Rethinking Models for Climate Financing

Part 5/5 - FUNDING AND INVESTMENT MATTER!

Effective climate action by multiple non-state actors, be they businesses, cities or regions, could make significant contributions to narrowing the global emissions gap, adapting to climate change, and demonstrating to governments that higher ambition is desirable and doable. Going beyond words, this 5-part series titled Beyond words: Climate Actions for a Green Economy show that these actors are hard at work and delivering. By Jovin Hurry

It has come to pass that much more is needed to secure finance and investment at the scale required to deliver a fully de-carbonized and climate-resilient global economy by 2050.

“The key is to get the funding to flow so that everyone everywhere can benefit from low-carbon and climate resilient investments. That’s why we are working with the UN and our other development partners to create the conditions that will attract investors and to get all forms of finance – public, private, philanthropic - working together for maximum impact,” said Laura Tuck, Vice President Sustainable Development, World Bank.

 The world's financial community is being called to mainstream their climate action. Image: EBRD

The world's financial community is being called to mainstream their climate action. Image: EBRD

In practical terms, hundreds of billions of euros in investment are needed to transition to a low carbon economy and meet the target of well below 2 degrees warming. To move ahead with a thinking different to that which created the climate change issues, the working model for climate financing needs a refresh button. It looks like the button has been pressed.

As such, it seems that today ‘Localizing is the new Globalizing’, with cities and regions around the world demonstrating their leadership in climate action for inclusive, resilient, sustainable and low carbon infrastructure development plans.

The Cities Climate Finance Leadership Alliance (CCFLA) launched The Global Mapping of Initiatives for Localizing Climate Finance. In this major publication, it shows an acceleration in providing funding, financing and technical assistance support to local and regional governments from the whole range of stakeholders.

The CCFLA is a multilevel and multi-stakeholder coalition launched under the initiative of the then UN Secretary General Ban Ki-moon in 2014. Today CCFLA has 50 international reference members e.g. banks, cities, governments that have come together to implement a set of measures designed to catalyse and accelerate investment into low-carbon and climate-resilient infrastructure in urban areas.

Read the rest of the articles in this climate action series:

Peter Damgaard Jensen, CEO of Danish Pension provider PKA and Chair of the Institutional Investors Group on Climate Change (IIGCC) said: “Strong investment signals from policy makers across carbon trading, energy, transport and buildings are essential to unlock the necessary capital.”

“That is why my organization is launching a new programme focused specifically on investor practices in this area, with a focus on ensuring ongoing dialogue between IIGCC’s growing membership of asset owners and managers about latest developments of climate disclosure. Effective pricing of climate related risk by financial markets is essential to help realize the goals of the Paris Agreement.”

The IIGCC is a collaborative forum with nearly 150 mainly mainstream investors across 11 countries with nearly $21 trillion in assets under management. It aims to encourage public policies, investment practices and corporate behaviour that address long-term risks and opportunities associated with climate change.

Furthermore, thinking anew, to facilitate cross-border green capital flows the Green Finance Committee of the China Society for Finance and Banking and the European Investment Bank have come together to develop green finance a notch higher. China is now the world’s largest green bond market. This year’s global green bond issuance will likely expand by about 40%, and may continue to grow rapidly over the years.

The Green Finance Committee has about 190-member institutions, including all major Chinese banks and many insurance companies, asset owners and managers, brokers, green companies, third party service providers and research institutions in the area of green finance. The European Investment Bank is the world’s largest lender for climate related investment and pioneered the Green Bond market in 2007 by issuing the world’s first green bond.

Both parties are strengthening investor confidence and enhancing transparency of green finance after months of technical assessment and market consultation by world-class experts. They have mapped and compared core standards for investments eligible for financing through green bonds.

They are demonstrating their commitment in mobilising new climate related investment by enhancing capital market frameworks, by avoiding duplication of verification and certification, and by assisting in reducing costs of green bond issuance.

 New financing models and collaboration needed to address climate change. Image: WWF

New financing models and collaboration needed to address climate change. Image: WWF

In this way, financial institutions work less in silos under the burden and load of their own procedures. The world’s financial community, in fact, is being called to mainstream their climate action. Around 20 public and private financial institutions have already agreed to implement five voluntary principles for mainstreaming climate action, to better develop and share practice to the benefit of the entire financial community, by aligning all financial flows with a below 2 degree celsius-coherent economy and society.

These Five Principles are:

  1. Commit to Climate Strategies
  2. Manage Climate Risks
  3. Promote Climate Smart Objectives
  4. Improve Climate Performance
  5. Account for your Climate Action

They launched a new online and publicly accessible Climate Mainstreaming Practices Database, which will help institutions share their knowledge and experience via concrete case studies to help them take into consideration climate change and implement the Five Principles.

“The case studies are an invaluable resource to help financial institutions progressively improve the way they integrate climate change in their operations, and contribute to making the Paris Agreement a reality,” said Benoit Leguet, Managing Director of the Institute for Climate Economics, a think-tank that provides independent expertise and analysis when assessing economic issues relating to climate & energy policies.

The current close to 50 case studies relate to both the Five Principles and the four areas of work below:

  1. Climate risks: approaches, tools and methodologies
  2. Mapping reporting initiatives and understanding implementation challenges
  3. City-level climate smart approaches and financial instruments
  4. Spreading a climate strategy into a whole organization

Hence, much work is being done on having investment to reallocate capital flows towards low-carbon and resilient growth, with additional upfront capital or risk sharing, to deliver financial returns and resource savings. 

Policy makers continue to work on inclusion to ensure that flows reach the countries and communities with greatest needs in terms of both sustainable growth and reducing vulnerability, to effectively doubling flows to developing countries by 2020.

The above examples showed the effort in integration to make the long-term consequences of climate change and wider sustainability factors a routine part of financial decision-making and accountability both in terms of opportunity and risk, to avoid financial system instability.

What can be done more could be on the innovation to enable green deal flow, particularly risk sharing for emerging economies and frontier markets, for domestic markets to grow; and also on the infrastructure that provides climate resilience tapping the financial system’s endless capacity for innovation and speed of action.

With new thinking, with operations similar to the Climate Mainstreaming Practices Database, the working model on transparency on finance and investment through harmonised approaches is being updated and simplified.

In the end, these new norms, standards and working models in the financial community will in turn support climate investment plans and policies tailored to national needs, priorities and capacities, that will attract diverse capital sources and greater private sector risk.