The world is at a climate crossroads.
A series of recent reports by the UN Intergovernmental Panel on Climate Change (IPCC) has highlighted the impacts of climate change we are currently experiencing, and foreshadowed a future where conditions are much more threatening to human and economic wellbeing than previously thought.
Average global temperatures have already risen by approximately 1.0°C. The acceleration of biodiversity loss, rising sea levels and ecological degradation are expected. The IPCC reports provide a stark reminder of the urgent need for action. Limiting global warming to 1.5°C, the upper limit to avoid the most catastrophic effects of climate change, requires reducing carbon dioxide emissions by about 45% from 2010 levels by 2030, and reaching net zero by 2050.
This implies rapid and far-reaching transitions in energy, transport, water and urban infrastructure. It means reassessing how we prioritise and finance infrastructure to support this transition. The OECD estimates that making future infrastructure investments 'climate-compatible' would require around a ten percent increase in project costs and, given the potential future costs of inaction, this is not a high price.
However, infrastructure spending is already far below what is needed. The OECD estimates that even if governments take no further action on climate change, around USD 95 trillion of investments in energy, transport, water and telecommunications infrastructure is needed between 2016 and 2030 just to sustain economic growth and development, or around USD 6.3 trillion per year. Current investment is considerably low, roughly USD 3.4 to USD 4.4 trillion per year.
Governments are already dealing with limited fiscal space, and they cannot address the infrastructure gap on their own. Through diverse financial instruments and channels, the financial sector can enable sustainable investment at the company and individual project level. Bank financing plays a critical role, particularly in project development, but capital market instruments and channels are equally or even more important, especially since institutional investors, who sit on large pools of assets, could be better mobilised for sustainable investment.
While the financial sector should play an important role in the low-carbon transition and in supporting sustainable development more broadly, the sector will inevitably be hit by sustainability-related shocks, for instance to climate risks, notably transition and physical risks. Building resilience and adapting to such risks also requires urgent attention and action.
Public policy needs to support and incentivise the mobilisation of private investment towards the climate transition, and this is what the OECD is focused on. Our Centre on Green Finance and Investment, established in 2016, is a global platform for policymakers, financial institutions, investors, the corporate sector and other stakeholders to share knowledge, monitor developments, and address key policy and market challenges.
Our annual survey of large pension funds has provided insights on institutional investment in sustainable infrastructure to help guide the direction of policy incentives and the efforts of industry. We have found that pension fund allocations to infrastructure are currently very limited, at roughly one percent on average, which means substantial space for greater activity. A new OECD project, Financing Infrastructure for the Low-Carbon Transition: Stocktaking of Institutional Investment, further assesses sustainability-relevant infrastructure investments by institutional investors using empirical analysis, to enable a more granular view of green and brown-field assets held by these investors.
We’re also working to improve the quality and quantity of information available to the market on sustainable outcomes in order to empower investors to make decisions on this basis, for example to assist investment funds to better integrate Environmental, Social and Governance (ESG) factors into their portfolios and strategies. ESG rating methodologies vary from firm to firm, as do disclosures on the impact of asset selection. We are exploring how corporate governance practices can support climate-related financial disclosures, and early OECD work on sustainability finance taxonomies on common features, practices and gaps, will pave the way for enhanced international coordination and harmonisation.
Only collective, coordinated action at the international level can mobilise investment in support of the climate transition and wider sustainability – this is a top priority for the OECD. We will continue to produce the research, analysis and guidance governments need to drive these efforts forward, provide platforms for global cooperation across sectors, and work with other international bodies towards global solutions.