Climate Finance: A force for good? – COP26 Edition
“Climate policy should not be seen in isolation, but should rather be considered an integral part of the broader policy agenda to promote economic growth”
———(Bank of England, 2018)
Low-carbon technologies such as renewable energies, low-emission transportation, sustainable infrastructure, as well as investments to curb the impacts of climate change need a dramatic increase in the decades ahead. However, most countries, particularly those in the Global South, lack the financial resources required to shift to a low-carbon development pathway, adapt to, and build resilience to the impacts of climate change. Recent reports and studies indicate that climate finance is the answer to this dilemma because not investing now will represent higher costs in the future and due to the significant economic opportunities in climate-friendly economic development.
For instance, analysis suggests that low-carbon sustainable growth “could deliver a direct economic gain of US$26 trillion through to 2030 compared to business-as-usual”. On the adaptation side, research indicates that “investing $1.8 trillion globally in five areas from 2020 to 2030 could generate $7.1 trillion in total net benefits”. Finally, if nothing is done now, forecasts indicate that the number of people in need of humanitarian assistance due to climate change could double by 2050, not to mention the social and economic impacts of extreme weather events.
But let’s also be realistic. Climate finance is a tool like any other. Since governments, public and private institutions are ultimately in control of climate finance, the verdict is out on who decides whether it is used for good? Undoubtedly, we all know these kinds of investments can do good in the world. So, what if climate finance interests could be used to benefit society? No tool or mechanism is inherently good or bad. Morality enters the picture when tools are used. Climate finance is critical for African countries to mitigate risks and capitalize on opportunities.
What is Climate Finance?
Climate finance relates to the money that needs to be spent on various activities that will slow down climate change and prepare societies and economies to adapt to new weather patterns. According to the UN, climate finance refers to local, national, or transnational financing drawn from public, private, and alternative sources of financing. These investments should help the world to reach the target of limiting global warming to 1.5°C above pre-industrial levels, a number that, according to the latest scientific studies, would limit catastrophic socio-economic impacts. To achieve this goal, the world needs to reduce its greenhouse gas emissions to practically zero by 2050.
And in answering the question, why is climate finance needed? First, climate finance is needed for mitigation because large-scale investments in energy, transport, land-use, industry, and waste management are required to reduce emissions significantly. Second, climate finance is equally essential for adaptation to prepare economies and societies for adverse weather patterns and extreme climatic events that might affect sectors such as agriculture, infrastructure, urban settlements, water, and many others.
Climate finance SIP – Business & Environment. www.hbs.edu
Steady upward trajectory, where do we stand and the way ahead?
Significant investments are needed, and international cooperation is critical. Developed countries committed to jointly mobilize $100 billion per year by 2020 to support climate action in developing countries more than a decade ago, a target still to be met.
Climate finance is becoming trendy and gaining momentum in the business world. For instance, last week, a coalition of financial sector players managing over $130 trillion of capital announced their commitment to transforming the economy for net-zero . These commitments include over 450 firms from 45 countries. While the number seems impressive and promising, much needs to be done, from announcement to practice. Starting with a shared taxonomy that specifies what is or is not a net-zero investment, designing and preparing the projects for these investments, creating the framework conditions for financial resources to flow from a to b in an efficient manner, and transparency and accountability mechanisms.
A critical question is whether the world can afford not to invest in climate action now. Communities in all parts of the world are already suffering from the economic effects of climate change, be it crop loss due to drought or significant damage to infrastructure caused by flooding or other extreme weather.
The UN says the massive amount of investment required represents an opportunity and not a risk, arguing that the benefits that flow from these investments dramatically outweigh any upfront costs. It is also increasingly accepted that climate investments make economic sense. The financial and business cases for clean energy are more vital than ever. In most countries, going solar is now cheaper than building new coal power plants. Clean energy investments also drive economic growth, potentially creating 18 million jobs by 2030, including the inevitable fossil-fuel job losses.
Many businesses have begun to invest in nature as a reaction to seeing their core business come under threat. Today, for example, Coca-Cola heavily invests in water preservation and is committed to becoming water neutral by 2020. That means that they promise to replace the same amount of clean water for nature for every drop of water they use in their products. But it was a PR disaster that sparked these conscientious efforts. Coca-Cola FEMSA, the world’s largest independent Coke bottler, also spends millions on water funds that finance projects to protect Latin American forests. Why? The reasons, again, are economic. Specifically to lock down Coke’s most important ingredient: water, threatened by the decline of the forests and changing weather patterns.
Climate finance has the potential to do far more than generate financial returns. One way to do so is by prioritizing investments with high co-benefits – for instance, other positive impacts on the Sustainable Development Goals, local and vulnerable communities’ lives, and the transition to a more equitable society.
Where do we go from here?
The speed and scale needed to transition the economy to a sustainable and low-carbon trajectory and adapt to climate change are unprecedented in human history. As a result, efforts are required on a global scale. Everyone needs to engage to achieve the common objective of protecting the weather stability that allowed societies to flourish in the last millennia.
First, Governments need to set ambitious targets to reduce the emission of greenhouse gases and set clear plans and policies to do so while considering necessary reforms in public investments and framework conditions for private sector engagement. Second, the private sector needs to scale up the transition and put the current pledges into practice through concerted efforts throughout value chains. Third, citizens need to continue putting pressure on elected government representatives and exerting their powers as consumers and investors to keep the private sector accountable. Finally, academia and civil society should continue generating knowledge, monitoring progress, and providing an independent assessment of progress and strategies currently in place.
The governments, investors, and businesses have to take a long hard look at how they implement climate finance. But, in the final analysis, we need to ensure that we can find a perfect balance to generate positive climate impacts while ensuring a just transition and promoting sustainable development across the world.
References
- Balkin, Jeremy K (2016): Investing with Impact: Why Finance is a Force for Good. Taylor and Francis. https://www.perlego.com/book/1573674/investing-with-impact-pdf.
- Tercek, Mark R. and Adams, Jonathan, S. (2013). Nature’s Fortune: How Business and Society Thrive by Investing in Nature. Basic Books.
- https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance
- https://www.oxfam.org/en/research/climate-finance-shadow-report-2018
About the Authors:
Romein is a (self-confessed) Pan-Africanist by heart. His diversified professional career spans many different sectors, i.e., local government, mining, consultancy, construction, advertising, and development cooperations.. Romein is the Head: Business for Development at PIRON Global Development, Germany (www.piron.global). Contact him via (vanstaden@piron.global)
Ebenezer is a Development Communication Specialist, MSME & SDG Enthusiast, Finance & Investment Nomad and a WriterPreneur. He`s Country Director (Ag) of PIRON Global Development GmbH, Ghana (www.piron.global). Contact him via (asumang@piron.global). He also serves as Ghana Country Branch Manager of People Investor AG (www.people-investor.com) . Contact him via (asumang@people-investor.com)
Joaquim is a seasoned sustainability professional with more than 15 years of professional experience in sustainability and climate change in public and private sectors in Africa, Asia, Europe, and Latin America. Contact him via (joaquim.floresta@yahoo.com.br)
