By Shreya Ramchandran
Climate finance refers to “local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.” Countries have to work together for a common cause and use their differentiated needs, responsibilities and capabilities to assist in the fight against climate change. Following the Paris Agreement (an international treaty on climate change adopted in 2015), the United Nations Framework Convention on Climate Change (UNFCCC) (an international environmental treaty to combat “dangerous human interference with the climate system”) and the Kyoto Protocol ( an international treaty which extended the 1992 UNFCCC), parties with more financial resources should come to the aid of those parties in need of financial assistance, and help them in their strive to achieve carbon neutrality and sustainable development. Access to financial assistance will help countries towards climate change mitigation, which requires large amounts of investment and capital to reduce greenhouse gas emissions. It will also help in their strive towards adaptation, where significant financial resources are required to adapt to adverse effects and impacts brought about by climate change. Adaptation is aimed at the “adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities.’
To facilitate the movement of financial resources to those countries in need, there were two international entities given the reins on the operations of climate financing – the Global Environment Facility (GEF) and the Green Climate Fund (GCF). The GEF is an international trust fund that has provided financial assistance worth more than $21.7 billion in grants and $119 billion in co-financing for more than 5000 projects taken up by around 135 developing countries in their strive to enhance biodiversity and fight climate change. They provide assistance to governments, private institutions, research agencies etc. The GCF was established by 194 governments in an attempt to provide investment resources in order to reduce greenhouse gas emissions, and help societies adapt to the adverse impact of climate change. They have given about $37.1 billion towards financing and co-financing, and have assisted around 190 projects. They have aided in avoiding about 2 billion tonnes of possible carbon dioxide emissions. Furthermore, under the Paris Agreement, developed countries committed to jointly mobilize $100 billion per year by 2020 to help developing countries address the pressing issues of climate change.
The success of this initiative lies in the fact that all countries contribute and support one another in this process. If one country backs out, everyone suffers, given the fact that climate change is a global problem affecting everyone. When President Donald Trump backed out of the Paris agreement in 2017, not only were many of the commitments towards carbon neutrality as well as environmentally hazardous projects such as the Keystone Pipeline overturned, but it also meant that the U.S. would not contribute to the Green Climate Fund. Members of the Paris agreement were worried that seeing the U.S, other countries would follow suit, given that the U.S. is a country of influence and that they are the second largest emitters of carbon dioxide in the world. The Obama administration has pledged $3 billion to the Green Climate Fund, but when Trump took office, they had only contributed $1 billion out of the $3 billion. Thus, with the U.S pulling out, they could not make good on this commitment, and many other countries suffered from the lack of financial support. With the Biden administration in power, the U.S is back in the agreement and this is a good sign given that the gap between climate funding and climate adaptation/mitigation is only growing larger.
According to the World Bank (2019), while the investments required for climate financing is large, almost reaching $90 trillion by 2030, the returns on these investments are expected to be four-fold. It will not only allow for better standards of living and longer life spans, but will also unlock new economic opportunities and jobs. A shift to low-carbon, resilient economies, where the costs of climate change impacts and repairs can be minimized, could create over 65 million net new jobs globally out to 2030. The rising prices of fossil fuels, as well as their depleting stock, has led to higher costs of extraction and use, and slowly the world is starting to turn to renewable energy sources. If we replace a 500 gigawatts of coal capacity with solar and wind energy, it would cut annual costs by up to $23 billion per year and yield a stimulus worth $940 billion.
Currently, the funds are largely being put towards the mitigation channel, rather than the adaptation channel. Climate finance towards adaptation only accounts for about 20% of total climate financing, even though it is estimated to generate a multi-fold return for every dollar invested. It is estimated that investing $1.8 trillion from 2020 to 2030 could generate $7.1 trillion in total net benefits. This benefit is in areas surrounding early warning systems, climate-resilient infrastructure, improved dryland agriculture crop production, global mangrove protection and more resilient water resources. Since the effects of climate change have already taken root in many countries, the process towards mitigation in the form of carbon taxes, carbon offsets, payments for ecosystem services etc., might not be the only path forward, and adaptation techniques will be needed to deal with the situation at hand. Using the National Adaptation Programme of Action (NAPAs) of countries, the aim is to focus on specific areas such as agriculture, water resource management, disaster risk management, sustainable land and forest management, energy, health etc., in an attempt to take up actions of adaptation including climate proofing economies and infrastructure, livelihood and jobs, safety and food security etc. The Least Developed Countries Fund and the Special Climate Change Fund (part of the GCF) were set up in hopes of further enhancing adaptation measures of countries. Under these funds, investments have directly benefited around 30 million people, climate proofed around 7 million hectares and supported the adaptation process of 507 regional, national and sector-wide policies and plans. For example, in Ethiopia, farmers are preparing themselves for the possibility of drought and crop failure, using innovative techniques for watershed management and irrigation, seed production and distribution as well as pest control. The aim is to reduce the vulnerability of the population and safeguard them against future impacts. Low adaptive capacity can leave countries vulnerable in the face of climate change, making it difficult for them to cope and endure the effects of climate change.
The effectiveness of all such measures relies on the transparency between parities on the extent of their situation as well as the use of the funds. The UNFCCC has a stated mandate for transparency and communication of information related to greenhouse gas emissions and the measures taken to reduce them, using tools such as finance, technology transfer and capital building. For those countries that lack the capacity and resources to track the progress of climate change in their borders as well as track the actions they take at the national level, financial and technical support is provided by bilateral and multilateral organizations. The COP allows the parties to come together and discuss their plan of action as well as the path forward.
The accountability of actions does not only lie with the government of the country. Private players, too, are taking the initiative to ensure that wherever their operations are, it is done within the framework of sustainable development and environmental safety. Investors not only look for returns in their investment but also whether the company is ESG (environment, social and governance) compliant, when assessing whether to invest in the company or not. ESG Risk Rating is not a traditional form of rating. It measures the exposure of the company to ESG issues (such as the use of carbon footprint of the company, depletion of natural resources, deforestation etc., as well as business relationships and corporate social responsibility) as well as the effectiveness of the management in managing these exposures i.e., whether the policies they have in place are converted from paper to practice. A high-risk company would be considered one where the company is exposed to high material ESG issues, but the management is not very effective in handling it. They divide the risk into two parts, the manageable risk and the unmanageable risk. Companies and management are assessed on how they are managing the manageable risk based on quality of policies, handling of controversies etc.
Thus, we can see that climate financing plays a crucial role in the fight against climate change, as countries adopt techniques of mitigation and adaptation. However, the key to success of this process is transparency and accountability on the part of the nation as well as individuals and companies. If we want to ensure a sustainable and long-lasting future, it is up to us to ensure the effectiveness of our actions and use of financial resources in adapting to climate change.
Shreya Ramchandran is a second-year undergraduate Economics and Finance student at Ashoka University.