An exploration of climate alignment in freight related investment decisions

Abstract

Meeting the Paris Agreement temperature goals requires large redirection of capital flows from carbon intensive to low carbon technologies. For the transport sector alone, the IEA (2017) finds that full decarbonization requires cumulative $13 trillion additional investments between 2015 and 2050 and for shipping’s full decarbonisation the investment required is estimated to be$1.2-1.6 trillion. Financial institutions are therefore key actors in enabling the transition to a low-carbon economy and the numerous collaborative initiatives and commitments such as the Net-Zero Asset Owner Alliance or the Poseidon Principles have emerged highlighting the willingness of financial actors to support this transition. Ensuring that investments are climate-aligned, i.e. that they are consistent with a downward trajectory to a decarbonization target, requires the development and wide adoption of rigorous climate-alignment methodologies and tools. However, there is no agreed decarbonization pathway and methodology in the freight transportation that allows investors to evaluate climate risk of their portfolios in a rigorous and comparable manner. These are particularly relevant for the freight transportation sector as assets long lifespans often exceed 20 years and current investments therefore create a carbon lock-in for the next crucial decades. Focusing on three types of freight transportation – road, rail and shipping, the objective of this paper is to provide novel insights in three key areas. First, it intends to give an overview of the existing climate alignment tools and identify the ones used by financiers of the freight transportation assets to screen their investments. Second, it seeks to understand the barriers to the adoption these tools, and the challenges to making portfolios climate aligned. Finally, it will provide recommendations on a way forward for climate alignment on freight transport. This research uses a mixed methods approach to validate findings, combining a literature review, semi-structured interviews with financial institutions and a deliberative workshop