Sustainable Investments and the Role of ‘Financial Institutions' in Climate Action

In an increasingly environmentally conscious world, the finance sector is undergoing a transformative shift, driven by the need for responsible investments. As the global community grapples with the urgent challenges of climate change, the role of 'Financial Institutions' has taken center stage in steering the course towards more sustainable global economies.  
   
David Carlin, Head of Risk at the United Nations Environment Programme Finance Initiative (UNEP FI) plays a pivotal role in assessing the risks and impacts of climate change on organizations and their clients as well as helping institutions prepare for climate-associated challenges to ensure a smooth transition towards sustainability.  
 
David joins to elaborate on the evolving landscape of finance and the role financial institutions like the UNEP FI play in driving environmentally responsible investments.  
  
Maryam Irfan, Industrial Decarbonization Network: For those who may not know, could you start by explaining what the UNEP FI does? And as the Head of Risk at this institution, what does your role entail?  
 
David Carlin: The UNEP FI, or the UN Environment Programme Finance Initiative is a special part of the United Nations that works primarily with the private sector, specifically financial institutions, to accelerate sustainable finance and financial sustainability. Our core focus lies in examining how institutions engage with nature, climate, and social goals with environmental impact. Over the past 30 years, we've been behind some of the biggest frameworks in the financial sector.  
 
These include the Principles for Responsible Banking, launched in 2019, the Principles for Sustainable Insurance, and the Principles for Responsible Investing, which is now our sister organization. We also act as conveners of net-zero alliances like the Net Zero Banking Alliance and the Net Zero Asset Owners Alliance. Our work serves as a convening hub, leveraging the UN's power to bring industry leaders together, to think about solutions that address the sustainability challenges our world faces.  

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As for me, I am specifically focused on assessing risks faced by institutions, both those they encounter and those they create. These risks include the impacts of climate change on organizations and their clients, as well as the impacts of the net-zero goals. We help institutions prepare for that to assure a smooth and orderly transition.  
 
My work also intersects with existing regulations, such as climate stress tests and disclosure requirements, including those outlined by the Task Force on Climate-related Financial Disclosures. We see our role as a hub not only for providing resources but also for facilitating knowledge exchange between peers in the industry and experts in climate modelling and climate science. This collaboration aims to break down the silos that hinder comprehensive solutions to climate change, nature loss, and biodiversity loss.  
 
In essence, our work serves as a think tank, a convening centre, and an organizational advocate. This is all geared toward helping firms move faster and equipping them with the tools they need to become positive partners on the road to sustainability.  
 
Maryam Irfan, Industrial Decarbonization Network: In your opinion, what are the key reasons sustainable investment is gaining importance in the financial sector, and what role do financial institutions play in this shift?  
 
David Carlin: There are two significant trends at play here. First is a preference-based shift, and second would be the technology and policy-based shift.  
 
The preference-based shift is evident in the fact that most financial institutions now cater to a younger, more socially conscious population worldwide. This new generation is increasingly concerned not only about achieving maximum financial returns but also about the impact they have on the planet. As science highlights the urgency of addressing climate change, biodiversity loss, and pollution, these interconnected planetary crises are not issues we can delay for future generations. They are immediate emergencies. As a result, there is a strong demand for partnerships that are advancing sustainability rather than hindering it.   
 
This demand is largely driven by consumers, employees and the top talent wanting to work for organizations committed to sustainability. Additionally, market dynamics play a role in this shift, especially because the advancement of technology and evolving policies have created market realities, where less sustainable technologies are becoming costlier and less competitive.   
 
As a result, we’re seeing a powerful shift to support not only sustainability but to also support the adoption of low-carbon energy, innovative transportation methods, and zero-carbon construction – essentials steps for us to live in harmony with the Earth’s planetary boundaries.   
 
Maryam Irfan, Industrial Decarbonization Network: Can you elaborate on how an institution's approach to sustainability is influenced?  
 
David Carlin: That depends on the nature of the institution involved. For those directly managing money, their commitment will come from a fiduciary duty to individuals who prioritize sustainability. For example, if you think about a company's retirement account and the strength of the employees or the union advocating for specific criteria in their investment choices, it represents a direct avenue for influence.  
 
Another aspect is the products offered. For instance, the oversubscription to green loans and green bonds in recent years showcases the market’s desire for sustainable options. However, beyond direct consumer-driven preferences, there's an angle involving investors, banks, and insurers assessing current relationships and considering where future partnerships might lie, to align with evolving market dynamics.  

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Additionally, as more energy is being generated from low-carbon sources, suppliers who are fastest in adopting low-carbon operating methods tend to be more successful. There isn’t always a bright line and many organizations are driven by a combination of these factors. You can get desired return while also advancing sustainability, it just depends on the lever that is more prominent within the business model.   
 
Maryam Irfan, Industrial Decarbonization Network: Methane emissions are a significant concern in the oil and gas industry. How does the UNEP FI view the relationship between financial institutions and methane abatement? Additionally, what are financial institutions doing to address these concerns?  
 
David Carlin: Methane abatement, as emphasized in the Intergovernmental Panel on Climate Change's 6th assessment report, the synthesis of which was published earlier this year, clearly states that methane and other non-CO2 greenhouse gas emissions represent the low-hanging fruit in our efforts to limit near-term warming. With regards to their potency, a single molecule of methane may have the warming potential equivalent to 20 carbon dioxide molecules over a longer time frame or nearly 80 times over a shorter time frame. So, the importance of reducing methane in the atmosphere cannot be overstated.  
 
What sets methane apart is its relatively short-lived nature of atmospheric methane means that aggressive mitigation today can help us to combat planetary warming, which means that taking action in the near term to mitigate its emissions can extend our runway to climate change. Unlike carbon dioxide, which can persist in the atmosphere for thousands of years, methane rapidly converts, predominantly into carbon dioxide and water, making it a powerful lever in preventing the thermostat from rising too high in the short term.  
 
From a financial standpoint, it's important that firms involved in industries with significant methane emissions, such as agriculture and oil and gas, understand the sources of these emissions. They should also begin to use the latest data and information to get accurate estimates of leak rates and the overall CO2 equivalent footprint. Much of the data used until a few years ago was based on outdated studies and often underestimated methane emissions. So, now it is important to make sure that we’re making decisions based on the latest science and best available evidence.  
 
While methane isn't part of the net-zero 2050 pledge, which primarily focuses on carbon dioxide, it does need to be diminished. As far as mitigating and minimizing other adverse consequences of high temperatures goes, cutting methane can be one of the most vital safety mechanisms for keeping temperatures from reaching dangerous levels in the next decade or two.  
 
We talk about accountability quite a bit and recognize that there is a difference in the physical properties of methane and the commitment people make towards it. Some might assert that the net-zero goal is just about CO2, but that does not mean that methane should be continually emitted at higher levels. On the contrary, slashing methane now may buy us time against some of the worst effects of climate change and represent one of the most easily achievable wins within our grasp today.   

Maryam Irfan, Industrial Decarbonization Network: Could you elaborate on the significance of methane data management for companies and their investors and what the potential consequences are of poor data management in terms of environmental impact and financial risk?  
 
David Carlin: When it comes to methane data management, we've seen exciting developments, including tracking data from satellites and various Earth observation methods, as well as improved monitoring and modelling on Earth itself. All that information needs to be assimilated into the decision-making process concerning client relationships.  
 
Regarding responsibility, it's worth noting that the oil and gas industry itself recognizes that methane emissions pose an existential challenge when released into the atmosphere and achieving a "leak 0" scenario is of absolute priority. We should also appreciate that economic incentives can play a crucial role in aligning actions, whether it’s using excess methane for crypto mining, enhancing pipeline infrastructure to limit leak rates, or employing technologies that capture or combust methane from digestion or other sources. These are all important technologies, and it is incumbent upon institutions to acquire the right data to understand the overall GHG footprint of their clients and engage with that as one of the most important near-term mitigation strategies.   

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While we acknowledge that methane reductions are similar to the issue of CO2 reduction, it is also one of the most important and direct-action steps that can be taken. Plus, given the relatively fewer sources of methane compared to CO2, we can effectively home in on some of the big emitters and pinpoint areas where action can be taken.  

Maryam Irfan, Industrial Decarbonization Network: Can you share insights into what kinds of methane data investors are currently using and how these data points inform investment decisions? How do you see this evolving in the future?  
 
David Carlin: Methane data is currently being used and considered at both facility and company-wide levels to calculate a total greenhouse gas (GHG) footprint for companies. It is also being used to determine potential internal carbon prices for companies gauging the social cost of carbon or, in the context of a carbon tax regime, to estimate associated liabilities arising from leaks or emissions.  
 
To summarize, it is employed in scenario analysis, engagement initiatives, and increasingly in understanding the relative environmental liabilities of companies with similar profiles. For companies that share similarities in terms of production costs, size, and operational footprints, methane data can be a critical differentiator for investors.  
 
Maryam Irfan, Industrial Decarbonization Network: Given the complex landscape of climate regulations and targets, how are financial institutions making informed and responsible investment decisions?  
 
David Carlin: The increasing prevalence of mandatory reporting and the standardization of reporting methods, such as those introduced by the IFRS Foundation's International Sustainability Standards Board (ISSB), with the release of the S1 guidance on broad sustainability and the S2 disclosure on climate, there is more of a convergence towards global expectations and standards for reporting. These standards help boost transparency, comparability, and, ultimately, usability.  
 
The long-term goal is to see sustainability disclosures in the same light as financial disclosures, containing essential information that can help investors make decisions about the company’s potential future and ongoing viability. In the absence of such information, the usefulness is significantly called into question. 
   
So, as we proceed with these disclosures, we’re trying to establish a level of consistency, quality, and transparency that renders them valuable, not just internally or to regulators or supervisors, but also to the wider market.  
 
We aspire to move beyond evaluating transition plans or climate risk reports like a professor grading students' work. Instead, the vision is to present this information to the marketplace, allowing stakeholders to judge it not based on the completeness of the report, its depth, detail, or visual presentation, but rather on whether the disclosed information places a company in a stronger or weaker competitive position compared to peers in the industry or other sectors. This, in turn, impacts the financial relationship that the market shares with the company in question.  
 
Maryam Irfan, Industrial Decarbonization Network: What are you most looking forward to at this year’s Methane Mitigation Europe Summit?  
 
David Carlin: I am genuinely looking forward to bringing together a large number of diverse voices from different sectors, including the financial industry, corporate world, science, and policy, to collectively think about the role each of them play in reducing methane emissions. It’s crucial now to think of this as not just an abatement challenge but an urgent action on the road to decarbonization.   
 
Reducing the amount of methane reaching the atmosphere molecule by molecule is one of the most effective investments we can make. By doing so, we can bring ourselves closer to the safe limits for our climate and I am eager to foster discussions that emphasize that sense of urgency and catalyze action, rather than just attempting to understand the problem or relying on past approaches.   
Curbing methane emissions in the near term can help us manage risks, but it will require the collective efforts of individuals across various sectors to drive this change.   

Interested in learning more?

Join over 200 oil and gas operators, NGOs, academics and methane initiatives, and tech providers at the Methane Mitigation Europe Summit to learn more about the critical role of financial institutions in reducing methane emissions. For more information on the 50+ speakers taking the stage in Amsterdam, download your copy of the event guide.