Periodic Reporting for period 3 - LINKS (Kick-starting global cLimate Investments:uncovering hidden liNks in climate finance and exploring dynamic evolution of investment networKs for policy deSign)
Période du rapport: 2022-09-01 au 2024-02-29
The financial system is increasingly built on investors’ interdependencies and interconnections that are hard to predict at the aggregate level. When it comes to low-carbon assets, this interconnectedness between investors remains unexplored as climate policy analysis takes the existing structure of financial systems as given. ‘Shifting the trillions’ to close the climate investment gap will require to exploit investors’ interactions and dynamics as their collective behaviour shape the actual flows in low-carbon technologies. The evolution of inter-connected structures will determine how the system could pool long-term financial assets to boost the low-carbon transition; how policy can seek to take advantages of non-linearity and tipping points in the system by influencing key actors and connections; and will determine the main winners and losers within the financial system itself. Understanding such aspects of the financial system is crucial to identifying points of intervention that climate policy can leverage to spur low-carbon finance.
This programme explores the market structures for low-carbon finance and the key features of the analysis are:
* model network structures of low-carbon investments and investors’ preferences in the complex architecture of current financial system;
* explore networks evolution and their dynamics to understand and shape the development of the climate finance system; and,
* identify effective policies and regulations to trigger a non-linear growth of climate investments.
This programme explores the market structures for low-carbon finance and the key features of the analysis are:
* model network structures of low-carbon investments and investors’ preferences in the complex architecture of current financial system;
* explore networks evolution and their dynamics to understand and shape the development of the climate finance system; and,
* identify effective policies and regulations to trigger a non-linear growth of climate investments.
LINKS aims to deliver robust conclusions on how to transform the financial system and design policies to re-orient financial flows towards low-carbon investments, by using complexity and systemic approaches. Substantial progresses have been made to advance three research directions:
i) Modelling networks structures of low-carbon investments and investors’ preferences. This task involved substantial efforts to construct investment networks using Bloomberg data and to carry out network analyses revealing which financial structures and investors lead to pathways of low-carbon deployment. It assessed which actors and relationships drove the growth of low-carbon investment globally; the ones responsible for investments in the initial stages of the sector’s development; and the actors and relationships that are key for market development.
ii) Explore network evolution and dynamics. This tasks analysed investors’ behaviour and dynamics over the last 20 years and assessed how investors’ decisions evolved over time in response to stimulus from external environment. It explored levers (including technological maturity, internal market dynamics, institutions and country contexts) that have impacted the investment system, to provide an understanding of why these environmental dynamics matter. Good progresses have also been made towards specific case study analyses, namely climate financial flows in developing countries. This work empirically shows that developing countries struggle to access finance, with path dependency in investment flows reinforcing existing inequalities.
iii) Identifying policies and regulations. This work explores how different market structures amplify the effect of different policies and invested public resources to trigger a non-linear growth of investments. One crucial achievement has been the publication of an analysis looking at the investment shift from fossil fuel to low-carbon assets driven by climate disclosure initiatives. An additional policy analysis is under development and will explore the role of climate policy stringency on fossil fuel and low-carbon investment.
Research advancements reached in the first period have already led to the publication of two analyses in top academic journals, namely Nature Climate Change and Global Environmental Change, in addition to two analyses currently under review and one working paper; while three additional studies are under development. The impact of such contributions has been recognised through a few influential opinion pieces and coverage in top-tier media (e.g. Financial Times, Climate & Capital Media and Illuminem).
Research from LINKS has been presented at 8 different academic Conferences, including the International Association for Energy Economics, European Association of Environmental and Resource Economists and Global Research Alliance for Sustainable Finance and Investment, among others; Central banks’ events and supported stakeholders’ meetings with external advisors, namely Glennmont Partners (investment fund), Mexico Embassy and UCL Partnership Advisory Board.
Additionally, LINKS has an active website (https://links-erc.eu/(s’ouvre dans une nouvelle fenêtre)) a quarterly newsletter reaching roughly 60 subscribers and a GitHub account where the source code associated to each published study is available.
i) Modelling networks structures of low-carbon investments and investors’ preferences. This task involved substantial efforts to construct investment networks using Bloomberg data and to carry out network analyses revealing which financial structures and investors lead to pathways of low-carbon deployment. It assessed which actors and relationships drove the growth of low-carbon investment globally; the ones responsible for investments in the initial stages of the sector’s development; and the actors and relationships that are key for market development.
ii) Explore network evolution and dynamics. This tasks analysed investors’ behaviour and dynamics over the last 20 years and assessed how investors’ decisions evolved over time in response to stimulus from external environment. It explored levers (including technological maturity, internal market dynamics, institutions and country contexts) that have impacted the investment system, to provide an understanding of why these environmental dynamics matter. Good progresses have also been made towards specific case study analyses, namely climate financial flows in developing countries. This work empirically shows that developing countries struggle to access finance, with path dependency in investment flows reinforcing existing inequalities.
iii) Identifying policies and regulations. This work explores how different market structures amplify the effect of different policies and invested public resources to trigger a non-linear growth of investments. One crucial achievement has been the publication of an analysis looking at the investment shift from fossil fuel to low-carbon assets driven by climate disclosure initiatives. An additional policy analysis is under development and will explore the role of climate policy stringency on fossil fuel and low-carbon investment.
Research advancements reached in the first period have already led to the publication of two analyses in top academic journals, namely Nature Climate Change and Global Environmental Change, in addition to two analyses currently under review and one working paper; while three additional studies are under development. The impact of such contributions has been recognised through a few influential opinion pieces and coverage in top-tier media (e.g. Financial Times, Climate & Capital Media and Illuminem).
Research from LINKS has been presented at 8 different academic Conferences, including the International Association for Energy Economics, European Association of Environmental and Resource Economists and Global Research Alliance for Sustainable Finance and Investment, among others; Central banks’ events and supported stakeholders’ meetings with external advisors, namely Glennmont Partners (investment fund), Mexico Embassy and UCL Partnership Advisory Board.
Additionally, LINKS has an active website (https://links-erc.eu/(s’ouvre dans une nouvelle fenêtre)) a quarterly newsletter reaching roughly 60 subscribers and a GitHub account where the source code associated to each published study is available.
Identifying ways in which the financial system can affect a changing climate through their many complex interconnections is a huge challenge, but it is essential to accelerate efforts to meet climate goals and to enable the design of effective policies and financial system reforms. Analyses carried out within LINKS, are using network-based methods which embrace this complexity, pushing forward a new paradigm.
Network models are indeed used to explain how a dynamic and evolving financial system emerges from the interactions between individual agents. Such models can detect the groups of influential investors and their investment patterns that are most effective at transferring capital to where it is needed, and such findings can act as a guide for policymakers. This type of thinking will be critical to the equitable distribution of climate finance across the world. In order that the pledged $100 billion a year from the developed to the developing world reaches the most vulnerable and is distributed fairly, it is vital to monitor the financial channels through which it flows and its impact on the economies of recipient countries.
Future efforts will be devoted to further understand how the financial system could be a strong enabler of a transition to a sustainable world, transforming economies and redistributing the resources of rich nations to the most vulnerable.
Network models are indeed used to explain how a dynamic and evolving financial system emerges from the interactions between individual agents. Such models can detect the groups of influential investors and their investment patterns that are most effective at transferring capital to where it is needed, and such findings can act as a guide for policymakers. This type of thinking will be critical to the equitable distribution of climate finance across the world. In order that the pledged $100 billion a year from the developed to the developing world reaches the most vulnerable and is distributed fairly, it is vital to monitor the financial channels through which it flows and its impact on the economies of recipient countries.
Future efforts will be devoted to further understand how the financial system could be a strong enabler of a transition to a sustainable world, transforming economies and redistributing the resources of rich nations to the most vulnerable.