Editing IPCC:AR6/WGIII/Chapter-15 (section)

== 15.3 Assessment of Current Financial Flows ==

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=== 15.3.1 Financial Flows and Stocks: Orders of Magnitude ===

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Assessments of finance for climate action need to be placed within the broader perspective of all investments and financing flows and stocks. This section provides aggregate level reference points of relevance to the remainder of this chapter, notably when assessing current levels of climate and fossil fuel-related investments and financing (Sections 15.3.2.3 and 15.3.2.4 respectively), as well as estimates of investment and financing needed to meet climate objectives ( [[#15.4|Section 15.4]] ).

Measures of financial flows and stocks provide complementary and interrelated insights into trends over time: the accumulation of flows, measured per unit of time, results in stocks, observed at a given point in time ( [[#IMF--2009|IMF 2009]] ; [[#UN%20and%20ECB--2015|UN and ECB 2015]] ). On the flows side, GDP, a System of National Accounts (SNA) statistical standard that measures the monetary value of final goods and services produced in a country in a given period of time. In 2020, global GDP represented above USD 2015 70 trillion [[#footnote-011|6]] (down from around 80 trillion USD 2015 in 2019), out of which developed countries represented approximately 60% (Figure 15.1); a slowly decreasing share over the last years. The GDP metric is useful here as an indicator of the level of activity of an economy but gives no indication relating to human well-being or SDG achievements ( [[#Giannetti--2015|Giannetti et al. 2015]] ) as it counts positively activities that negatively impact the environment, without making deductions for the depletion and degradation of natural resources.

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[[File:47941be2e62b66e9c5e9ef30cb94828b IPCC_AR6_WGIII_Figure_15_1.png]]

'''Figure 15.1 | Financial flows – GDP (trillion USD''' 2015 ''') by type of economy (left) and region (right).''' Note: Regional breakdown based on official UN country classification. GDP in trillion USD 2015 . Source: [[#World%20Bank%20Data--2020a|World Bank Data (2020a)]] . Numbers represent aggregated country data. Last updated data on 15 September 2021. CC BY-4.0.

Gross-fixed capital formation (GFCF), another SNA standard that covers tangible assets (notably infrastructure and equipment) and intangible assets, is a good proxy for investment flows in the real economy. In 2019, global GFCF reached around 20 trillion USD 2015 compared to around 14 trillion USD 2015 in 2010, a more than 40% increase (Figure 15.2). Global GFCF represents about a quarter of global GDP, a relatively stable ratio since 2008. This share is, however, much higher for emerging economies, notably in Asia, which are building new infrastructure at scale. As analysed in Sections 15.4 and 15.5, infrastructure investment needs and gaps in developing countries are significant. How these are met over the next decade will critically influence the likelihood of reaching the Paris Agreement goals.

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[[File:4eb97c2b06cb7437df3cc3057a6d9968 IPCC_AR6_WGIII_Figure_15_2.png]]

'''Figure 15.2 | Financial flows – GFCF (trillion USD''' 2015 ''') by type of economy (left) and region (right).''' Note: Regional breakdown based on official UN country classification. GDP in trillion USD 2015 . Gross fixed capital formation (GFCF) includes land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. Source: [[#World%20Bank%20Data--2020b|World Bank Data (2020b)]] . Data for 2020 not available. Last updated data on 15 September 2021. CC BY-4.0.

On the stock side, an increasingly significant portion of the growing value of financial capital (stocks in particular) may be disconnected from the value of underlying productive capital in the real economy ( [[#Igan--2020|Igan et al. 2020]] ). This trend, however, remains uneven between developed countries, most of which have relatively deep capital markets, and developing countries at different stages of development ( [[#15.6.7|Section 15.6.7]] ). Bonds, a form of debt financing, represent a significant share of total financial assets. As of August 2020, the overall size of the global bond markets (amount outstanding) was estimated at approximately USD128.3 trillion, out of which over two thirds was from ‘supranational, sovereign, and agencies’, and just under a third from corporations ( [[#ICMA--2020b|ICMA 2020b]] ). As discussed later in the chapter, since AR5, an increasing number and volume of bonds have been earmarked for climate action but these still only represent less than 1% of the total bond market. As of end-2020, climate-aligned bonds outstanding were estimated at USD0.9 trillion ( [[#Giorgi--2021|Giorgi and Michetti 2021]] ), though already raising concerns in terms of both underlying definitions ( [[#15.6.6|Section 15.6.6]] ) and risks of increased climate-related indebtedness ( [[#15.6.1|Section 15.6.1]] , 15.6.3).

From the perspective of climate change action, these orders of magnitude make it possible to highlight the relatively small size of current climate finance flows and relatively larger size of remaining fossil fuel-related finance flows (discussed in the following two sub-sections), as well as, more generally, the significant overall scale of financial flows and stocks that have to be made consistent with climate goals. These orders of magnitude further make it possible to put in perspective climate-related investment needs ( [[#15.4|Section 15.4]] ) and gaps ( [[#15.5|Section 15.5]] ).

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=== 15.3.2 Estimates of Climate Finance Flows ===

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The measurement of climate finance flows continues to face similar definitional, coverage and reliability issues as at the time of AR5 and the Special Report on Global Warming of 1.5°C, despite progress made (more sources, greater frequency, and some definitional improvements) by a range of data providers and collators. Based on available estimates (Table 15.1 and Figure 15.3), flows of annual global climate finance are on an upward trend since AR5, reaching a high-bound estimate of USD681 billion in 2016 ( [[#UNFCCC--2018a|UNFCCC 2018a]] ), representing USD674 billion 2015. Latest available estimates indicate a drop in 2018 ( [[#Buchner--2019|Buchner et al. 2019]] ) and a rebound in 2019 and 2020 ( ''medium confidence'' ) ( [[#Naran--2021|Naran et al. 2021]] ). Although not directly comparable in terms of scope, current climate finance flows remain small (approx. 3%) compared to the GFCF reference point introduced in [[#15.3.1|Section 15.3.1]] , and need to be put in perspective with remaining fossil fuel financing ( ''medium confidence'' ) ( [[#15.3.2|Section 15.3.2]] .3).

'''Table 15.1 | Total climate finance flows between 2013 and 2020.'''

{| class="wikitable"
|-
! Source (type)

! 2013

! 2014

! 2015

! 2016

! 2017

! 2018

! 2019

! 2020

|-
| UNFCCC SCF (total high)

| 687

| 584

| 680

| 681

| colspan="2"| Published after lit. cut-off

| n/a

| n/a

|-
| ''Deflated to USD'' 2015

| ''706''

| ''590''

| ''680''

| ''674''

|
|-
| UNFCCC SCF (total low/CPI)

| 339

| 392

| 472

| 456

| /608

| /540

| /623

| /640

|-
| ''Deflated to USD'' 2015

| ''349''

| ''396''

| ''472''

| ''451''

| ''/590''

| ''/513''

| ''/581''

| ''/590''

|}

Note: CPI: Climate Policy Initiative; SCF: Standing Committee on Finance. Numbers in current billion USD. Deflated to USD 2015 in italic ''.'' Given the variations in numbers reported by different entities, changes in data, definitions and methodologies over time, there is low confidence attached to the aggregate numbers presented here. The higher bound reported in the SCF’s Biennial Assessment reports includes estimates from the International Energy Agency on energy efficiency investments, which are excludes from the lower bound and CPI’s estimates. Sources: [[#UNFCCC--2018a|UNFCCC (2018a)]] ; [[#Buchner--2019|Buchner et al. (2019)]] ; [[#Naran--2021|Naran et al. (2021)]] .

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[[File:0b23cddc42faaf9abe59d6d7d468f5bd IPCC_AR6_WGIII_Figure_15_3.png]]

'''Figure 15.3 | Available estimates of global climate finance between 2014 and 2020.''' Note: Numbers in current billion USD. Deflated to USD 2015 see Table 15.1 in italic. Type of Economy figure '''(left)''' : Regional breakdown based on official UN country classification. ‘0’ no regional mapping information available. Sectoral figure '''(right)''' : Policy includes Disaster Risk Management; Policy and national budget support and capacity building. Transport includes Sustainable/Low-carbon Transport. Energy Efficiency includes Industry, Extractive Industries, Manufacturing &amp; Trade, Low-carbon Technologies, Information and Communications Technology, Buildings and Infrastructure. Electricity includes Renewable Energy Feneration, “Infrastructure, energy and other built environment”, Transmission and Distribution Systems, and Energy Systems. No sector means no sector information available, or negligible flows. Other includes Non-energy GHG reductions, Coastal Protection. Source: own calculations, based on [[#Naran--2021|Naran et al. (2021)]] .

At an aggregate level, in both developed and developing countries, the vast majority of tracked climate finance is sourced from domestic or national markets rather than cross-border financing ( [[#Buchner--2019|Buchner et al. 2019]] ). This reinforces the point that national policies and settings remain crucial ( [[#15.6.2|Section 15.6.2]] ), along with the development of local capital markets ( [[#15.6.7|Section 15.6.7]] ).

Climate finance in developing countries remains heavily concentrated in a few large economies ( ''high confidence'' ), with Brazil, India, China and South Africa accounting for around one-quarter to more than a third depending on the year, a share similar to that represented by developed countries. Least-developed countries (LDCs), on the other hand, continue to represent less than 5% year-on-year ( ''medium confidence'' ) ( [[#BNEF--2019|BNEF 2019]] ; [[#Buchner--2019|Buchner et al. 2019]] ). Further, the relatively modest growth of climate finance in developed countries is a matter of concern given that economic circumstances are, in most cases, relatively more amenable to greater financing, savings and affordability than in developing countries.

At a global level, the majority of tracked climate finance is assessed as coming from private actors ( [[#Buchner--2019|Buchner et al. 2019]] ), although, the boundaries between private and public finance include significant grey zones (Box 15.2), which implies that different definitions could lead to different conclusions ( [[#Yeo--2019|Yeo 2019]] ; [[#Weikmans--2019|Weikmans and Roberts 2019]] ). However, private investments in climate projects and activities often benefit from public support in the form of co-financing, guarantees or fiscal measures. In terms of financial instruments and mechanisms, debt as well as balance sheet financing (which can rely on both own resources and further debt) and project financing (combining a large debt portion and smaller equity portion) represent the lion’s share. In this context, the rapid rise of climate-related bond issuances since AR5 ( [[#Giorgi--2021|Giorgi and Michetti 2021]] ) represents an opportunity for scaling up climate finance but also poses underlying issues of integrity ( [[#Nicol--2018a|Nicol et al. 2018a]] ; [[#Shishlov--2018|Shishlov et al. 2018]] ) and additionality ( [[#Schneeweiss--2019|Schneeweiss 2019]] ), as further discussed in [[#15.6.5|Section 15.6.5]] , and needs to be considered in the context of overall indebtedness and debt sustainability (Sections 15.6.1 and 15.6.3).

Mitigation continues to represent the lion’s share of global climate finance (consistently above 90% between 2017 and 2020), and in particular renewable energy, followed by energy efficiency and transport ( ''high confidence'' ) ( [[#UNFCCC--2018a|UNFCCC 2018a]] ; [[#Buchner--2019|Buchner et al. 2019]] ). While capacity additions on the ground kept rising, falling technology costs in certain sectors (e.g., solar energy) has had a negative impact on the year-on-year trend that can be observed in terms of volumes of climate finance ( [[#BNEF--2019|BNEF 2019]] ; [[#IRENA--2019a|IRENA 2019a]] ). However, such cost reduction could free up investment and financing capacities for potential use in other climate-related activities.

Tracking adaptation finance continues to pose significant challenges in terms of data and methods. Notably, the mainstreaming of resilience into investments and business decisions makes it difficult to identify relevant activities within financial datasets ( [[#Agrawala--2011|Agrawala et al. 2011]] ; [[#Brown--2015|Brown et al. 2015]] ; [[#Averchenkova--2016|Averchenkova et al. 2016]] ). Despite these limitations, evidence shows that finance for adaptation remains fragmented and significantly below rapidly rising needs ( [[#15.4|Section 15.4]] and Cross-Chapter Box FINANCE: Finance for Adaptation and Resilience in [[IPCC:Wg3:Chapter:Chapter-17|Chapter 17]] of AR6 WGII report). Further, there is increasing awareness about the need to better understand and address the interlinkages between climate change adaptation and disaster risk reduction (DRR) towards achieving resilience ( [[#OECD--2020a|OECD 2020a]] ). [[#Watson--2015|Watson et al. (2015)]] however, note that between 2003 and 2014, of the USD2 billion that flowed through dedicated climate change adaptation funds, only USD369 million explicitly went to DRR activities ( [[#Climate%20Funds%20Update--2014|Climate Funds Update 2014]] ; [[#Nakhooda--2014a|Nakhooda et al. 2014a]] ; [[#Nakhooda--2014b|Nakhooda et al. 2014b]] ; [[#Watson--2015|Watson et al. 2015]] ). For the private sector, insurance and reinsurance remain the dominant way to transfer risk as discussed in [[#15.6.4|Section 15.6.4]] ).

More generally, significant gaps remain to track climate finance comprehensively at a global level:

'''•''' Available estimates are based on a good coverage of investments in renewable energy and, where available, energy efficiency and transport, while other sectors remain more difficult to track, such as industry, agriculture and land use ( ''high confidence'' ) ( [[#UNFCCC--2018a|UNFCCC 2018a]] ; [[#Buchner--2019|Buchner et al. 2019]] ).

• In contrast to international public climate finance, domestic public finance data remain partial despite initiatives to track domestic climate finance (e.g., [[#Hainaut--2018|Hainaut and Cochran 2018]] ) and public expenditures ( ''high confidence'' ) (for instance based on the UNDP’s Climate Public Expenditure and Institutional Review approach).

Data on private and commercial finance remain very patchy, particularly for corporate financing (including debt financing provided by commercial banks), for which it is difficult to establish a link with activities and projects on the ground ( ''high confidence'' ). Further, as individual sources of aggregate reporting ( [[#UNFCCC--2018a|UNFCCC 2018a]] ; [[#Buchner--2019|Buchner et al. 2019]] ; [[#FS-UNEP%20Centre%20and%20BNEF--2020|FS-UNEP Centre and BNEF 2020]] ) tend to rely on the same main data sources (notably the BNEF commercial database for renewable energy investments) as well as to cross-check numbers against similar other sources, there is a potential for ‘group-think’ and bias.

Such data gaps as well as varying definitions of what qualifies as ‘climate’ (or more broadly as ‘green’ and ‘sustainable’) not only pose a measurement challenge. They also result in a lack of clarity for investors and financiers seeking climate-related opportunities. Such uncertainty can lead both to reduced climate finance as well as to a lack of transparency in climate-related reporting (further discussed in [[#15.6.1|Section 15.6.1]] ), which in turn further hinders reliable measurement.

In terms of finance provided and mobilised by developed countries for climate action in developing countries, while accounting scope and methodologies continue to be debated (Box 15.4), progress has been achieved on these matters in the context of the UNFCCC ( [[#UNFCCC--2019b|UNFCCC 2019b]] ). A consensus, however, exists, on a need to further scale up public finance and improve its effectiveness in mobilising private finance ( [[#OECD--2020b|OECD 2020b]] ), as well as to further prioritise adaptation financing, in particular towards the most vulnerable countries ( [[#Carty--2020|Carty et al. 2020]] ). The relatively low share of adaptation in international climate finance to date may in part be due to a low level of obligation and precision in global adaptation rules and commitments ( [[#Hall--2018|Hall and Persson 2018]] ). Further, providers of international climate finance may have more incentive to support mitigation over adaptation as mitigation benefits are global while the benefits of adaptation are local or regional ( [[#Abadie--2013|Abadie et al. 2013]] ).

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=== Box 15.4 | Measuring Progress Towards the USD100 Billion yr –1 by 2020 Goal – Issues of Method ===

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In 2009, at COP15, Parties to the UNFCCC agreed the following: ‘In the context of meaningful mitigation actions and transparency on implementation, developed countries commit to a goal of mobilising jointly USD100 billion a year by 2020 to address the needs of developing countries. This funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance’ ( [[#UNFCCC--2009|UNFCCC 2009]] ).

This goal is further embedded as a target under SDG 13 Climate Action. While the parameters for what and how to count were not defined when the goal was set, progress in this area has been achieved under the UNFCCC ( [[#UNFCCC--2019b|UNFCCC 2019b]] ) and via a UN-driven independent expert review ( [[#Bhattacharya--2020|Bhattacharya et al. 2020]] ).

There remain well documented interpretations and debates on how to account for progress ( [[#Clapp--2012|Clapp et al. 2012]] ; [[#Stadelmann--2013|Stadelmann et al. 2013]] ; [[#Jachnik--2015|Jachnik et al. 2015]] ; [[#Weikmans--2019|Weikmans and Roberts 2019]] ). Different interpretations relate mainly to the type and proportion of activities that may qualify as ‘climate’ on the one hand, and to how to account for different types of finance (and financial instruments) on the other hand. As an example, there are different points at which financing can be measured, for example, pledges, commitments, disbursements. There can be significant lags between these different points in time, for example disbursements may spread over time. Further, the choice of point of measurement can have an impact on both the volumes and on the characteristics (geographical origin, labelling as public or private) of the finance tracked. The enhanced transparency framework under the Paris Agreement may lead to improvements and more consensus in the way climate finance is accounted for and reported under the UNFCCC. Available analyses specifically aimed at assessing progress towards the USD100 billion goal remain rare, for example the UNFCCC SCF Biennial Assessments do not directly address this point ( [[#UNFCCC--2018a|UNFCCC 2018a]] ). Dedicated OECD reports provide figures based on accounting for gross flows of climate finance based on analysing activity-level data recorded by the UNFCCC (bilateral public climate finance) and the OECD (multilateral public climate finance, mobilised private climate finance and climate-related export credits) ( [[#OECD--2015a|OECD 2015a]] ; [[#OECD--2019a|OECD 2019a]] ; [[#OECD--2020b|OECD 2020b]] ). For 2018, the OECD analysis resulted in a total of USD78.9 billion, out of which USD62.2 billion of public finance, USD2.1 billion of export credits and USD14.5 billion of private finance was mobilised. Mitigation represented 73% of the total, adaptation 19% and cross-cutting activities 8%.

Reports by Oxfam provide a complementary view on public climate finance, building on OECD figures and underlying data sources to translate gross flows of bilateral and multilateral public climate finance in grant equivalent terms, while also, for some activities, applying discounts to the proportion considered as climate finance ( [[#Carty--2016|Carty et al. 2016]] ; [[#Carty--2018|Carty and Le Comte 2018]] ; Carty et al 2020). The resulting annual averages for 2015–2016 and 2017–2018 range between 32% (low bound) and 44% (high bound) of gross public climate finance. The difference with OECD figures stems from the high share represented by loans, both concessional and non-concessional, in public climate finance, that is, 74% in 2018 ( [[#OECD--2020b|OECD 2020b]] ).

A point of method that attracts much attention relates to how to account for private finance mobilised. The OECD, through its Development Assistance Committee, established an international standard to measure private finance mobilised by official development finance, which consists in methods tailored to different financial mechanisms. These methods take into account the role of, risk taken, and/or amount provided by all official actors involved in a given project, including recipient country institutions, thereby also avoiding risks of double counting ( [[#OECD--2019b|OECD 2019b]] ). MDBs apply a different method ( [[#World%20Bank--2018a|World Bank 2018a]] ) in their joint climate finance reporting (AfDB et al. 2020), which neither correspond to the geographical scope of the USD100 billion goal, nor address the issue of attribution to the extent required in that context.

Notwithstanding methodological discussions under the UNFCCC, there is still some distance from the USD100 billion a year commitment being achieved, including in terms of further prioritising adaptation. While the scope of the commitment corresponds to only a fraction of the larger sums needed ( [[#15.4|Section 15.4]] ), its fulfilment can both contribute to climate action in developing countries as well as to trust building in international climate negotiations. Combined with further clarity on geographical and sectoral gaps, this can, in turn, facilitate the implementation of better coordinated and cooperative arrangements for mobilising funds ( [[#Peake--2017|Peake and Ekins 2017]] ).

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=== 15.3.3 Fossil Fuel-related and Transition Finance ===

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As called for by Article 2.1c of the Paris Agreement and introduced in [[#15.3.1|Section 15.3.1]] , achieving the goal of the Paris Agreement of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels requires making all finance consistent with this goal. Data on investments and financing to high GHG activities remain very partial and difficult to access, as relevant actors currently have little incentive or obligations to disclose such information compared to reporting on and communicating about their activities contributing to climate action. Further, the development of methodologies to assess finance for activities misaligned with climate mitigation goals, for hard- and costly-to-abate sectors such as heavy industries, as well as for activities that eventually need to be phased out but can play a transition role for a given period, remain work in progress. This results in limited empirical evidence to date.

In modelled pathways that limit warming to 1.5°C (&gt;50%) with no or limited overshoot, however, make it clear that the share of fossil fuels in energy supply has to decrease (see Chapter 3). For instance, the International Energy Agency (IEA) Net Zero by 2050 scenario relies on halting sales of new internal combustion engine passenger cars by 2035, rapid and steady decrease of the production of coal (minus 90%), oil (minus 75%) and natural gas (minus 55%) by 2050, and phasing out all unabated coal and oil power plants by 2040 ( [[#IEA--2021b|IEA 2021b]] ). To avoid locking GHG emissions incompatible with remaining carbon budgets, this implies a rapid scaling down of new fossil fuel-related investments, combined with a scaling up of financing to allow energy and infrastructure systems to transition ( ''hi'' ''gh confidence'' ).

The IEA provides comprehensive analyses of global energy investments, estimated at about USD1.8 trillion a year over 2017–2019 ( [[#IEA--2019a|IEA 2019a]] , 2020a), and expected to reach that level again in 2021 after a drop to about 1.6 trillion in 2020 ( [[#IEA--2021c|IEA 2021c]] ). Energy investments represent about 8% of global GFCF ( [[#15.3.2|Section 15.3.2]] .1). In the power sector, fossil fuel-related investments reached an estimated USD120 billion yr –1 on average over 2019–2020, which remains well above the level that underpin the IEA’s own Paris-compatible Sustainable Development Scenario (SDS) and Net Zero Emission (NZE) scenarios. The IEA observes a similar inconsistency for supply-side new investments: in 2019–2020 on average yr –1 , an estimated USD650 billion were invested in oil supply and close to USD100 billion in coal supply. These estimates also result in fossil fuel investments remaining larger in aggregate than the total tracked climate finance worldwide ( [[#15.3.2|Section 15.3.2]] .2). For oil and gas companies, which are amongst the world’s largest corporations and sometimes government owned or backed, low-carbon solutions are estimated to represent less than 1% of capital expenditure ( [[#IEA--2020b|IEA 2020b]] ). As discussed in the remainder of this chapter, shifting investments towards low-GHG solutions requires a combination of conducive public policies, attractive investment opportunities, as well as the availability of financing to finance such a transition.

In terms of financing provided to fossil fuel investments, available analyses point out a still significant role played by commercial banks and export credit agencies. Commercial banks provide both direct lending as well as underwriting services, the latter facilitating capital raising from investors in the form of bond or share issuance. Available estimates indicate that lending and underwriting extended over 2016– 2019 by 35 of the world’s largest banks to 2100 companies active across the fossil fuel lifecycle reached USD687 billion yr –1 on average (Rainforest Action Network et al. 2020). Official export credit agencies, which are owned or backed by their government, de-risk exports by providing guarantees and insurances or, less often, loans. In 2016–2018, available estimates indicate the provision of about USD31 billion yr –1 worth of fossil fuel-related official export credits, out of which close to 80% was for oil and gas, and over 20% for coal ( [[#DeAngelis--2020|DeAngelis and Tucker 2020]] ).

Finance for new fossil fuel-related assets lock in future GHG emissions that may be inconsistent with remaining carbon budgets and, as discussed above, with emission pathways to reach the Paris Agreement goals. This inconsistency exposes investors and asset owners to the risk of stranded assets, which results from potential sharp strengthening climate public policies, that is, transition risk. As a result, a growing number of investors and financiers are assessing climate-related risks with the aim to disclose information about their current level of exposure (to both transition and physical climate-related risks), as well as to inform their future decisions ( [[#TCFD--2017|TCFD 2017]] ). Reporting to date is, however, inconsistent across geographies and jurisdictions ( [[#CDSB%20and%20CDP--2018|CDSB and CDP 2018]] ; [[#Perera--2019|Perera et al. 2019]] ), with also a wide variety of metrics, methodologies, and approaches developed by commercial providers that contribute to disparate outcomes ( [[#Kotsantonis--2019|Kotsantonis and Serafeim 2019]] ; [[#Boffo--2020|Boffo and Patalano 2020]] ). Further, as developed in [[#15.6.1|Section 15.6.1]] , there is currently not enough evidence in order to conclude whether climate-related risk assessments result in increased climate action and alignment with the goals of the Paris Agreement ( [[#The%202°%20Investing%20Initiative%20and%20Wüest%20Partner--2020|The 2° Investing Initiative and Wüest Partner 2020]] ).

As developed in [[#15.6.3|Section 15.6.3]] , the insufficient level of ambition and coherence of public policies at national and international levels remains the root cause of the still significant misalignment of investment and financing compared to pathways compatible with the Paris Agreement temperature goal ( [[#UNEP--2018|UNEP 2018]] ). Such lack of coherence includes low pricing of carbon and of environmental externalities more generally, as well as misaligned policies in non-climate policy areas such as fiscal, trade, industrial and investment policy, and financial regulation ( [[#OECD--2015b|OECD 2015b]] ), as further specified in the sectoral Chapters 6 to 12.

The most documented policy misalignment relates to the remaining very large scale of public direct and indirect financial support for fossil fuel-related production and consumption in many parts of the world ( [[#Bast--2015|Bast et al. 2015]] ; [[#Coady--2017|Coady et al. 2017]] ; [[#Climate%20Transparency--2020|Climate Transparency 2020]] ). Fossil fuel subsidies are embedded across economic sectors as well as policy areas, for example, from a trade policy perspective, in most countries, import tariffs and non-tariff barriers are substantially lower on relatively more CO 2 intensive industries ( [[#Shapiro--2020|Shapiro 2020]] ). Available inventories of fossil fuel subsidies (in the form of direct budgetary transfers, revenue forgone, risk transfers, or induced transfers), covering 76 economies, indicate a rise to USD340 billion in 2017, a 5% increase compared to 2016. Such trend is due to slowed down progress in reducing support among OECD and G20 economies in 2017 ( [[#OECD--2018b|OECD 2018b]] ) and to a rise in fossil fuel subsidies for consumption in several developing economies ( [[#Matsumura--2019|Matsumura and Adam 2019]] ), which, in turn, reduces the efficiency of public instruments and incentives aimed at redirecting investments and financing towards low-GHG activities.

As a result, the demand for fossil fuels, especially in the energy production, transport and buildings sectors, remain high, and the risk-return profile of fossil fuel-related investments is still positive in many instance ( [[#Hanif--2019|Hanif et al. 2019]] ). Political economy constraints of fossil fuel subsidy reform continue to be a major hurdle for climate action ( [[#Schwanitz--2014|Schwanitz et al. 2014]] ; [[#Röttgers--2018|Röttgers and Anderson 2018]] ), as further discussed in [[#15.5.2|Section 15.5.2]] . and Chapter 13.

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