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Biased metrics threaten climate investment where it's needed most, researchers warn

In a published by Nature, experts from the Sustainable Finance Hub say that, although low- and middle-income countries (LMICs) face the most threat from climate change, their ability to respond and adapt to its effects is threatened by a lack of funds, which are urgently required to transition their economies to more sustainable systems.

Because climate change is driven by cumulative global emissions, the lack of funds will make it harder for everyone to achieve the goals of the Paris agreement, while ultimately failing to protect investors from exposure to climate risks.

At the upcoming UN Climate Conference, COP29, set to take place in Baku, Azerbaijan in November and dubbed the "finance COP," state negotiators will focus on sourcing the trillions of dollars needed per annum to meet global climate goals from both public and private investors.

With private investors increasingly seeking to align their portfolios with the goal of the Paris agreement to keep global average temperatures to 1.5 °C above the pre-industrial average, an array of standards and frameworks has been created to evaluate the emissions and climate-risk profiles of sovereign debt portfolios.

But these metrics can have unintended negative consequences for countries seeking investment, the researchers say.

The researchers looked at one example of a metric used by private investors to measure the "emissions intensity" of their lending to governments.

They found that LMICs fare worse than high-income economies on this emissions-intensity measure because of their lower GDPs and higher reliance on emissions-intensive industries such as agriculture.

Many LMICs already face untenable debts and this emissions-intensity metric could further reduce incentives for investors to lend to the countries that are in most need of climate finance.

The researchers call for a fresh approach, where sovereign investors work with researchers to develop metrics for judging sovereign-debt portfolios that consider nations' historical emissions performance and future trajectories.

They also called on financial institutions, regulators, researchers and others to come together and evaluate where well-meaning sustainable finance metrics may be inadvertently impacting access to climate finance by those that need it most.

"LMICs face substantial challenges raising funds from private investors as it is. If well-meaning sustainable finance metrics make it harder again, this endangers our global response to climate change, which will have powerful negative effects for us all, including the private investors making these decisions," says lead author and Head of the Sustainable Finance Hub, Dr. Arjuna Dibley.