It is essential to pursue formal standardisation of green finance and explore innovative financing instruments
By Amrita Goldar & Varsha Jain
Five years ago, COP21 brought all nations together to implement ambitious actions to mitigate climate change and inked those commitments as the Paris Agreement. The year 2020 was important in this regard, but Covid-19 dampened the spirits as negotiations happened virtually and major decision-making got deferred to 2021. Hopes are high from COP26 as it is expected to set a path for clean resilient recovery; ensure greater finance commitments and cooperation; and establish adaptation plans and policies. As the Nationally Determined Contributions targets will be revised, future finance requirements will also increase; therefore, the climate finance agenda needs to be strengthened.
Finance is a major pillar for achieving the necessary climate actions. As per the OECD, current infrastructure investments remain insufficient to meet SDGs. Developed country commitments to support climate actions and Paris Agreement targets of developing countries under Article 9 have also not fully materialised.
Urgency to achieve these goals is missing, according to a 2018 report by the Climate Finance Unit, Ministry of Finance. Climate finance flows need to be defined to identify the meaning of ‘new and additional’ finance. This is crucial to facilitate reliable climate finance reporting and separate it from official development assistance grants. India needs to be more actively involved in the climate finance rulemaking as it expands its renewable capacity to 450GW by 2030. Various countries are already deploying innovative mechanisms to spur climate finance, viz. the EU’s plan to include forestry under its Emissions Trading System (ETS) to promote ‘carbon farming’, Germany’s plan to launch an ETS in 2021 to cover transportation and heating fuels, France’s adoption of Article 173 to promote green investments by institutional investors, etc.
Around $103 trillion are projected to be required for 2016-30 to achieve the IEA’s 66% 2°C scenario. According to a report by Oxford Economics and GI Hub, total infrastructure spending needs for Asia and Pacific over 2016-30 are estimated at $26.2 trillion, including the climate change measures. Therefore, it is important to keep up with these growing finance requirements and leverage different sources to respond to the rising infrastructure needs.
The global energy infrastructure is still being majorly funded by public finance, but given the scale of projected investments, it becomes crucial for countries to engage greater private capital. Further, decreased government revenues and increased welfare spending post-Covid-19 will reduce the availability of capital for such projects. As per the Climate Policy Initiative, global climate finance flows were $546 billion in 2018, decreasing from $612 billion in 2017. Average flows during 2017 and 2018 ($579 billion) were majorly mobilised from private sources ($326 billion), while the remaining was publicly funded.
Financial contributions from domestic, bilateral and multilateral development finance institutions accounted for most public capital. Private capital reached record levels of $330 billion in 2017 (43% year-on-year growth), but declined in 2018 owing to macroeconomic factors like US-China trade war, Brexit, etc.
Thus, the private sector’s role in climate finance is already increasing, but it needs to be escalated significantly since traditional sources such as commercial banks will taper off. Further, private capital will become more risk-averse post the pandemic. Overcoming this crisis and ensuring a sustainable world will require collective actions and strengthened cooperation across public and private participants. More active rulemaking for regulating new and innovative finance sources is required. The role of institutional investors can be vital in this regard. OECD pension funds already manage around $42.5 trillion worth of assets. Further, credit enhancement schemes provided by various multilateral development banks can be utilised to de-risk certain projects.
In addition, there is merit in looking at other important groupings such as the G20 for giving a push to this agenda. G20 countries launched the Green Growth Action Alliance in 2012 to mobilise greater private investments and set up the Green Finance Study Group in 2016 to mobilise greater green finances and identify the associated barriers. The forum’s role has also been central in achieving the scale of action required to fulfil SDGs and Paris Agreement targets.
It established the Climate Sustainability Working Group during 2018 to focus dedicatedly on climate finance. The Italian presidency has also emphasised developing new and resilient models for a sustainable recovery from the pandemic by leveraging global financial flows towards the Paris targets. However, while the G20’s focus has been on increasing transparency and voluntary disclosures to attract investments, it needs to be diversified. It is essential to pursue formal standardisation of green finance; explore innovative financing instruments; assist developers in project preparation phase; and support developing countries in developing green finance roadmaps, etc.
A more serious discourse on ways to implement the pledged climate actions is required. It is crucial to ensure that the enthusiasm around climate finance doesn’t fizzle out, and it remains at the heart of every international forum.
Goldar is senior fellow and Jain is research assistant, ICRIER