Accounting for finance is key for climate mitigation pathways

Science, 28 May 2021.DOI: 10.1126/science.abf3877

8 Pages Posted: 8 Feb 2021 Last revised: 25 May 2021

See all articles by Stefano Battiston

Stefano Battiston

University of Zurich - Department of Banking and Finance; Ca Foscari University of Venice

Irene Monasterolo

EDHEC Business School

Keywan Riahi

International Institute for Applied Systems Analysis (IIASA)

Bas van Ruijven

International Institute for Applied Systems Analysis (IIASA)

Date Written: May 10, 2021

Abstract

The financial system, the ecosystem of investors (e.g., banks, investment funds, insurance), markets, and instruments, is often considered to play an enabling role in climate mitigation pathways to a low-carbon transition. But it can also have a hampering role, e.g., if investors’ perceptions of low risk from a missed transition and low opportunities from a transition fail to trigger a reallocation of capital into low-carbon investments. This increases the chance of the transition not occur-ring within the time window required to stabilize the climate or occurring in a disorderly fashion. But investors, who can influence the realization of climate mitigation pathways, themselves rely upon estimates of climate mitigation pathways from process-based Integrated Assessment Models (IAMs). And IAMs do not model the financial system nor investors’ decisions, thus the feedback loop between the financial system and mitigation pathways is not taken into account by the IAMs nor by the finance community. This limitation to our understanding of the dynamics and the feasibility of the low-carbon transition weakens the ability of IAMs to inform policy and investment decisions. We propose a framework to capture the interdependence between investors’ perception of future climate risk, depending on the credibility of climate policies, and the allocation of in-vestments in the economy.

Keywords: climate finance, financial risk, mitigation scenarios, energy technology, systemic risk, integrated climate financial risk assessment

JEL Classification: G01, G20, Q43, Q54

Suggested Citation

Battiston, Stefano and Monasterolo, Irene and Riahi, Keywan and van Ruijven, Bas, Accounting for finance is key for climate mitigation pathways (May 10, 2021). Science, 28 May 2021.DOI: 10.1126/science.abf3877, Available at SSRN: https://ssrn.com/abstract=3748041 or http://dx.doi.org/10.2139/ssrn.3748041

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Irene Monasterolo (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Keywan Riahi

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Bas Van Ruijven

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
232
Abstract Views
786
rank
182,198
PlumX Metrics