Editing IPCC:AR6/SR15/Chapter-4 (section)

== 4.4.2.3 Financial institutions ==

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IPCC AR5 assessed that in order to enable a transition to a 2°C pathway, the volume of climate investments would need to be transformed along with changes in the pattern of general investment behaviour towards low emissions. The report argued that, compared to 2012, annually up to a trillion dollars in additional investment in low-emission energy and energy efficiency measures may be required until 2050 (Blanco et al., 2014; IEA, 2014a) <sup>[[#fn:r1006|1006]]</sup> . Financing of 1.5°C would present an even greater challenge, addressing financing of both existing and new assets, which would require significant transitions to the type and structure of financial institutions as well as to the method of financing (Cochrani et al., 2014; Ma, 2014) <sup>[[#fn:r1007|1007]]</sup> . Both public and private financial institutions would be needed to contribute to the large resource mobilization needed for 1.5°C, yet, in the ordinary course of business, these transitions may not be expected. On the one hand, private financial institutions could face scale-up risk, for example, the risks associated with commercialization and scaling up of renewable technologies to accelerate mitigation (Wilson, 2012; Hartley and Medlock, 2013) <sup>[[#fn:r1008|1008]]</sup> and/or price risk, such as carbon price volatility that carbon markets could face. In contrast, traditional public financial institutions are limited by both structure and instruments, while concessional financing would require taxpayer support for subsidization. Special efforts and innovative approaches would be needed to address these challenges, for example the creation of special institutions that underwrite the value of emission reductions using auctioned price floors (Bodnar et al., 2018) <sup>[[#fn:r1009|1009]]</sup> to deal with price volatility.

Financial institutions are equally important for adaptation. Linnerooth-Bayer and Hochrainer-Stigler (2015) <sup>[[#fn:r1010|1010]]</sup> discussed the benefits of financial instruments in adaptation, including the provision of post-disaster finances for recovery and pre-disaster security necessary for climate adaptation and poverty reduction. Pre-disaster financial instruments and options include insurance, such as index-based weather insurance schemes, catastrophe bonds, and laws to encourage insurance purchasing. The development and enhancement of microfinance institutions to ensure social resilience and smooth transitions in the adaptation to climate change impacts could be an important local institutional innovation (Hammill et al., 2008) <sup>[[#fn:r1011|1011]]</sup> .

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