Measuring Climate Investments, Impacts and Risk

Through ratifying the Paris Agreement, 189 countries have agreed to work together to invest in a low-carbon future, lowering greenhouse gas (GHG) emissions enough to limit global temperature increase in this century to 2 C or less. Significant financial resources must be mobilized to meet this commitment, from both the public and private sectors.

To increase financial resources flowing toward a new, greener economy, we must be able to measure “climate finance.” We must have clear, transparent methods to determine whether investments are “green,” and we must be able to forecast the impact these investments will have in lowering GHG emissions.

IFC’s new Green Banking Academy (GBAC) is an online banking knowledge initiative designed to help financial institutions and the private sector in Europe and Central Asia (ECA) learn about green banking and build green portfolios. Through knowledge, training, advisory and investment services, GBAC can help you embrace the opportunities of the future green economy. One of the services available through GBAC is the use of IFC’s climate measurement tool, CAFI. CAFI enables financial institutions to track the share of green investments in their portfolio and produce impact reports, estimating the positive impact these investments will have on the environment.

If you can’t measure it, you can’t improve it.

Peter Drucker, Austrian management consultant, 1909 – 2005

Classifying Investments as Green

To qualify as “green,” investments must support climate change mitigation, or adaptation to climate change. Beyond this simple definition, there are many details to include. Consider these situations:

  • Some definitions consider investments to be green only if they are “incremental,” that is, if the funded project involves environmental action that goes beyond a “business-as-usual” approach.
  • Some definitions consider projects to be green only if they are “additional,” that is, if the funding is a new investment.
  • How can a project be classified if only a portion of the investment is truly dedicated to solving environmental problems?

“Green washing” describes the practice of mis-labelling investments as green when the investments do not actually contribute to the goals of the Paris Agreement.

Without clear, transparent measurement methodologies, it is difficult to know when the goal of increasing climate finance has been met, and, more importantly, it is difficult to determine whether our efforts to mobilize investment will actually have an impact on future GHG emissions. Investors seeking green investments are demanding information showing that funded projects meet international “green” standards.

Types of Climate Risks

There are two distinct types of climate risk: physical and transitional risks. Physical risks are the easiest to visualize. These are the risks of drought, heatwaves, floods, and other climate change events that could have a direct impact on business operations and the financial institutions that support them. Transitional risks are the risks to businesses as society transitions to a low-carbon economy. How fast will change occur? Will changing environmental and social policies affect your institution’s portfolio? How will businesses be impacted by shifts in the prices of the commodities they purchase as inputs?

The Economist Intelligence Unit estimates the total value of assets exposed to both risks of climate change to reach $43 trillion by 2100. Financial institutions that identify and evaluate these risks as thoroughly as possible will have an enhanced opportunity to offset these risks through insurance or diversified portfolios, making these institutions more resilient in the future.

To identify and value potential risks, evaluators need access to long-term historic data in areas such as temperature, rainfall, and commodity prices. This information must be incorporated into a range of potential future climate scenarios to create future profitability projections. These potential future climate scenarios must include a wide range of possibilities, based on varying degrees of temperature increase, and varying speed of global temperature increase.

From a risk perspective, the emphasis is on how much is not known rather than how much is known about the future climate.
George Backus, American geophysicist

It is difficult to place probabilities on potential outcomes given the number of unknown variables involved. For example, a large-scale climate disaster event may speed global warming, but may also spur global investment in new low-carbon technology. The only clear certainty is that the unknowns of our future climate contribute to business risk.

Impact Reporting

As well as reporting financial resources dedicated to green investments, it is crucial to measure and report the predicted outcomes of climate investments. Impacts are typically measured in terms of carbon dioxide equivalent metric tonnes, or CO 2 -e. This measurement includes carbon dioxide emissions, as well as other GHG emissions. For example, methane emissions have 25 times more potential to cause global warming than carbon dioxide emissions. To convert methane emissions to CO 2 -e, multiply them by 25. Nitrous oxide emissions have 298 times the potential to create global warming, compared to carbon dioxide.

The UN Environment Program reports that based on current commitments, global CO 2 -e emissions will reach 56 gigatons (56 billion metric tons) by 2030. To achieve the goals of the Paris Accord, we must work to halve this number, to 25 gigatons CO 2 -e by 2030,

Measuring Impact with CAFI

IFC has developed an online platform that financial institutions can use to assess potential investments to ensure they are green The Climate Assessment for Financial Institutions (CAFI) tool can also be used to report climate impact data.

Through CAFI, financial institutions can analyze, potential loans in detail to determine their green eligibility and future climate impact. At the macro level, CAFI can be used as a visual tool to illustrate the real-time climate impact of an entire portfolio and other key performance indicators through a graphic, dashboard mode. As well as reductions in CO 2 -e emissions, CAFI can be used to measure savings in water and energy.

Financial institutions using CAFI can be assured they are using international standard methodology to assess loans. CAFI is updated on an ongoing basis to meet new standards, embrace new methods, and include new technologies. Currently, CAFI has the capability of assessing assets in a wide range of seven categories, with more options coming.

CAFI Analysis Categories:

  • Renewable energy
  • Energy efficiency
  • Special climate
  • Green buildings
  • Transport
  • Water efficiency
  • Adaption

Coming soon:

  • Climate smart agriculture
  • Green buildings

Start Your Green Journey
For more information about GBAC or to schedule an assessment of your climate capabilities, please email ecagbac@ifc.org to contact a member of our ECA GBAC team. We are looking forward to working with you. Stay green!