Breaking the Code

The report identifies five major barriers to climate-aligned finance: structural challenges to influencing the real economy, competitive disadvantage, varying alignment methodologies, multiple decarbonization pathways, and inadequate data. It argues that while divestment alone is insufficient, financial institutions can use levers such as sustainability-linked loans, transition finance, and collective action initiatives (e.g., Climate Action 100+, Poseidon Principles) to drive decarbonization. The document emphasizes the need for harmonized assessment methodologies, industry-informed decarbonization pathways, and standardized reporting to move the financial sector from a reactive to a proactive role in the low-carbon transition.

• Divestment alone is insufficient for aligning major financial portfolios with climate targets because there is an inadequate supply of investible assets that are already aligned.
• Collective action initiatives help mitigate 'carbon leakage,' where carbon-intensive assets sold by one climate-conscious investor are simply repurchased by neutral investors, thereby neutralizing the original investor's influence.
• Financial institutions are increasingly using sustainability-linked loans to incentivize decarbonization by tying interest rates to specific sustainability performance targets.
• There is significant fragmentation in climate alignment methodologies, which typically follow a logic of calculating climate impact, allocating it to securities, aggregating to the portfolio level, and assessing alignment with a pathway.
• Decarbonization pathways are currently developed through two primary methods: 'top-down' modeling, often relying on International Energy Agency (IEA) scenarios, and 'bottom-up' coalitions like the Mission Possible Platforms that focus on sector-specific technological and financing challenges.
• Data availability remains a critical barrier; for example, fewer than half of the companies in the MSCI World Index report greenhouse gas emissions, and only 2% provide a full accounting of all direct emissions.
• The EU Sustainable Finance Taxonomy is a leading policy-driven effort to redirect private finance, but it is unlikely to become a global de facto standard due to regional differences in economic construction and transition speeds.
• Transition finance is distinguished from green finance by its ability to provide capital to carbon-intensive companies to facilitate their shift to sustainable activities, focusing on both the use of proceeds and issuer behavior.

APA

Mitchell, J., Schafferer, L., Matsuo, T., & Lalit, R. (2020). Breaking the Code. RMI. https://rmi.org/app/uploads/2020/07/Breaking_the_Code.pdf

Chicago

Mitchell, James, Lindsey Schafferer, Tyeler Matsuo, and Radhika Lalit. Breaking the Code. RMI, 2020. https://rmi.org/app/uploads/2020/07/Breaking_the_Code.pdf.

Wikipedia

{{cite report |last1=Mitchell |first1=James |last2=Schafferer |first2=Lindsey |last3=Matsuo |first3=Tyeler |last4=Lalit |first4=Radhika |title=Breaking the Code |publisher=RMI |date=July 2020 |url=https://rmi.org/app/uploads/2020/07/Breaking_the_Code.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{mitchell2020breaking, author = {Mitchell, James and Schafferer, Lindsey and Matsuo, Tyeler and Lalit, Radhika}, title = {{Breaking the Code}}, institution = {RMI}, year = {2020}, month = jul, url = {https://rmi.org/app/uploads/2020/07/Breaking_the_Code.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }