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

=== 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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