Transitioning to a low carbon economy in order to limit global warming to well below 2°C involves changes in investment and lending practices, financial related regulations, and policy incentives. The concept of '2° Investing' refers to the alignment of investment strategies, lending policies and related regulation with climate policy goals (now the Paris Agreement). It has been wildly adopted by financial institutions, governments and NGOs following the adoption of the Paris agreement.
After developing a framework to assess and label the carbon footprint of banks in 2007, Stan Dupre coined the concept of 'alignment of investment strategies and financial regulation with climate goals', in his 2010 book on sustainable finance. He then founded the company 2° Investing Ventures, the think tank 2° Investing Initiative in 2012 and its data subsidiary Asset Resolution in 2018 to implement the concept, develop the related methodologies, software, dataset and public policies, mobilizing $40M of funding (as of 12/2020). He led 2° Investing Initiative and as CEO, and Asset Resolution as its chairperson (representing 2Dii) until 2020 and now focus on developing 2° Investing Ventures.
In 2007, building on the carbon data of Inrate, and in collaboration with WWF, Friends of the Earth, and the French Environmental Agency, Stan Dupre (for his consultancy Utopies) put together and pilot-tested the first open-source methodology for assessing the 'financed emissions' of banks, pension funds and other financial institutions. The project lead to a climate ranking of French banks, and a labelling scheme and online climate scanner for retail financial products, as well as the creation of a first non-for-profit, the ATEPF in 2008, to promote the approach. The findings have been described in a book, the press and a TV documentary.
The carbon footprint of financial institutions is now promoted by the Partnership for Carbon Accounting Financials (PCAF) and the product scanner has been redesigned and relaunched by Rift in France and MyFairMoney in Germany.
2° Investing's first study highlighted the shortcomings of the carbon footprint as a metric to inform investment decisions. To address them, we explored the possibility to apply scenario analysis to investment portfolios based on physical asset-level data from business intelligence (Decouty 2012) and raised funds to launch a first research project in 2014. The project led to the creation of a methodology, a software (PACTA) and a database (Asset Resolution). Our approach has been applied by more than a 1,000 financial institutions including the leading banks and supervisors. It inspired other portfolio scenario analysis methods by peers and various pledges by investors and governments.
To our knowledge, the idea to make financial regulation consistent with climate and environmental policy goals was first coined by Stan Dupre in his 2010 book and a 2012 concept paper on the topic. 2° Investing Initiative then explored it is a first policy paper (Thomä et al, 2013) and a report for the European Commission in 2015. At the same time we helped the UNEP Inquiry disseminating the concept globally. The first law to be passed based on our recommendations was the French Article 173 on mandatory climate disclosure in the finance sector in 2015. In 2017, Stan Dupre joined the EU High Level Expert Group on sustainable finance (HLEG) and drafted the recommendations that led to the reforms on climate-related disclosures, the integration of sustainability into financial advice and the inquiry on short-termism in Europe (EU action plan).
The introduction of the concept of '2° investing' into financial regulation in France, combined with the adoption of the Paris Agreement in 2015, and the rise of climate scenario analysis in the finance sector led to the adoption of what is now known as 'Paris-Aligned' investment and lending strategies. Since 2018, major investors and banks have started to commit to such strategies, in the context of collective initiatives such as the UNEP's Net Zero Alliance and Principles for Responsible Banking.
In 2020, observers estimate that a third of large European banks have adopted such strategies. US and international banks are following, and a range of organizations (SBTi, RMI, IIGCC...) are currently racing to set the standard on what being 'Paris-aligned' actually means in practice.
However, avoiding 'climate impact-washing' remains a challenge.
Due to the mismatch of time horizons across the investment chain, climate-related risks are not financially material enough today to drive the alignment of investment and lending strategies with climate goals. Additional drivers are necessary. Individual clients and beneficiaries present an interesting opportunity in this respect: consumer research suggests that a large majority of them want to invest and use their shareholder rights to support the Paris Agreement, while they represent (directly or as final beneficiary) a significant part of total financial assets ownership. 2° Investing Initiative and other organizations have started to activate this lever through awareness-raising, online tools, and the exploration of potential changes in tax incentives.
However, it is only the beginning of the journey on the topic...
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The introduction of mandatory climate disclosure in the finance sector, Article 173 of the French Energy Transition Law
The uptake of climate scenario analysis by supervisors and public authorities, the role of PACTA
The role of retail investors and beneficiaries, the reform of MIFID
Since 2007, about 150 people contributed to the developments of the 2° investing-related concepts, methodologies and tools. 2° Investing Initiative has been co-funded with Hugues Chenet, and co-developed internationally with Jakob Thomä, who became managing director of the network in 2018. Other key contributors to the inception of the project include Victor Roquin, Nicolas Delange and Alexandre Gazuit who developed the first bank carbon footprint methodology at Utopies; Corentin Decouty who first explored the feasibility of portfolio climate scenario analysis in his thesis; Chris Weber, Michael Hayne, Klaus Hagedorn, Clare Murray and Florence Palandri who contributed to the early developments of PACTA, Taylor Posey, Matthieu Bardout and Noemie Klein who set-up Asset Resolution; Laura Ramirez who developed the activity in Latin America; and Diane Strauss, Anuschka Hilke, Thomas Braschi, Emma Gauthey, Gabrielle Couderc and Simon Messenger who supported the development in France. About 50 people currently work on the activities created to implement the concept.