Improving the availability of finance is critical to achieving climate change goals. The developed countries need to provide more financial resources to support developing countries to reduce greenhouse gas emissions and for adapting to the impacts of climate change. Unfortunately, there is currently a significant gap between the amount of climate finance needed and the amount that is available. This gap can hinder the ability of developing countries to transition to low-carbon and climate-resilient economies, and to protect vulnerable communities from the impacts of climate change.
It is essential to improve the availability and accessibility of finance to support the implementation of ambitious global climate action. This can include increasing public and private sector investment in clean energy and climate-resilient infrastructure, as well as supporting developing countries in accessing and using funds effectively.
EGROW Foundation organised an online discussion on the urgency of action to address climate change. The speakers said private financial sector holds the majority of the funds to combat climate change. They face difficulties in redirecting investments towards climate solutions, and there is a need for increased funding and innovative solutions to address the pressing challenge of climate change.
The speakers proposed a new climate finance agenda that requires three crucial elements of finance: a significant increase in private finance, a transformation of the multilateral development banking system, and the delivery of concessional finance at scale. Edited excerpts:
Amar Bhattacharya, Senior Fellow – Global Economy and Development, Center for Sustainable Development, Brookings.
The importance of funding green infrastructure, which shares similarities with sustainable infrastructure, remains crucial. However, there is an ongoing crisis faced by emerging markets and developing countries, resulting in a significant decline in economic growth prospects and putting them at risk of a decade of lost development. Moreover, progress towards the 2030 Sustainable Development Goals (SDGs) and climate goals has not been satisfactory, with emerging markets and developing countries responsible for 75% of annual incremental emissions.
Previous forms of growth and the influence of technological changes have resulted in certain negative consequences, making it imperative to shift towards a sustainable and eco-friendly model of growth. To achieve this, we must replace old capital with new capital, particularly in the area of infrastructure, which requires significant financing.
Advances in technology across various sectors can help to shift the global economy towards a growth trajectory that avoids the negative consequences of past growth models. To achieve sustainable development goals, it is recommended that investment levels be doubled from pre-COVID levels, resulting in an incremental GDP growth of approximately 6-7%. Central to this is the need for climate-related investments, with a focus on transforming energy systems.
Several concerns pertain to climate change, stressing the necessity for a fair shift away from fossil fuels and recognizing the expenses associated with transitioning from coal, such as unemployment and assets that cannot be utilized. The inadequacy of mechanisms to address loss and damage caused by climate change underlines the need for immediate investment in adaptation and resilience to prevent future costs.
There should also be an emphasis on the importance of investing in natural capital, which includes sustainable agriculture, degraded land, forests, and biodiversity, highlighting the potential economic gains of such investments. Investing in sustainable growth and natural capital is intricately linked.
Three significant areas need attention, i.e., energy systems, loss and damage response, and adaptation and nature, that require investment and transformation to combat climate change. They assert the pressing need to amplify investment in these areas and estimate that the current climate-related investments, which are between 500 to 600 billion annually, need to be raised to 2.4 trillion annually by 2030.
Out of this amount, 1.4 trillion should come from domestic sources, with the private sector playing a crucial role, while the remaining 1 trillion needs to be financed externally. The public sector has been historically responsible for most climate-related investments; however, private finance can make a significant contribution to increasing investments. The investment required for these areas is four times greater than the current investment levels, and the international financing needs are ten times greater than the previously discussed 100 billion concerning the UNFCCC climate accords.
Different projects require different financing approaches, and private investment may be adequate for some projects, even if the policy environment is favorable. However, other projects may require public assistance due to factors such as high costs of capital, risks, and coordination challenges. The significance of development finance institutions and regional organizations in addressing these challenges remains important, especially in countries such as India with less developed financial systems.
Augmenting the financial resources of multilateral institutions, specifically the MDB system, is crucial, as its current level of funding is deemed insignificant when compared to the colossal global demands. They propose an initiative to double the financing for MDBs within the next five years and broaden the funding sources to encompass national development banks and bilateral institutions. Importance of concessional finance to support adaptation, resilience, and loss and damage in vulnerable countries, which would require substantial funding from the international donor community remains largely important too.
Therefore, three crucial elements of finance are needed to drive a new climate finance agenda: a significant increase in private finance, a transformation of the MDB system, and the delivery of concessional finance at scale.
Galina Hale, Professor of Economics at UC Santa Cruz.
The financial industry and climate change are closely intertwined, with climate change presenting significant risks to the financial sector. These risks include regulatory and credit risks, as well as the potential for financial institutions to contribute to climate solutions. Urgent action is needed to address the climate crisis, and financial institutions must invest in climate solutions beyond simply mitigating risks.
Physical risks resulting from climate change are currently affecting communities around the world, and geolocational data can be used to measure such risks. Therefore, investing in adaptation solutions to protect vulnerable communities from these risks is crucial. However, there is a need to find ways to make climate investment profitable for the financial industry.
There are two types of climate risks: physical risks and transition risks. Physical risks are not limited to the average temperature rise, but also the impact of extreme weather conditions on agriculture and human survival. The speaker also elaborates on the transition risks which may arise due to the stranded assets of fossil fuels, influenced by carbon taxes, technology advancements, and stakeholder preferences.
The importance of reporting Scope 3 emissions is immense. Companies are currently avoiding the disclosure of Scope 3 emissions by engaging in certain practices such as spinning off subsidiaries or purchasing inputs. Unless Scope 3 emissions are disclosed, attempts to combat climate change would be futile.
Private financial sectors hold the majority of the necessary funds to combat climate change. However, there is a difficulty of redirecting investments towards climate solutions. Further, non-banking financial institutions investing more in such solutions, with a specific focus on adaptation projects aimed at safeguarding people, property, and nature remains important.
Investing in both mitigation and adaptation can provide tangible benefits in terms of loss prevention, but the challenges associated with financializing climate solutions are huge. Thus, there is a need for increased funding and innovative solutions to address the pressing challenge of climate change.
A structured finance in collaboration with non-governmental organizations and government support could be a solution to these challenges. Financial innovation and tokenizing investments make it easier for individuals to contribute. Profitable climate solutions for financial institutions are crucial and can be achieved by establishing ways to price, structure, package, and market them. In order to enhance the return on investment for private investors, government or NGO grants could lower the private sector’s required investment portions.
Attention is needed to address not just CO2 emissions but also those of methane and nitrous oxide, which are powerful greenhouse gases primarily released from agricultural activities. Reducing methane emissions can have an immediate impact since it remains in the atmosphere for a shorter period than CO2. There is a need for investment and innovation in plant-based food production to slow down the expansion of animal agriculture.
In conclusion, climate change presents significant risks to the worldwide financial system, and there is a need to make climate solutions profitable to attract private sector investment globally. Private financial sectors hold the majority of the necessary funds to combat climate change, but there are difficulties in redirecting investments towards climate solutions.
Innovative solutions are needed to address the challenges of financializing climate solutions, and investing in both mitigation and adaptation can provide tangible benefits in terms of loss prevention. Attention is needed to address not just CO2 emissions but also those of methane and nitrous oxide, and investment and innovation in plant-based food production can help slow down the expansion of animal agriculture.
Suranjali Tandon, Assistant Professor, National Institute of Public Finance and Policy.
Climate finance is of major significance due to the changing weather patterns and the forecasts presented by the IPCC. The projected cost is estimated to be $4-6 trillion to be raised over the coming years, with every country committing to a net-zero target. The figures of climate finance and SDG financing are intertwined, and the importance of incorporating externalities related to climate change into the financing industry is immense.
The two fundamental elements of climate finance are adaptation and mitigation. Adaption focuses on paying for the costs of the current effects of climate change, while mitigation entails a change in business and economic activity, which will require the involvement of various stakeholders in the economy.
Commercial banks have the potential to be major players in this shift by dedicating funds towards priority sector lending for climate change-aligned activities. The Reserve Bank of India has already displayed support for this shift, as evidenced by the release of a sustainable finance report and a statement from the governor highlighting a focus on green deposits and a supervisory framework for climate-related risks.
Companies must be held accountable for their negative climate actions. One approach to achieving this accountability is through disclosure frameworks, such as the BRSR in India, which mandates that companies disclose their emissions and sustainability responsibilities. Private finance can leverage this information to invest in companies that comply with ESG standards and abstain from investing in non-compliant firms.
The role of rating agencies in the context of climate finance is important, and rating agencies must be reformed to better account for climate change. The importance of public finance for climate action should also be taken into consideration since private finance is not always willing to invest in certain activities.
The social impact of investments has emerged as a possible financing instrument for sectors that have not been served by either private or public finance. The concept of climate finance and its constituent parts such as mandatory reporting, corporate social responsibility, and regulatory measures remain pivotal. The altering policies also remain important to attract private investment, e.g., tax incentives and regulatory relaxations provided by India’s offshore financial centre.
Green finance comprises investments in clean energy, energy efficiency, and clean transportation, and it is mainly financed by private entities such as commercial financial institutions, corporations, and foreign direct investments. A small portion of the funds comes from multilateral banks and international finance, while public budgets provide the majority of the financing.
There is a crucial role of public finance in facilitating the shift towards a low-carbon economy and raising climate finance. Policymakers may explore available policy instruments and tools to increase the funds, given the substantial funding gap in achieving climate-related sustainable development goals.
Climate finance plays a crucial role in the transition to a sustainable and low-carbon economy. The key elements are adaptation and mitigation, with private finance playing a crucial role in this shift. The implementation of regulatory measures and incentives can encourage private investment in climate action, and public finance can facilitate the shift towards a low-carbon economy. The importance of incorporating externalities related to climate change into the financing industry cannot be overstated, and policymakers must explore all available policy instruments and tools to increase funds for climate action.