Transformative Actions to Revive Green Climate Finance

The reasons for faster climate action are growing more acute every year, and yet, public action at the global level is proving to be a disappointment. As is the case in history of all major past technological changes, finance remains the great enabler of climate action. Recognizing this tenet, development organizations, multilateral development banks and institutional investors are all increasingly prioritizing their climate budgets and actions, announcing larger targets for themselves, and have in most cases been successful in recapitalizing their dedicated climate funds. At the same time, technological choices are growing rapidly and market solutions are becoming increasingly viable across a growing number of sectors.

At the national level, the Central Banks of many countries are considering and introducing measures for accelerated climate action and many private banks, insurance companies and institutional investors are visibly allocating more to ‘sustainable’ or ‘green’ portfolios and even the equity flows to the green sector are on a rise and innovative green technologies – ranging from electric vehicles, to batteries for renewables – are now closer to becoming ‘market-ready’.

However, while financial institutions, along with the other key actors have started preparing to step up and accelerate climate finance, the required public policies to enable and support them on a coordinated basis are still lagging. This situation is further aggravated due to the weakened macroeconomic conditions of many low and middle income countries, which doesn’t permit them to undertake ambitious climate actions, even if they so desire.

At the global level, COP25 could be considered a disappointment, especially on resolving the issues pertaining to climate finance, as Article 6 was once again shelved with the Rulebook still pending and discussions on long-term finance was also left unresolved. While a few Parties, led by the vulnerable and least developed countries advocated for higher ambitions, most others stuck to their stated positions, and the divide between developed and developing countries positions became clearly evident. The large emitters did not commit any meaningful enhancements of their climate goals and it seemed that some developing countries too have started to re-think the desirability of enhancing their climate targets.

The MDBs and dedicated climate funds can be considered to be the key influencers in this area at present, leveraging their role strategically to shift more public and private funding to climate relevant investments and assets, through support mechanisms and better ‘models’ of public-private policy frameworks. But is this sufficient? Further, given the scale of needs ahead in the next crucial decade, and the higher costs and risks of such financing in the private sector, especially in developing countries, reviving the Article 6 mechanism and international voluntary trading mechanisms is critical. The efficacy of private actors and markets to achieve the desired goals, in the absence of a globally coordinated rulebook, is not yet clearly explored.

In this context, it is imperative to review the green finance requirements and hurdles, and re-think on measures required to bring a fresh impetus to its mobilization and effective utilization. An expanded role of ‘Green’ financial institutions is now vital and the potential of various finance channels and the array of financing instruments needs to be assessed to determine those which can be leveraged best to facilitate a wider range of ambitious climate actions. At a macroeconomic level, the challenge of green financing is not insuperable: The gross annual needs for enhanced climate financing are still relatively small at around USD 2 trillion a year, amounting to approximately 2 percent of global GDP, and as compared to the size of total financial assets (~ USD 400 trillion) under deployment in global bank debt, bond and equity markets. Thus, much of the needed finance can come from effectively reallocating a small portion of the existing finances.

There are several successful and ground-breaking finance and business models now existing for funding climate actions from the regional, to national, to local levels. The knowledge from these can be built on and modified to be scaled-up and replicated in new geographies. For instance, the past rapid growth of the Green bond markets (from virtually zero to close to USD 200 billion a year in the past decade) could hold important lessons for re-designing traditional financial instruments and local capital markets for sustainable green finance.

The broad question around which this plenary discussion will focus is: Can financial institutions do more on their own, supported by the stronger investor preferences for green investments, and can they play the role of the bellwether to revive overall and public climate finance and enable more innovative and ambitious climate actions?

Some other questions which arise include:
  • As a next step, with the larger global rulebook and uniform standards for climate financing remaining out of reach, is it time now for countries and smaller regional groupings to plan their own robust accounting frameworks and finance roadmaps? This is especially pertinent for the vulnerable and developing countries, where the need is the most and the incremental financing challenges the greatest, while offering the greatest opportunities for accelerated action.
  • In the same vein, is it time to bring smaller and more nimbler ‘climate clubs’ into existence, for example, through accelerated regional cooperative mechanisms; or should the approach now shift to focus more on accelerating sub-national climate actions and specific sectoral changes, with cities, and transport, infrastructure and industries coming to the forefront?
  • Carbon taxes (and subsidies) have often been thought as a key solution to the public and market-enhancing climate financing challenge, but the political costs have been very high (as evident in disparate settings from France and Australia to Chile and Ecuador). What alternatives are possible? Can the private sector do more and better on its own to create a new class of voluntary and market-led international mechanisms, building on the lessons from the CDM markets and ETSs?
  • Can central banks and regulators play a much bigger and more independent role, and how should they coordinate their policies better for accelerated climate investments in the private financial markets?
  • Is the financial sector doing enough to recognize climate risks and is there a critical momentum building for the financial intermediaries to voluntarily move away from investing in such high-risk and potentially major stranded assets in the future?