Climate Finance

 

 1. Context and definition of the concept

  • Climate finance refers to the economic resources, from public or private sources, allocated to support projects and initiatives geared towards mitigating or adapting to climate change. The scale of the goals to be achieved as regards climate means that a huge volume of finance is needed to carry out the necessary measures.
    • Climate finance resources come from very diverse sources: public budgets from governments, private investments that raise resources by issuing financial products (such as green bonds), multilateral funds as part of the United Nations Framework Convention on Climate Change process (such as the Green Climate Fund and the Adaptation Fund)…
    • The range of projects that are eligible for inclusion under the climate finance umbrella is very broad. The following are some examples:
      • A project to develop renewable energies (e.g. a wind farm).
      • Investments in improving energy efficiency (e.g. replacing an old boiler in the home with a more efficient modern version).
      • Promoting initiatives to boost sustainability in transport (e.g. setting up a municipal bicycle system in a city).
      • Promoting sustainable agriculture practices (e.g. improvements in irrigation management.

  • The principle of “common, but differentiated responsibilities” plays a key role in international negotiations on climate change and in all matters related to climate finance. The developed countries are therefore under the obligation to mobilise economic resources to support less wealthy countries in their climate action measures.
  • The Paris Agreement makes reference to this principle and urges developed countries to come up with a specific roadmap in order to achieve the goal of US$100 billion in annual climate finance by 2020.
  • Also closely linked to the concept of climate finance are all the aspects linked to economic-financial disclosure and the management of links related to climate change: 

2. Progress (existing initiatives and compliance with goals)

  • In the case of the former, an increasing number of initiatives now allow for transparent, rigorous information on investments made by companies and organisations, as well as on their performance.
  • In the case of the latter, the financial community is increasingly aware of the risks derived from funding projects involving fossil-based energies that are not aligned with climate action goals and that might not be able to be completed as planned. In fact, there have been warnings from some quarters about significant problems if these risks are not managed properly and on a timely basis.
  • A not insignificant number of investment funds are starting to penalise companies that have a high proportion of investments in fossil fuels in their portfolios.
  • However, many analysts and reports on energy prospecting consider that fossil-based energies will continue to play an important role, even in the most demanding climate scenarios, and therefore that the systemic risk faced by the financial sector for having committed in this field is more of a long-term issue than a short-term one and that, in any case, it is manageable if approached properly.
  • The risks of climate change are much greater than those that are undertaken by investing in fossil fuel projects. One example of the climate risk for investments is the risk derived from the potential impact of extreme meteorological phenomena on economic activities, infrastructure, etc. Another would be the risks that electricity generation plants would have to undertake due to the increase in the temperature of the water they need to cool their processes. This type of risks are mobilising the insurance sector and the electricity system operators, as well as many other players.

3. Statements

  • Despite the increase in resources allocated to climate finance, the resources that have been mobilised are much lower than what is needed to meet the goal of keeping
  • Meeting the climate change goals, as part of the Sustainable Development Agenda, will require an accumulated investment of US$90 trillion between 2015 and 2030. According to the report by Stern and Calderón (2014), a huge amount of resources need to be mobilised on an urgent basis.

4. Challenges to be faced

  • Climate finance from private sources has been gaining unprecedented momentum since the Paris Agreement was approved. According to a report from BNEF, the volume of green bonds issued is expected to reach a record US$72 billion in 2016, mostly driven by the surge in green bonds being issued in China.
  • In the energy sector, renewable energies and energy efficiency continue to evolve very favourably at global level, despite the low prices of oil and natural gas. For example, renewable energies accounted for over two-thirds of investments in electricity generation in 2015 and investments in energy efficiency allowed to reduce the energy intensity worldwide by 1.8% in 2015, slightly better than the improvement achieved in 2014 (when the reduction was 1.5%).
  • Current reports reveal that the number and scale of climate finance announcements are on the rise.

  • The Global Energy Investment report from the International Energy Agency indicates that the current trend of transition towards investments in decarbonisation is still not enough to guarantee climate sustainability. In 2015, US$1.8 trillion[1] was invested in the energy sector (the equivalent of 2.4% of cumulative global GDP). Of that amount, over US$580 billion was allocated to the upstream oil and gas sector (exploration and production), US$425 billion to electricity generation (70% to renewable energies), US$195 billion to natural gas infrastructure (liquefied natural gas and gas pipelines) and a further US$210 billion to energy efficiency (mostly building).

  • Despite the sharp increase in “green” financial products – such as the green bonds mentioned previously – one of the main challenges facing this type of products, according to various analysts, is reaching a consensus on the standardised criteria that should be used to define the products and lend stability to the market.

5. Call to Action (NOTE: All proposals geared towards mitigation. Adaptation should also be tackled)

  • Key factor: Being able to quickly mobilise the financial resources needed to develop the investments needed to meet the 2º C target, as part of the Agenda for Sustainable Development.
  • The amount of public resources allocated to climate finance should be increased, either in the form of direct contributions by the countries to projects or via multilateral funds for climate action (e.g. The Green Climate Fund).
  • Governments should also develop policies that make it easier to mobilise private investment. In this regard, policies that are based on the “polluter pays” principle and which send a strong signal as regards the price of CO2 emissions are crucial in mobilising clean investments (renewable energies, energy efficiency, etc.).
  • Raising funds derived from setting a price for CO2 that is payable by those that produce the emissions, may also be useful in providing resources to finance the decarbonisation of the economy and support vulnerable customers or sectors that are not able to compete on a level playing-field with others that do not apply CO2
    • As well as providing resources, developed economies should collaborate on financial capacity-building in the most vulnerable countries.
    • The process of implementing the Paris Agreement should advance on the basis of clear, transparent rules that allow to calculate the level of climate finance attained, as part of a broad diagnosis that also specifies needs, funding sources, receivers, etc.
    • In the area of financial reform, the opportunity should be taken to reinforce financial disclosure policies in companies, so as to ensure that issues associated to climate change are the object of transparent and thorough disclosure.