On June 29, 2021, CPI launched the UK dashboard beta version of the Net Zero Finance Tracker. In its beta form, the Tracker draws on nearly 200 datasets to cover more than 1200 private institutions in the UK that together represent over USD 25 trillion in assets managed or owned. It monitors a wide range of actions that signal progress on financial alignment with the Paris Agreement and net zero emissions goals.

Net Zero Finance Tracker

Background

Since the establishment of the Paris Agreement in 2015, many initiatives have been launched to galvanize public and private action on Paris Alignment (principles, targets, standards, disclosure, pathway assessments, portfolio temperature assessments). However, there is currently no comprehensive view of progress across the financial system and real economy in relation to alignment with the Paris Agreement. This is essential to make sense of the transitions underway, the outstanding gaps, and to identify who needs to play which role going forward.

CPI is working to fix these data gaps by developing the Net Zero Finance Tracker

CPI is building out the Tracker with the ultimate aim to:

1. Assess the public and private finance response to climate change.
2. Integrate benchmarks to assess the alignment of financial stocks and flows with Paris Agreement and net zero emissions objectives.
3. Identify gaps and opportunities to scale up necessary investments by country, sector, and actor type.
4. Inform effective prioritization and targeting of policy and public/private investment by corporations, policy makers, regulators, and financial institutions.

The Net Zero Finance Tracker evaluates three dimensions of Paris alignment:

• Targets: signaling intent to respond. This dimension tracks indicative qualitative commitment and quantitative targets adopted to address climate change, as well as membership of initiatives that may influence future capital alignment.
• Execution: measuring integration of climate considerations into decision-making processes, potentially resulting in future investment flows. This dimension looks at concrete qualitative changes to actor policies, governance and investment approach that may influence future capital alignment.
• Flows: tracking finance allocated to climate solutions via investment into productive assets/activities and capital markets. This dimension relies on the measurement of quantitative changes in stocks and flows of relevant finance (both low and high emissions).

Initial Findings from the UK Dashboard

The Tracker reveals that as of 2020, over 800 UK private institutions – including banks, asset managers, corporates, and other actors – reported some level of climate target setting. This includes qualitative commitments, quantitative targets, as well as membership in coalitions or initiatives that may influence future capital alignment. Nearly 700 institutions are beginning to integrate these targets into practice by changing policies, governance, and investment approaches.

While one indicator of on-the-ground financing levels—green bond issuance—has shown steady increases in the UK, other indicators show less progress. Project-level finance for climate change mitigation and adaptation in fact decreased between 2015 and 2018, the last year for which there is reliable data. Further, currently, there are 10 times as many institutions whose share of portfolios exposed to climate-critical sectors is misaligned with the Paris Agreement as there are aligned institutions. The institutions with misaligned portfolios are usually larger than those with aligned portfolios.

To reach net zero emissions by 2050, annual green investment will need to rise by several multiples of current levels over the coming decade. The Tracker indicates that this will require a rapid scale up of existing mitigation activities in every economic sector, as well as deploying new technologies that have not yet been rolled out at any significant scale. Challenges facing the UK include decarbonizing an aging building stock, phasing out gas in both the electricity and heat networks, replacing all vehicles with electric alternatives, and restoring degraded land such as forests and peatland.

The Tracker reveals additional key findings for private finance actors, including the following, which may be of particular interest to policymakers:

• Asset managers: The number of asset managers responding to climate change has increased exponentially in recent years. In 2015, only 12 asset managers reported any response to climate change. That rose to 408 by 2020, representing over USD 12 trillion in assets, which is equal to approximately the entire UK investment management industry. While not all asset managers are able to provide primary financing for climate mitigation, they can get closer on portfolio alignment by taking more advanced steps with their target setting and integration actions, such as using climate scenario tools or climate risk due diligence.
• Banks: The number of banks in the UK reporting some level of response to climate change has increased incrementally over the last five years. In 2020, 16 UK banks reported some level of response to climate change, representing approximately USD 7 trillion in assets, compared to USD 10 trillion managed by banks in the UK overall. Most of the efforts by banks have been on disclosure of targets. Banks have been slow to incorporate more developed climate response actions despite growing regulatory pressure, while rising green finance contributions have not resulted in alignment across portfolios as a whole.
• Pension Funds: While only two UK pension funds reported any level of response to climate change in 2015, 70 were engaged by 2020. However, only around one-tenth of these pension funds disclose the degree to which their portfolios align with the Paris Agreement. This indicates that significant work must be done to encourage pension fund risk disclosure and alignment.
• Wealth Management Firms: Wealth management is a USD 4.5 trillion industry in the UK, yet only 14 firms have reported any response to climate change and these firms’ underlying assets total just USD 238 billion. This represents a significant opportunity for regulatory redirection.
• Insurance companies: The number of insurance companies responding to climate change has seen significant growth recent years, though there is room for improvement. Early leaders in insurance have shown it is possible to head straight to integration measures, such as incorporating climate risk disclosure and carbon prices in their business models, and have a higher climate response score according to the Tracker in this area than on targets. However, this hasn’t yet fed through into aligned portfolios.

The Tracker also reveals sector-specific emissions cuts and investment needs drawn from the independent, public advisory body, the Committee on Climate Change. These including the following, which may be of particular interest to policymakers:

• Power: The UK has made good progress decarbonizing the electricity grid, but significant further investment is required to scale up renewables, replace remaining fossil fuel generation (natural gas), and upgrade the network.
• Buildings: Decarbonizing buildings requires a major scale-up of investment and represents one of the most challenging policy areas. Over half of the building stock in the UK was built before 1965, so renovations are critical to achieve net zero, as well as ensuring new buildings meet near-zero standards, which would be higher than current targets for energy performance.
• Transport: Emissions cuts in transport require rapidly rising investment, corresponding to rising numbers of electric vehicles and charging infrastructure. Average annual investment over the next five years needs to be over 10 times greater than the average over the past five years. A planned ban on sales of internal combustion engine vehicles in 2030 will contribute to shifting investment, but further measures could be taken to limit registration periods of fossil fuel vehicles or encourage scrappage to ensure removal by 2050.
• Industry: Investment needs for industry are low at the start of this decade but rise to over USD 5 billion per year in the mid-2030s. Public funding may lead private investment in this sector, where the up-front costs of deep decarbonization can be very high.Ambitious policies will be needed to decarbonize further through a range of abatement measures, while protecting jobs and competitiveness.
• Agriculture and land use: Emissions from agriculture, forestry, and other land use are challenging to abate, requiring large-scale changes to all land-use practices. While the investment required is low in absolute terms compared to other sectors (approximately USD 2 billion per year), behavior change like dietary switching and reducing food waste will also be needed to make an impact.

About the Net Zero Finance Tracker

Climate Policy Initiative produced the methodology, analyzed available aggregated data, and developed the Net Zero Finance Tracker. An advisory group of experts reviewed the methodology, analysis, and beta Tracker. The European Climate Foundation provided funding for methodology work, as well as analysis and development of the UK beta Tracker, while the Government of Austria has provided funding for methodology and analysis that can eventually extend to a global version. All responsibility for content rests with CPI and not advisory or funder organizations.

We are actively fundraising to build out a global Net-Zero Finance Tracker (with an initial contribution from the Austrian Government), which will include a global dashboard, additional national dashboards, and will maintain an active network of members and data providers.