Editing IPCC:AR6/WGII/Chapter-18 (section)

=== 18.4.2 Enabling Conditions for Near-Term System Transitions ===

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Given actors, institutions and their engagement is fundamental to supporting system transitions needed for CRD ( [[#18.3|Section 18.3]] ), this section assesses recent literature with respect to how the values, choices and behaviours of those actors enable or constrain specific enabling conditions. Such enabling conditions represent opportunities for policymakers to pursue actions that contribute to CRD beyond direct risk management options such as climate adaptation and GHG mitigation (Sections 18.2.5.1, 18.2.5.2).

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==== 18.4.2.1 Governance and Policy ====

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An overarching enabling condition for achieving system transitions and transformations is the presence of enabling governance systems ( ''very high confidence'' ) ''.'' Recent literature on the translation of governance into system transitions in practice suggests four key actions are important. The first is the critical reflection on so-called ‘development solutions’, alternatively framed by some as ‘empty promises’, that worsen climate risk, inequity, injustice and ultimately lead to unsustainable development ( [[#Mikulewicz--2018|Mikulewicz, 2018]] ; [[#Mikulewicz--2020|Mikulewicz and Taylor, 2020]] ). Examples include development aid ( [[#Scoville-Simonds--2020|Scoville-Simonds et al., 2020]] ), large-scale development projects such as biofuel production in Ethiopia ( [[#Tufa--2018|Tufa et al., 2018]] ) and urban growth management in Vietnam ( [[#DiGregorio--2015|DiGregorio, 2015]] ). The second is the recognition that while the power of different actors and institutions is often tied to access to resources and the ability to constrain the actions of others, other dimensions of power such as its ability to produce knowledge as well as its contingency on circumstances and relationships are also important in enabling energy transitions ( [[#Avelino--2016|Avelino et al., 2016]] ; [[#Avelino--2016|Avelino and Wittmayer, 2016]] ; [[#Lockwood--2016|Lockwood et al., 2016]] ; [[#Ahlborg--2017|Ahlborg, 2017]] ; [[#Avelino--2017|Avelino and Grin, 2017]] ; [[#Partzsch--2017|Partzsch, 2017]] ; [[#Smith--2018|Smith and Stirling, 2018]] ). Third, governance systems can help to develop productive interactions between formal government institutions, the private sector and civil society including the provision ‘safe arenas’ for social actors to deliberate and pursue transitional and transformational change ( [[#Haukkala--2018|Haukkala, 2018]] ; [[#Törnberg--2018|Törnberg, 2018]] ; Strazds; [[#Ferragina--2020|Ferragina et al., 2020]] ; [[#Koch--2020|Koch, 2020]] ) ( [[#18.3.1|Section 18.3.1]] , Box 18.1). Fourth, governance can address challenges such as climate change from a systems perspective and pursue interventions that address the interactions among development, climate change, equity and justice, and planetary health ( [[#Harvey--2019|Harvey et al., 2019]] ; [[#Hölscher--2019|Hölscher et al., 2019]] ). This is evidenced by recent experience with the COVID-19 pandemic response as well as ongoing escalation of disaster risk associated with extreme weather events ( [[#Walch--2019|Walch, 2019]] ; [[#Cohen--2020|Cohen, 2020]] ; [[#Schipper--2020b|Schipper et al., 2020b]] ; [[#Wells--2020|Wells et al., 2020]] ).

One output from systems of governance is formal policy frameworks and policies that influence processes and outcomes of system transitions that support CRD ( [[#18.1.3|Section 18.1.3]] ). The Paris Agreement, for example, provides a framework for CRD by defining a mitigation-centric goal of ‘limiting warming to well below 2°C and enabling a transition to 1.5°C’ ( [[#UNFCCC--2015|UNFCCC, 2015]] ). It also provides for a broadly defined global adaptation goal ( [[#UNFCCC--2015|UNFCCC, 2015]] : Art. 7.1). The NDCs are the core mechanism for achieving and enhancing climate ambitions under the Paris Agreement. However, the pursuit of a given NDC within a specific country will likely necessitate a range of other policy interventions that have more immediate impact on technologies and behaviour, implicating transitions in energy, industry, land and infrastructure ( ''very high confidence'' ) ( [[#18.3.1|Section 18.3.1]] ). SDG-relevant activities are increasingly incorporated into climate commitments in the NDCs (at last count 94 NDCs also addressed SDGs), contributing to several (154 out of the 169) SDG targets (Brandi and Dzebo; [[#Pauw--2018|Pauw et al., 2018]] ). This reflects the potential of the NDCs as near-term policy instruments and signposts for progress towards CRD ( ''medium agreement'' , ''limited evidence'' ) ( [[#McCollum--2018b|McCollum et al., 2018b]] ).

As reflected by the SDGs (and SDG 13 specifically), the mainstreaming of climate change concerns into development policies is one mechanism for pursuing sustainable development and CRD ( ''very high confidence'' ). However, such mainstreaming has also been critiqued for perpetuating ‘development as usual’, reinforcing established development logics, structures and worldviews that are themselves contributing to climate change and vulnerability ( [[#O’Brien--2015|O’Brien et al., 2015]] ) and for obscuring and depoliticising adaptation choices into technocratic choices ( [[#Murtinho--2016|Murtinho, 2016]] ; [[#Webber--2017|Webber and Donner, 2017]] ; [[#Benjaminsen--2018|Benjaminsen and Kaarhus, 2018]] ; [[#Khatri--2018|Khatri, 2018]] ; [[#Scoville-Simonds--2020|Scoville-Simonds et al., 2020]] ). The coordinated implementation of sustainable development policy and climate action is nonetheless crucial for ensuring that the attainment of one does not come at the expense of others (Stafford-Smith et al., 2017). For example, aggressive pursuit of climate policies that facilitate transitions in energy systems can undermine efforts to secure sustainability transitions in other systems (Sections 18.3.1.1, 18.2.5.3, Table 18.7).

Several non-climate international policy agreements provide context for CRD such as the 1948 UN Universal Declaration of Human Rights, the UN Declaration on the Rights of Indigenous Peoples ( [[#Hjerpe--2015|Hjerpe et al., 2015]] ) and the Convention on Biological Diversity (CBD; [[#UNFCCC--1992|UNFCCC, 1992]] ), the UN Convention to Combat Desertification (UN, 1994), as well as the more recent Sendai Framework for Disaster Risk Reduction ( [[#UNDRR--2015|UNDRR, 2015]] ) and the ‘new humanitarianisms’ which seeks to reduce the gap between emergency assistance and longer term development ( [[#Marin--2017|Marin and Naess, 2017]] ). Collectively they provide a global policy framework that protects people’s rights that are potentially threatened by climate change ( [[#Olsson--2014|Olsson et al., 2014]] ). These policies are relevant to transitions across multiple systems, particularly in societal systems towards more equitable and just development.

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==== 18.4.2.2 Economics and Sustainable Finance ====

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===== 18.4.2.2.1 Economics =====

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System transitions towards CRD is contingent on reducing the costs of current climate variability on society while making investments that prepare for the future effects of climate change. Climate change and responses to climate change will affect many different economic sectors both directly and indirectly ( [[#Stern--2007|Stern, 2007]] ; [[#IPCC--2014a|IPCC, 2014a]] ; [[#Hilmi--2017|Hilmi et al., 2017]] ). As a consequence, the characteristics of economic systems will play an important role in determining their resilience ( ''very high confidence'' ). These effects will occur within the context of other developments, such as a growing world population, which increases environmental pressures and pollution. This impact is higher for developing countries than for high-income countries ( [[#Liobikienė--2018|Liobikienė and Butkus, 2018]] ). While looking for sustainable climate-resilient policies, many complex and interconnected systems, including economic development, must be considered in the face of global-scale changes ( [[#Hilmi--2010|Hilmi and Safa, 2010]] ).

[[#Miller--2017|Miller (2017)]] discusses some of the planning for, and application of, adaptation measures that improve sustainability, noting the importance of considering a range of factors including complexities of interconnected systems, the inherent uncertainties associated with projections of climate change impacts and the effects of global-scale changes such as technological and economic development for decision makers. For example, addressing climate impacts in isolation is unlikely to achieve equitable, efficient or effective adaptation outcomes ( ''very high confidence'' ). Instead, integrating climate resilience into growth and development planning allows decision makers to identify what sustainable development policies can support climate-resilient growth and poverty reduction and understand better how patterns and trends of economic development affect vulnerability and exposure to climate impacts across sectors and populations, including distributional effects ( [[#Doczi--2015|Doczi, 2015]] ). [[#Markkanen--2019|Markkanen and Anger-Kraavi (2019)]] highlighted that climate change mitigation policy can influence inequality both positively and negatively. Although higher levels of poverty, corruption, and economic and social inequalities can increase the risk of negative outcomes, these potential negative effects would be mitigated if inequality impacts were taken into consideration in all stages of policy making ( ''very high confidence'' ).

The primary objective of economic and financial incentives around carbon emissions is to redirect investment from high to low carbon technologies ( [[#Komendantova--2016|Komendantova et al., 2016]] ). Recent years have seen policy interventions to incentivise transitions in energy, land and industrial systems to address climate change and sustainability focus on price-based, as opposed to quantity based, interventions. Price-based interventions aim at leveraging market mechanisms to achieve greater efficiency in the allocation of resources and costs of mitigating climate change. For example, carbon pricing initiatives around the world today cover approximately 8 gigatons of carbon dioxide emissions, equivalent to about 20% of global fossil energy fuel emissions and 15% of total carbon dioxide GHG emissions ( [[#Boyce--2018|Boyce, 2018]] ). Meanwhile, environmental taxes and green public procurement push producers to eliminate the negative environmental effects of production (Danilina and Trionfetti, 2019). There are several advantages for environmental taxation including environmental effectiveness, economic efficiency, the ability to raise public revenue, and transparency ( ''very high confidence'' ). These gains can provide more resource-efficient production technologies and positively affect economic competitiveness ( [[#Costantini--2018|Costantini et al., 2018]] ).

Policies encouraging eco-innovation, defined as ‘ ''new ideas, behaviour, products, and processes that contribute to a decreased environmental burden'' ’ ( [[#Yurdakul--2020|Yurdakul and Kazan, 2020]] ), can positively affect economic competitiveness. By implementing policies to encourage eco-innovation, countries enhance their energy efficiency. These gains can provide more resource-efficient production technologies and positively affect economic competitiveness ( ''very high confidence'' ) ( [[#Costantini--2018|Costantini et al., 2018]] ; [[#Liobikienė--2018|Liobikienė and Butkus, 2018]] ). Other than eco-innovation, it is important to also consider exnovation, meaning the phasing out of old technologies, as otherwise the expansion of supply could lead to a rebound owing to cheaper prices for carbon-based products (Arne [[#Heyen--2017|Heyen et al., 2017]] ; [[#David--2017|David, 2017]] ). Hence, decarbonisation strategies that set limits to carbon-based trajectories can be beneficial. Quantity-based interventions—or so-called ‘command-and-control’ policies—involve constraints on the quantity of energy consumption or GHG emissions through laws, regulations, standards and enforcement, with a focus on effectiveness rather than efficiency.

For a transition from dirty (more advanced) technologies to clean (less advanced) ones, market-based instruments such as carbon taxes should be considered alongside subsidies and other incentives that stimulate innovation ( [[#Acemoglu--2016|Acemoglu et al., 2016]] ). Research and development in energy technologies, for example, can help reduce costs of deployment and therefore the costs of operating in a carbon-constrained world. [[#Hémous--2016|Hémous (2016)]] indicates that a unilateral environmental policy which includes both clean research subsidies and trade tax can ensure sustainable growth, but unilateral carbon taxes alone might increase innovation in polluting sectors and would not generally lead to sustainable growth.

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===== 18.4.2.2.2 Climate Finance =====

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Achieving progress on system transitions will be contingent on the ability of actors and institutions to access the financing they need to invest in innovation, adaptation and mitigation, and broader system change ( ''very high confidence'' ). By greening their investment portfolios, investors can support reduction in vulnerability to the consequences of climate change and the reduction of GHG emissions. Finance can contribute to the reduction of GHG emissions, for example, by efficiently pricing the social cost of carbon, by reflecting the transition risks in the valuation of financial assets, and by channelling investments in low-carbon technologies ( [[#OECD--2017|OECD, 2017]] ). At the same time, there is a growing need to spur greater public and private capital into climate adaptation and resilience including climate-resilient infrastructure and nature-based solutions to climate change. For instance, the Green Climate Fund, established within the framework of the UNFCCC, is assisting developing countries in adaptation and mitigation initiatives to counter climate change.

Recent evidence sheds light on the magnitude and pervasiveness of climate risk exposure for global banks and financial institutions. According to [[#Dietz--2016|Dietz et al. (2016)]] , up to about 17% of global financial assets are directly exposed to climate risks, particularly the impacts of extreme weather events on assets and their outputs. However, when indirect exposures via financial counterparts are considered, the share of assets subject to climate risks is much larger (40–54%) ( [[#Battiston--2017|Battiston et al., 2017]] ). Hence, the magnitude of climate change-related risks is substantial, and similar to those that started the 2008 financial crisis ( ''high agreement'' , ''limited evidence'' ).

Financial actors increasingly recognise that the generation of long-term, sustainable financial returns is dependent on stable, well-functioning and well-governed social, environmental and economic systems ''(very high confidence'' ) ( [[#Shiller--2012|Shiller, 2012]] ; Schoenmaker and Schramade, 2020). Institutional approaches to a variety of environmental domains (Krueger et al., 2019) which seek to integrate the pursuit of green strategies with financial returns include targeted investments in green assets (e.g., green bonds, clean energy public equity) and specialised funds/vehicles for renewable energy infrastructure ( [[#Tolliver--2019|Tolliver et al., 2019]] ; [[#Gibon--2020|Gibon et al., 2020]] ); cleantech venture capital and alternative finance ( [[#Gianfrate--2019|Gianfrate and Peri, 2019]] ); investment screening to steer capital to green industries ( [[#Nielsen--2019|Nielsen and Skov, 2019]] ; [[#Ambrosio--2020|Ambrosio et al., 2020]] ); and active ownership to influence organisational behaviour ( [[#Silvola--2021|Silvola and Landau, 2021]] ).

Despite the expansion of green mandates across the investment chain, definitions of some of the asset classes associated with green investing are ambiguous and poorly defined. The EU taxonomy for sustainable activities is a promising step in the right direction. For example, a ‘green’ label for bonds is often stretched to encompass financing facilities of issuers that misrepresent the actual environmental footprint of their operations (the so-called risk of ‘greenwashing’). Even in cases where the bonds’ proceeds are actually used to finance green projects, investors often remain exposed to both the green and ‘brown’ assets of the issuers ( [[#Gianfrate--2019|Gianfrate and Peri, 2019]] ; [[#Flammer--2020|Flammer, 2020]] ). The heterogeneity of metrics and rating methodologies (along with inherent conflict of interests between issuers, investors and score/rating providers) results in inconsistent and unreliable quantification of the actual environmental footprint of corporate and sovereign issuers ( [[#Battiston--2017|Battiston et al., 2017]] ; [[#Busch--|Busch et al.]] ).

In order to promote financial climate-related disclosures for companies and financial intermediaries, the financial system could play a key role in pricing carbon and in allocating capital towards low-carbon emission companies ( [[#Aldy--2019|Aldy and Gianfrate, 2019]] ; [[#Bento--2020|Bento and Gianfrate, 2020]] ; [[#Aldy--2021|Aldy et al., 2021]] ). Stable and predictable carbon-pricing regimes would significantly contribute to fostering financial innovation that can help further accelerate the decarbonisation of the global economy, even in jurisdictions which are more lenient in implementing climate mitigation actions ( ''very high confidence'' ) ( [[#Baranzini--2017|Baranzini et al., 2017]] ). A growing number of financial regulators are intensifying efforts to enhance climate-related disclosure of financial actors. In particular, the Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. Several countries are considering implementing mandatory climate risk disclosure in line with TCFD’s recommendations. Central Banks are also considering mandatory disclosure and climate stress testing for banks. For instance, in November 2020 the European Central Bank (ECB) published a guide on climate-related and environmental risks explaining how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules. The ECB also announced that banks in the Euro-zone will be stress tested on their ability to withstand climate change-related risks. In addition to disclosure requirements and stress testing, some Central Banks are considering the possibility of steering or tilting the allocation of their assets to favour the less polluting issuers ( [[#Schoenmaker--2019|Schoenmaker, 2019]] ). This, in turn, would translate into lower cost of capital for cleaner sectors, significantly accelerating the greening of the real economy.

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==== 18.4.2.3 Institutional Capacity ====

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Institutional capacity for system transitions refers to the capacity of structures and processes, rules, norms and cultures to shape development expectations and actions aimed at durable improvements in human well-being. The AR5 highlighted the need for strong institutions to create enabling environments for adaptation and GHG mitigation action ( [[#Denton--2014|Denton et al., 2014]] ). Institutions stand within the social and political practices and broader systems of governance that ultimately drive adaptation and development processes and outcomes. They are thus produced by them and can become tools by which some actors constrain the actions of others ( [[#Gebreyes--2018|Gebreyes, 2018]] ). As a consequence, they and can become a significant barrier to change, whether incremental or more transformational ( ''very high confidence'' ). The post-AR5 focus on transformational adaptation and resilience present in the literature suggests that institutions that enable system transitions towards CRD are secure enough to facilitate a wide range of voices, and legitimate enough to change goals or processes over time, without reducing confidence in their efficacy.

The limited literature on institutions and pathways relevant to system transitions and CRD suggests that institutions are most effective when taking a development-first approach to adaptation. This is consistent with the principles of CRD which emphasise not simply reducing climate risk, but rather making development processes resilient to the changing climate. There is agreement in this literature that such an approach allows for the effective integration of climate challenges into existing policy and planning processes ( ''very high confidence'' ) ( [[#Pervin--2013|Pervin et al., 2013]] ; [[#Kim--2017b|Kim et al., 2017b]] ; [[#Mogelgaard--2018|Mogelgaard et al., 2018]] ). However, this approach generally rests on an incremental framing of institutional change ( [[#Mahoney--2009|Mahoney and Thelen, 2009]] ) based on two critical assumptions. The first is that existing processes and institutions are capable of bringing about system transitions that generate desired development outcomes and thus can be considered appropriate vehicles for the achievement of CRD. A large critical literature questions the efficacy of formal state and multilateral institutions. The evidence for the ability of local, informal institutions to achieve development goals remains uneven, with robust evidence of positive impacts on public service delivery, but more ambiguous evidence on behaviour changes associated with strengthened institutions ( [[#Berkhout--2018|Berkhout et al., 2018]] ). The second is that the mainstreaming of adaptation will bring about changes to currently unsustainable development practices and pathways, instead of merely strengthening development as usual by subsuming adaptation to existing development pathways and allowing them to endure in the face of growing stresses ( [[#Eriksen--2015|Eriksen et al., 2015]] ; Godfrey-Wood and Otto Naess, 2016; [[#Scoville-Simonds--2020|Scoville-Simonds et al., 2020]] ). There is evidence that countries with poor governance have limited adaptation planning or action at the national level, even when other determinants of adaptive capacity are present ( [[#Berrang-Ford--2014|Berrang-Ford et al., 2014]] ). This suggests that, in these contexts, adaptation efforts are likely to be subsumed to existing government goals and actions, rather than having transformational impact.

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==== 18.4.2.4 Science, Technology and Innovation ====

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Ongoing innovations in technology, finance and policy have enabled more ambitious climate action over the past decade, including significant growth in renewable energy, electrical vehicles and energy efficiency. However, access to, and the benefits of, that innovation have not been evenly distributed among global regions and communities, and continued innovation is needed to facilitate climate action and sustainable development ( ''very high confidence'' ). Policymakers need useful science and information ( [[#Cornell--2013|Cornell et al., 2013]] ; [[#Kirchhoff--2013|Kirchhoff et al., 2013]] ; [[#Calkins--2015|Calkins, 2015]] ; IPCC, 2019 f; [[#Guido--2020|Guido et al., 2020]] ) to make informed decisions about possible risks, and the benefits, costs and trade-offs of available adaptation, mitigation and sustainable development solutions (i.e., Article 4.1 of the Paris Agreement; [[#UNFCCC--2015|UNFCCC, 2015]] ). Moreover, recent literature has emphasised the need for deep technological, as well social, changes to avert the risks of conventional development trajectories ( [[#Gerst--2013|Gerst et al., 2013]] ; [[#IPCC--2014a|IPCC, 2014a]] ).

An effective and innovative technological regime is one that is integrated with local social entities across different modes of life, local governance processes ( [[#Pereira--2018|Pereira, 2018]] ; [[#Nightingale--2020|Nightingale et al., 2020]] ) and local knowledge(s), which increasingly support adaptation to socio-environmental drivers of vulnerability ( [[#Schipper--2014|Schipper et al., 2014]] ; [[#Nalau--2018|Nalau et al., 2018]] ; IPCC, 2019 f). These actors and their knowledge are often ignored in favour of knowledge held by experts and policymakers, exacerbating uneven power relations ( [[#Naess--2013|Naess, 2013]] ; [[#Nightingale--2020|Nightingale et al., 2020]] ). For example, achieving sustainability and shifting towards a low carbon energy system (e.g., hydropower dams, wind farms) remains a contested space with divergent interests, values and future prospects ( [[#Bradley--2014|Bradley and Hedrén, 2014]] ; [[#Avila--2018|Avila, 2018]] ; [[#Mikulewicz--2019|Mikulewicz, 2019]] ), and potential impacts on human rights as embodied by the Paris Agreement ( [[#UNFCCC--2015|UNFCCC, 2015]] ). A number of studies have emphasised the limits of relying upon technology innovation and deployment (e.g., expansion of renewable energy systems and/or carbon capture) as a solution to challenges of climate change and sustainable development ( [[#18.3.1.2|Section 18.3.1.2]] ). This is because such solutions may fail to consider the local historical contexts and barriers to participation of vulnerable communities, restricting their access to land, food, energy and resources for their livelihoods.

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==== 18.4.2.5 Monitoring and Evaluation Frameworks ====

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Enabling system transitions towards CRD is dependent in part on the ability to monitor and evaluate system transitions and broader development pathways to identify effective interventions and barriers to their implementation ( ''very high confidence'' ). However, the monitoring and evaluation of individual system transitions, much less CRD, remains highly challenging for multiple reasons ( [[#Persson--2019|Persson, 2019]] ). The highly contextual nature of resilience, adaptation and sustainable development means that, unlike climate mitigation, it is difficult to define universal metrics or targets for adaptation and resilience ( [[#Pringle--2018|Pringle and Leiter, 2018]] ); ( [[#Brooks--2014|Brooks et al., 2014]] ). This is demonstrated by the Paris Agreement’s global goal for adaptation, The mismatch between timescales associated with resilience and adaptation interventions and those over which the results of such interventions are expected to become apparent tends to result in a focus on the measurement of spending, outputs and short-term outcomes, rather than longer-term impacts ( [[#Brooks--2014|Brooks et al., 2014]] ; [[#Pringle--2018|Pringle and Leiter, 2018]] ). The need to assess resilience and adaptation against a background of evolving climate hazards, and to link resilience and adaptation with development outcomes, present further methodological challenges ( ''very high confidence'' ) ( [[#Brooks--2014|Brooks et al., 2014]] ).

Currently, the ability to monitor different components of CRD are in various stages of maturity ( ''very high confidence'' ). Monitoring of the SDGs, for example, is a routine established practice at global and regional levels, and UNDP publishes annual updates on progress towards the SDGs ( [[#United%20Nations--2021|]] [[#United%20Nations--2021|United Nations, 2021]] ). For resilience, [[#Brooks--2014|Brooks et al. (2014)]] identify three broad approaches to its measurement, each of which could offer potential mechanisms for monitoring progress towards CRD. One is a ‘hazards’ approach, in which resilience is described in terms of the magnitude of a particular hazard that can be accommodated by a system, useful in contexts where thresholds in climate and related parameters can be identified and linked with adverse impacts on human populations, infrastructure and other systems ( [[#Naylor--2020|Naylor et al., 2020]] ). An ‘impacts’ approach is one in which resilience is measured in terms of actual or avoided impacts and is suited for tracking adaptation success in delivering CRD over longer timescales, for example at the national level ( [[#Brooks--2014|Brooks et al., 2014]] ). Finally, a ‘systems’ approach is one where resilience is described in terms of the characteristics of a system using quantitative or qualitative indicators which are often associated with different ‘dimensions’ of resilience ( [[#Serfilippi--2018|Serfilippi and Ramnath, 2018]] ; [[#Saja--2019|Saja et al., 2019]] ). This allows measurement of key indicators that are proxies for resilience at regular intervals, even in the absence of significant climate hazards and associated disruptions ( ''very high confidence'' ) ( [[#Brooks--2014|Brooks et al., 2014]] ) (see also Cross-Chapter Box ADAPT in Chapter 1). Similar criteria could be applied to evaluating adaptation options and their implementation as well as various interventions in pursuit of SDGs.

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'''Box 18.6 | ‘Green’ Strategies of Institutional Investors'''
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'''''Negative and Positive Screening''''' '''.''' Investors assess the carbon footprint of issuers and identify the best and worst performers ( [[#Boermans--2019|Boermans and Galema, 2019]] ). The issuers with excessive carbon footprint are divested and fall into the ‘exclusion lists’ (negative screening). Alternatively, the investors commit to pick only the best in class (positive screening). As a bare minimum, screening approaches force more transparent environmental reporting from issuers. In the most optimistic scenario, to avoid exclusion lists issuers may progressively divest their non-green operations. In the long term, the combination of positive and negative screening will reward sustainable issuers relative to non-green sectors, thus reducing the cost of capital for less polluting entities.

'''''Active Ownership.''''' Equity investors can exercise the voting rights at shareholders’ meetings in relation to governance and business strategy, including the environmental performance. In addition, institutional investors engage with the management and the boards of directors of investee companies. Active ownership is therefore defined as the full exercise of the rights that accrue to the ‘owners’ of the securities issued by companies ( [[#Dimson--2015|Dimson et al., 2015]] ; [[#Dimson--2020|Dimson et al., 2020]] ). Active owners are entitled to question and challenge the robustness of financial analyses and the risk assessment behind strategic decisions including the environmental footprint ones. For instance, since fossil fuel businesses face the prospect of dramatic business decline ( [[#Ansar--2013|Ansar et al., 2013]] ) and must revisit their business model to survive, active ownership by institutional investors may foster the transition to cleaner production and supply chain. Companies more exposed to carbon risks particularly need the active support of long-term shareholders. In turn, investors adopting an active ownership approach can manage their holdings’ exposure to climate change risks, thus protecting the value of their investments on a long-term horizon (Krueger et al., 2019).

'''''Specialized Financial Instruments and Investors''''' ''.'' New asset classes have been created to address the climate change challenge. Also, specialised investment funds and vehicles came to life with the primary objective of addressing climate issues. While these financial instruments and funds prioritise the achievement of climate objectives, they do not sacrifice financial returns and are able to attract private capital. To mention a few examples:

* ''Green bonds'' are typically issued by companies, banks, municipalities and governments with the commitment to use the proceeds exclusively to finance or refinance green projects, assets or business activities. These bonds are equivalent to any other bond issued by the same entity except for the label of ‘greenness’ that ideally is verified ''ex ante'' at the launch and ''ex post'' when the proceeds are actually used by the issuer. Early evidence show that green bonds do not penalise financially issuers ( [[#Gianfrate--2019|Gianfrate and Peri, 2019]] ; [[#Flammer--2020|Flammer, 2020]] ).
* ''Carbon funds'' are designed to help countries achieve long-term sustainability typically financing forest conservation. They are intended to reduce climate change impacts from forest loss and degradation.
* ''Project finance.'' New renewable energy initiatives are likely to recur more and more to project finance. Project finance relies on the creation of a special purpose vehicle (SPV), which is legally and commercially self-contained and serves only to run the renewable energy project. The SPV is financed without (or very limited) guarantees from the sponsors (typically energy companies: investors are therefore paid back on the basis only of SPV’s future cash flows only and cannot recourse on the sponsors’ assets) ( [[#Steffen--2018|Steffen, 2018]] ).
* ''Cleantech venture capital'' . These funds invest exclusively in early-stage companies working on innovative, but not yet fully tested, clean technologies. The risk profile of such investments is usually very high. The extent to which this segment of the financial industry can successfully support ‘deep’ energy innovations is still debated ( [[#Gaddy--2017|Gaddy et al., 2017]] ). When cleantech start-ups develop hardware requiring a high upfront investment, support from the public sector seems necessary to attract further investments from large corporations and patient institutional investors.
* ''Crowdfunding and alternative finance'' are emerging as a channel to both finance small-scale clean energy projects as well as fund early-stage innovative clean technologies ( [[#Cumming--2017|Cumming et al., 2017]] ; [[#Bento--2019|Bento et al., 2019]] ).

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