurate
decreases in investment in fossil fuels would cause low carbon investment to overtake fossil fuel
investment by around 2025.
Climate change will have an impact on all aspects of life in APEC: it will influence financial systems, supply
chains, worker productivity, facilities, equipment and even consumer behavior. The empirical evidence
presented in this report shows that the physical and transition costs from climate change have already
impacted equity and debt instrument payoffs and valuations and will likely continue to do so. Financial
institutions, including central banks, are not immune to these financial costs. Evidence indicates that
financial institutions, on average, are underestimating climate change risks.
70
CONCLUSION
To guarantee their survival, financial institutions must integrate climate financial risk management into
their operations. For countries at the very beginning of the process of climate financial risk management,
central banks and financial regulators can raise awareness by surveying financial institutions practices
regarding climate financial risk management. Additionally, central banks and financial supervisors can
develop their own tools to assess the exposure of the financial sector and individual institutions to
climate financial risks. Finally, central banks and financial regulators can require financial institutions to
run climate financial stress tests. This allows financial supervisors to assess the exposure to climate
financial risks of individual financial institutions, as well as of the whole financial sector.
The transition to a low-carbon economy will require the mobilization of large amounts of capital and the
development of new financial products. This represents a unique opportunity for financial institutions and
can translate into a significant comparative advantage and be an efficient way to reduce an institution’s
overall risk exposure.
Given their tremendous size, influence, and long-term investment horizons, institutional investors in APEC
– with their more than $42 trillion in AUM – are uniquely exposed to the long-term threats of climate
change and uniquely positioned to invest in long-term climate solutions. Many institutional investors in
APEC member economies are increasingly acknowledging and voluntarily managing climate-related risks.
They are joining, supporting, and helping to lead sustainability-focused initiatives such as PRI and TCFD.
They are also increasingly integrating climate change considerations into their investment analyses
alongside social and governance issues. It does not appear, however, that they are systematically
investing in efforts to mitigate or adapt to climate change, such as renewable energy or climate-resilient
infrastructure.
Fortifying institutional investors in APEC member economies against climate risk and scaling-up their
contributions to climate finance will require policymakers, regulators, and financial markets alike to
confront the systemic structural barriers that inhibiting progress. Governments, regulators, and investors
throughout APEC provide examples of the way forward, which includes among other things:
• Establishing new and expanding existing carbon • Widely adopting TCFD recommendations for
pricing mechanisms that align with economists’ carbon-related disclosures;
recommendations (≥ $40 per ton);
• Setting standards for climate-related financial
• Looking to economies like Viet Nam and Chile for products like People’s Bank of China and other
examples of effective feed-in-tariffs and Chinese regulators;
renewable energy auctions;
• Leveraging blended finance structures provided
• Learning from Singapore’s sovereign wealth by various DFIs; and
fund’s approach to long-term investment
• Pressuring holdings to reduce their emissions
management and reporting;
like CalPERS, GPIF, and other members of the
Climate Action 100+.
Institutional investors in APEC member economies need not sit on the sidelines and await change. They
can and should play an important role in signaling their need. They can continue voluntarily incorporating
climate considerations into their investment strategies and seize on the increasing number of climate-
related products and tools available to them across asset classes. And they can continue to use their size,
influence and platform to advocate for any number of policy, regulatory, and market reforms. The
momentum that they create will carry the investment community beyond the tipping point where a focus
on climate-related investment is no longer avoidable but is inevitable.
71
APPENDIX A
Appendix A. Methodological Assumptions and Additional Data Tables
Physical climate change impacts
Estimates for future temperature, days with dangerous heat, extreme rainfall and drought probability are
extracted from the World Bank Climate Knowledge Portal (WBCKP). For all member economies apart
from Hong Kong (China) and Chinese Taipei, the WBCKP provides estimates on the country level. For
Hong Kong (China) and Chinese Taipei, the data is downloaded using coordinates for those economies.
Sea level rise extracted from Kopp et al. (2014). The paper provides estimates of sea-level rise under RCP
2.6, 4.5 and 8.5 scenarios for a global network of tide gauges. In order to generate country-level
estimates of Sea Level Rise (SLR), we match countries to their nearest tide gauges and take average
values. For the climate change mitigation scenario, we report RCP 2.6 SLRs. The baseline scenario in this
chapter is defined by RCP 6.0. Kopp et al. (2014) paper does not provide estimates for RCP 6.0, since
“21st-century sea-level rise projections for this pathway are nearly identical to those for RCP 4.5”.
Therefore, we report RCP 4.5 SLRs for the baseline scenario.
Coastal flood modelling
Coastal flood modelling results, both GDP and mortality impacts, are derived from the DIVA model (Hinkel
& Klein, 2009). DIVA is an integrated, state-of the-art research modelling framework for coastal systems
that assesses biophysical and socio-economic consequences of sea-level rise and socio-economic
development. It accounts for coastal erosion (both direct and indirect), coastal flooding (including river
mouths), wetland change and salinity intrusion into deltas and estuaries. The DIVA was run in support of
this chapter under RCP 6.0 and RCP 2.6 concentration pathways under the SSP2 economic growth
scenario in order to estimate economic costs of coastal floods and number of people affected with and
without adaptation.
River flood modelling
River flood modelling results, both economic losses and mortality impacts, are derived the from estimates
by Dottori et al. (2018). This uses a multi-model framework to estimate human losses and direct
economic damage from riverine floods at a range of temperatures. It assumes current vulnerability levels
and the absence of future adaptation. Climate change is accounted for using the inter-sectoral impact
model intercomparison project (ISIMIP) ensemble of river flow projections, comprising ten hydrological
models and five driving climate runs. It uses a detailed modelling framework to simulate river flow and
flooding processes. This chapter used supplementary data published in support of Dottori et al. (2018)
and aligns outputs to a SSP2 growth scenario for consistency with other models run in support of this
chapter.
Air pollution
Mortality impacts of air pollution are calculated using TM5-FASST. The TM5-FASST model is a reduced-
form air quality source-receptor which of estimates the impact of ambient pollutant concentrations on
human health for 56 regions, including most APEC member economies. TM5-FASST is based on a
calculation of the relationship between emissions and air pollution at a 1-degree by 1-degree spatial
resolution (van Dingenen et al., 2018).
A.1
APPENDIX A
Emissions under the RCP 6.0 and RCP 2.6 scenario are extracted from Fujimori, Hasegawa, Ito, Takahashi,
& Masui (2018), which provide gridded emissions data for 2005-2100 under combinations of SSPs and
emissions trajectories. The emissions data was extracted and re-aggregated to the 56 TM5-FASST regions
and used as input into TM5-FASST.
Mortality from extreme hot and cold days
This report draws on the estimates of temperature-related excess mortality from Gasparrini et al. (2017)
to estimate the future impacts of extreme hot and cold days on human health. The paper provides
estimates of excess mortality for cold and heat and their net change in 1990–2099 under each scenario of
climate change, assuming no adaptation or population changes. For this chapter, estimates are adjusted
to take account of population growth according to the SSP2 pathway
Economic costs of climate change and emissions reductions, revenues from carbon taxation
The effect of chronic climate change impacts, the costs of emissions reductions and revenues from
carbon taxation are calculated using GTAP-IAM. The GTAP-IAM model is an integrated assessment model
that combines a climate module with SSPs and the GTAP and GTAP E (Energy) and P (Power) databases. It
is an extension of Global Trade Analysis Project (GTAP)-INT, which has previously been used to model the
economic impacts of climate change on GDP at the country-level (Kompas, Pham, & Che, 2018). GTAP
Power database allows for a distinction between fossil fuels and renewable sources of energy. The GTAP
framework allows for both climate and trade interactions across countries in a large-dimensional setting.
Along with the separation of energy demand from the rest of the demands for other commodities, GTAP-
IAM also provides a foundation for climate change analysis by incorporating carbon dioxide emissions, a
carbon tax and emissions trading. The carbon tax is converted into percentage form before entering
price linkage equations. The tax also serves as trading revenue when countries decide to undergo
emissions trading within a trading bloc.
The model is calibrated for 37 countries/regions across 60 commodity groups, solved with forward-
looking behavior to 2100. It allows for both a measure of the damages from climate change, relative to
an assumed RCP, and the costs of emissions reduction. The bulk of parameter values are as contained in
the original GTAP and GTAP E-P databases.
The model accounts for the following climate-change damages, drawing on country-level estimates from
Roson and Sartori (2016). For more details on integration into the model, see Kompas, Pham, & Ch
(2018):
• Reduction of labor productivity due to temperature increases, modelled for agricultural,
manufacturing and service sectors
• Reduction of labor productivity due to increased disease burden
• Reduction of agricultural productivity, modelled for maize, wheat and rice separately and for
other crops together
• Inundation of coastal lands due to sea level rise
A.2
APPENDIX A
Energy components have four layers in the model:
• Energy is a composite product from electricity and non-electricity energy
• Non-electricity energy is a composite product of coal and non-coal energy
• Non-coal energy is a composite product of crude oil, gas, and petroleum products
• Crude oil, gas, petroleum products, as well as electricity and coal, are composite products of
domestically produced commodities and imports (of these commodities)
All layers of the 'energy tree' are governed by CES technology with various given values of the elasticity of
substitution.
The emission reduction estimates the economic costs of limiting temperature rise to a level consistent
with the Paris Agreement under the SSP2 growth scenario using the GTAP-IAM model. The emissions
reduction scenario assumes the current trajectory in energy efficiency improvements for fossil fuels of
1.78% per year continues, while the efficiency improvement in other GHGs rises from 0.87% per year to
1.5% per year.
To mitigate policy costs, the model permits the use of negative emissions technologies to offset the
continued release of GHG emissions in ‘hard to treat’ sectors. The model solves for the necessary carbon
tax rate in order for each member economy to achieve emissions reductions consistent with a below 2°C
degree pathway. Revenues from carbon taxation are therefore endogenous to the model. Emissions trade
between countries is not modelled, so the modelled carbon tax varies across member economies.
Energy investment needs
Energy investment needs are reported based on estimates published by McCollum et al. (2018). This
paper uses an ensemble of models to estimate energy investment needs to transform the energy system
into a low carbon system consistent with keeping warming well below 2°C.
The estimates presented in chapter 1 are generated by averaging outputs of 6 Integrated Assessment
Models (AIM/CGE, IMAGE, MESSAGEix-GLOBIOM, POLES, REMIND-MagPIE and WITCH-GLOBIOM), under
‘Current Policy’ and ‘2C’ scenarios, which reflect the baseline and climate change mitigation scenarios in
chapter 1.
McCollum et al. (2018) reports results for the United States and China separately as well as the 5 regions
from the SSP database. For United States and China, McCollum model estimates are used directly. For
APEC member economies other than the United States and China, energy investment needs are
calculated based on a member economy’s share of its corresponding region’s 2050 GDP. For example,
Indonesia’s 2050 GDP is 11% of the IAM ‘Asia’ region (less China), therefore 11% of the energy
investment need identified by McCollum et al. is assigned to Indonesia. The results are presented
undiscounted in 2015$ terms.
Formal/informal sector model
The co-benefits of environmental policy with regards to formal/informal sector substitution are modelled
using a new implementation of the model published by Bento, Jacobsen and Liu (2018). Following Piggott
A.3
APPENDIX A
& Whalley (2001), the model encompasses three sectors: manufactured goods, formal services and
informal services. Manufacturing and formal services are taxed, while informal services not. Inside the
model, energy taxes fall more heavily on manufactured goods, which have no substitutes in the informal
economy, whereas labor taxes fall on services, which can be substituted by the formal sector.
We calibrate the model for each country individual based on baseline data. Manufacturing’s share of the
formal economy, the service sector’s share of the formal economy is calibrated to World Bank data
(World Bank databank). The energy intensity of the whole economy, energy intensity of the
manufacturing sector, energy intensity of the service sector is calculated using GTAP IO database. The size
of the informal sector for each APEC country is drawn from Schneider (2005).
SSP2 scenario assumptions on GDP and population
Figure A.1. SSP2 assumptions on GDP per capita in 2050 and 2100
expressed as a multiple of 2020 levels
Source: Fricko et al. (2017) and Crespo Cuaresma (2017)
A.4
APPENDIX A
Figure A.2. SSP2 assumptions on population growth, relative to 2020
Source: Samir & Lutz (2017)
Figure A.3. Annual deaths from air pollution per million of population in 2050 and 2100
under the baseline scenario
Source: Vivid Economics
A.5
APPENDIX A
Table A.1. Change in sea level, rainfall and drought likelihood
Note: Sea level rise relative to 2000, expected largest monthly rainfall amount in 25 years and drought likelihood
relative to 1986-2005. Severe drought is defined as a Standardized Precipitation Evaporation Index below negative 2.
Source: Kopp et al. (2014), World Bank Climate Portal, Vivid Economics
Figure A.4. 2100 Coastal flood losses as a % of GDP under baseline scenario
25% 25%
2100 no adaptation
2100 adaptation
20% 20%
GDP loss in 2050
GDP loss in 2100
15% 15%
10% 10%
5% 5%
0%
e 0%
Papua New…
l
Brunei Darussalam
Peru
China
Chinese Taipei
Singapore
Hong Kong, China
United States
Mexico
Papua New Guinea
Japan
New Zealand
Australia
Malaysia
Russia
Chile
Philippines
Indonesia
Viet Nam
Brunei…
Republic of Korea
Canada
i
Malaysia
China
Chinese Taipei
United States
Japan
New Zealand
Mexico
Viet Nam
Australia
Philippines
Republic of Korea
Canada
Hong Kong, China
Chile
Indonesia
Russia
Peru
Thailand
h
Singapore
C
Source: Vivid Economics, based on Hinkel, J., & Klein, R. J. T. (2009)
A.6
APPENDIX A
Table A.2. Change in health impacts from 2020 to 2050 under the baseline scenario
Source: Vivid Economics, based on World Bank Climate Portal
Figure A.5. The impact of air pollution on mortality in 2050 and 2100 under the baseline scenario
Source: Vivid Economics, based on TM5-FASST model
A.7
APPENDIX A
Figure A.6. Changes in mortality due extreme temperatures from 2020 to 2050 and 2100
under the baseline scenario
Source: Vivid Economics, based on Gasparrini et al. (2017)
Figure A.7. Increase in mortality from river flooding from 2020 to 2050 and 2100
under the baseline scenario
Source: Vivid Economics, based on Dottori et al. (2018)
A.8
APPENDIX A
Table A.3. Avoided physical impacts through Paris compatible policy: heat
Source: Vivid Economics, based on World Bank Climate Change Knowledge Portal
Table 24. Avoided physical impacts through Paris compatible policy:
sea level rise, precipitation and drought
Source: Vivid Economics, based on Kopp et al. (2014) and the World Bank Climate Change Knowledge Portal
A.9
APPENDIX A
Table A.5. Change in health impacts from 2020 to 2100 under the baseline scenario
Source: Vivid Economics
Table A.6. Health benefits from Paris compatible policy in 2050 compared to baseline
Source: Vivid Economics, based on Gasparrini et al (2017), Dottori et al (2018) and the DIVA model (Hinkel et al,
2009)
A.10
APPENDIX A
Table A.7. Health benefits from Paris compatible policy in 2100 compared to baseline
Source: Vivid Economics, based on Gasparrini et al (2017), Dottori et al (2018), the DIVA model (Hinkel et al, 2009) and
the TM5-FASST model (van Dingenen et al, 2018).
Figure A.8. Benefits of emissions reduction in avoided mortality from coastal flooding
Source: Vivid Economics, based the DIVA model (Hinkel et al, 2009)
A.11
APPENDIX A
Figure A.9. Benefits of emissions reduction in avoided mortality from river flooding
Source: Vivid Economics, based on Dottori et al (2018)
Table A.8. Air pollution co-benefits from emissions reduction in 2050 and 2100
Source: Vivid Economics
A.12
APPENDIX B
Appendix B. Trends in Global Climate Finance Over Time
Table B.1. Total climate finance, 2012-2016 (billions USD)
Year Amount
2012 $359
2013 $342
2014 $392
2015 $472
2016 $455
2017
$510-$530
(projected)
Table B.2. Private vs. public climate finance, 2012-2016 (billions USD)
2012 2013 2014 2015 2016
Private
Commercial FI 21 21 46 54 42
Corporate actors 66 47 59 46 28
Households 33 40 41 39 44
Institutional investors 0.4 1 1 3 2
PE, VC, Infrastructure funds 1.2 2 2 2 1
Project developers 102 88 92 124 113
Total private 224 199 241 267 230
Public
Climate Funds 1.6 2 2 2 3
Governments and their agencies 12 12 14 17 19
Total public FI 122 129 134 185 202
Public FI – Bilateral 15 15 22 17 14
Public FI – Multilateral 38 44 48 44 48
Public FI – National 69 70 64 124 140
Total public 136 143 151 205 224
Table B.3. Climate finance by use, 2012-2016 (billions USD)
2012 2013 2014 2015 2016
Adaptation
Coastal protection 2 0.5 1 0.2 0.1
Industry, extractive industries, manufacturing & trade 0.5 0.3 0.1 0.1
Policy and national budget support and capacity building 0.2 0.7 0.9 0.2 0.4
Infrastructure, energy, and other built environment 3 2 1 1
Agriculture, forestry, land-use, and natural resource 3 2 4 4 5
management
Water and wastewater management 10 15 15 11 11
Other adaptation 7 4 4 5 6
Total adaptation 22 27 27 22 22
Mitigation
Non-energy GHG reductions 7 0.2 0.1 0.1
Policy and national budget support and capacity building 0.4 0.1 0.2 0.3
Waste and wastewater management 1 1 1 0.7
Low-carbon technologies 0.3 4 2 2
B.1
APPENDIX B
Transmission & distribution systems 1 3 6 3
Agriculture, forestry, land-use, and natural resource 6 4 5 4
management
Energy efficiency 32 31 26 26 33
Sustainable transport 17 22 78 106
Renewable energy generation 265 244 284 321 269
Other mitigation 40 4 16 6 10
Total mitigation 337 311 360 445 427
Dual Benefits 4 4 5 6
Table B.4. Climate finance by geographical destination, 2013-2016 (billions USD)
2013 2014 2015 2016
Non-OECD
Central Asia and Eastern Europe 11 12 11 8
East Asia and Pacific 95 118 175 184
Latin America and the Caribbean 24 27 32 20
Middle East and North Africa 5 9 8 7
South Asia 13 17 20 24
Sub-Saharan Africa 13 10 13 12
Transregional 10 13 12 13
Total non-OECD 169 206 270 269
OECD
Americas 38 44 54 59
Japan, Korea, Israel 35 40 36 17
Other Oceania 5 3 3 5
Western Europe 94 98 109 105
Total OECD 172 185 202 186
Table B.5. International and domestic climate finance flows, 2013-2016 (billions USD)
2013 2014 2015 2016
Domestic
Non-OECD 123 150 214 214
OECD 130 140 168 156
Total domestic 253 290 382 370
International
From non-OECD to other non-OECD 11 10 12 10
From non-OECD to OECD 3 2 3 3
From OECD to other OECD 40 43 31 27
From OECD to non-OECD 36 47 44 45
Total international 90 102 90 85
Table B.5. Climate finance by instrument type, 2012-2016 (billions USD)
2012 2013 2014 2015 2016
Grant 11 13 13 18 18
Project-level equity 11 17 27 40 36
Low-cost project debt 69 74 48 45 45
Balance sheet financing 198 164 177 179 142
Project-level market rate 70 74 125 190 215
debt
Sources for all tables in this appendix:
Climate Policy Initiative (CPI) (2018). Global Climate Finance: An Updated View 2018. November 2018.
CPI (2016). Global Climate Finance: An Updated View on 2013 & 2014 Flows. October 2016. B.2
CPI (2013). The Global Landscape of Climate Finance 2013. October 2013.
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