Against an annual financing demand of $7.6 trillion for climate action over 2020-50, only $650 billion of investment was available, from all sources, in 2019 and 2020. As per KPMG’s recently released report — Closing the climate finance gap — that represents a funding gap of close to 4% of the global GDP against what is needed to limit warming by 2100 to below 1.5 degrees Celsius from the pre-industrial levels.
Within the demand matrix projected over 2020-2050, energy and transport dominate with a 44% and 34% share, respectively, with building and infrastructure accounting for 11% and industry for 5%. Other demand-sources for climate funding account for just 6%. Against this, in 2019 and 2020, energy accounted for 51%, while transport got 25%. Buildings and infrastructure accounted for 8% and industry a mere 0.5%. Adaptation—crucial for survival for the most climate-vulnerable nations in the worst-case scenario—got 8%.
The KPMG report also says that current financing remains narrowly concentrated by geography. It lists five immediate obstacles. First, the diversity in financing needs is challenging, especially when read with a limited pipeline of bankable opportunities. For instance, while there is considerable opportunity in the renewable energy space, technologies for several hard-to-abate sectors are still evolving and conventional financing sees “elevated risk” in these. Second, policy is yet to keep up with financing needs in some sectors, which is worsened by the fiscal capacity of governments, and regulatory deficiencies, especially in developing economies. Third, socio-political challenges in phasing out regressive subsidies and in creating broad-based carbon pricing frameworks add to the resource crunch. Fourth, information architecture to support climate action, including information, disclosures, and taxonomies, still remain inadequate. And lastly, cross-border flows from developed economies into emerging markets and developing economies (EMDEs) fall short of the mark. Also, there are near-term headwinds, including inflation, debt overhang and rising interest rates that are elevating risk profiles. The report calls for action on five fronts. First, a sharper prioritisation of climate finance flows along differentiated financing pathways is required, considering impact potential and distance to commercial viability. Second, it said significant government action is needed to bridge existing policy gaps. Third, structural reforms to deepen financial markets and diversify investor base, while strengthening risk management architecture, are needed urgently. Fourth, functioning carbon markets are the need of the hour, along with a harmonised ESG taxonomy and disclosures. Lastly, EMDEs should be co-opted into climate agenda covering cross-border financial flows, technology transfers, etc. The role for government in facilitating meaningful climate action is stark, experts believe. Anish De, global head for energy, natural resources, and chemicals (ENRC), KPMG, said, “Deeper collaboration at scale among governments, multi-laterals, corporates and financial institutions will be crucial.”