Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

Climate-Change-Finance

Climate induced crisis has severely impacted public finances across global economy due to the loss of output, tax revenues, and increase in government spending. It has been widely embraced by the experts that if climate tipping points were to be crossed, the repercussions may be huge and we, as a society must carefully consider bridging the gaps between private finance and climate change related interventions. Frans Timmermans, Executive Vice-President, European Commission while making the link between finance and climate change said that the green transition is not solely about borrowing and spending but involves making investments that can yield both a high rate of economic return and a very high rate of social return. Making public budgets better while making carbon budgets worse is not a sustainable route.

India pledged to meet 50% of its energy demands from renewable fuels by 2030 and make the transition to a net zero carbon economy by 2070 at the COP26 in Glasgow last year. According to all indications, the nation is on track to meet its short-term goal. However, to meet the decarbonization goal, considerably more difficult obstacles must be overcome. Recent official proceedings outlined India’s plan to reach its 2070 goal for which the country will require “trillions of dollars” to achieve carbon neutrality. The dossier, which was made public at the current COP27 conference in Sharm El-Sheikh, Egypt, also indicates that by 2030, India may have spent more than Rs 85 trillion on climate change adaptation.

Funding has historically been a stumbling block in climate negotiations. The third-highest emitter in the world may therefore have its work cut out for it. However, the letter also contains another key insight that the Sharm El-Sheikh negotiators, particularly those from wealthy nations, would do well to not overlook: The Paris Pact’s goal of limiting temperature rise to 1.5 degrees Celsius would be gravely jeopardised if funding continued as usual.

India’s concerns about energy security were emphasised by Environment Minister Bhupender Yadav when he released the strategy blueprint. He emphasized that the nation cannot afford to ignore its developmental needs, especially given that doing so will require raising a sizable portion of the populace out of destitution. Delaying action on the climate catastrophe is no longer an option since a workable solution must be found without burdening the underprivileged.

It is encouraging that a just transition employment programme has been established at COP27. However, we still need to work on making it functional at the national level. To ensure that funds are distributed to the groups most negatively impacted by the transition, it is essential to develop indicators for gauging just outcomes and incorporate them into financing plans, such as the Just Energy Transition Partnership (JETP), as well as include labour unions and marginalised communities in consultative processes for creating investment plans. Additionally, it is crucial to raise the proportion of grants in funding for a just transition to ensure that the finance is not just available for clean energy projects with a positive return on investment but may also be used to reduce the unfavourable distributional effects of the transition.

Financing Climate Change Mitigation
The Adaption Gap report 2022 made a strong case considering growing threats, it urges for more finance and the implementation of measures targeted at assisting vulnerable people and nations adapt to the climate emergency. According to the done study, by the end of the decade, the estimated yearly adaptation demands will range from $160 billion to $340 billion, and they might reach $565 billion by 2050.

Inger Anderson, Executive Director, UNEP, rightly said “The world must urgently reduce greenhouse gas emissions to limit the impacts of climate change. But we must also urgently increase efforts to adapt to the impacts that are already here and those to come.”

The science behind taking environmentally sound decisions depend on the financial accounting used and analysed by the decision makers to invest in strategies, programs, and interventions that aim at climate change mitigation. There currently exists a discrepancy between what governments propose and what investors deem to be investible projects and the world urgently needs a new business model for converting adaptation priorities into investable initiatives. The investment pipeline is clogged; it needs to be unclogged immediately. To prevent the climatic slaughter from taking millions of lives, we require a global increase in adaptation investment. Unprecedented cooperation between recipient governments, development partners, and other lenders is urgently needed.

Role of Private Climate Finance in Emerging Markets
As emerging markets and developing countries work to reduce greenhouse gas emissions and manage climate change while dealing with its repercussions, private climate financing must play a crucial role.

These economies must, according to various estimates, invest at least $1 trillion in energy infrastructure by 2030 and $3 to $6 trillion annually across all sectors by 2050 to significantly reduce greenhouse gas emissions and combat climate change. By 2030, an additional $140 billion to $300 billion year would be required to prepare for the physical effects of climate change, such as rising sea levels and worsening droughts. Depending on how successful climate mitigation efforts have been, this might increase significantly to between $520 billion to $1.75 trillion annually beyond 2050 (IMF, 2022).

Positively, private sustainable finance increased to a record $250 billion in emerging market and developing nations last year. At a time when investable low-carbon infrastructure projects are frequently in short supply and funding for the fossil fuel industry has increased since the Paris Agreement, private finance must, nevertheless, at least quadruple by 2030.

Source: Bloomberg Finance L.P.; Morningstar Direct; and IMF, 2022

It is clear from the above pictorial depiction that a lack of depth in domestic capital markets, notably the limited size of local currency bond markets, and significant credit risk may be to blame for the low share of private sector issuance in developing economies and the large share of foreign currency issuance in emerging market and developing economies. The high percentage of issuance in foreign currencies in emerging market and developing nations seems to reflect demand for sustainable bonds, which is mostly driven by investors based in mature economies who favour international debt over local currency debt. Another important reason for developing economies is the relative scarcity of big enough firms to issue bonds, particularly on international markets.

Global Financial Stability Report 2022 concludes that novel financial mechanisms can assist expand the investment base while overcoming some of the difficulties. To increase private sector investment and offer capacity for risk-taking, multilateral development banks must be involved. Through their policy guidance, oversight, and capacity building, longer-term structural difficulties brought on by climate change could be handled in a much manageable manner.

If the contractual terms of new kinds of outcome-based financing instruments—in particular, sustainability-linked bonds—are appropriately specified, they may reduce instances of greenwashing. For these bonds to have a significant influence on global warming, sustainability goals should be tied to Paris Agreement-compliant emission-reduction targets. Firms in emerging markets with lots of room to improve their emission intensity would benefit greatly from this kind of instrument. However, the penalty for missing the target must be established so that private issuers have a strong incentive to meet the targets.

Considerable efforts should be made to encourage the business sector, local governments, and government organisations to issue sustainable bonds. Small and medium-sized businesses might not be able to take advantage of initiatives that entail structures with risk-mitigating elements at their core if they do not have access to the bond market. To promote the development of effective, scalable, and sound markets, MDBs and international financial institutions will take on long-term initiatives to build local currency bond markets. They will also provide guarantees, subsidise issuance costs, and take first loss positions in funding vehicles and securitizations. Finally, they will help with the issuance of these bonds.

Specialised public climate funds like the Green Climate Fund (also operated under the auspices of the UNFCCC) should get enough funding to close the adaptation financing gap. Institutional and non-institutional leadership in advanced economies must devote a sizeable portion of the annual finance commitments they have made to developing economies under the Paris Agreement to these funds. Social advantages of adaptation finance need focus in policies, especially for countries most negatively impacted by climate change.

References

  • Sowińska-Świerkosz, B. and García, J., 2022. What are Nature-based solutions (NBS)? Setting core ideas for concept clarification. Nature-Based Solutions, 2, p.100009.
  • Pörtner, H.O., Roberts, D.C., Adams, H., Adler, C., Aldunce, P., Ali, E., Begum, R.A., Betts, R., Kerr, R.B. and Biesbroek, R., 2022. Climate change 2022: Impacts, adaptation and vulnerability. IPCC Sixth Assessment Report.
  • Ulibarri, N., Ajibade, I., Galappaththi, E.K., Joe, E.T., Lesnikowski, A., Mach, K.J., Musah-Surugu, J.I., Nagle Alverio, G., Segnon, A.C., Siders, A.R. and Sotnik, G., 2022. A global assessment of policy tools to support climate adaptation. Climate policy, 22(1), pp.77-96.

Edited by Queenie Nair

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members