Finance for climate action is among the key focus areas of today’s global finance discussion. This includes finance needed for climate action, mostly climate change mitigation and adaptation. However, the broader discussion on climate finance is also accepted by stakeholders to encompass finance needs to address climate-induced losses and damages at the global and national levels. This includes among others finance needs targeting actions aimed at addressing climate and disaster risks, which have the potential to increase existing social, economic, and environmental vulnerabilities. 

Enhanced climate action which is evidence-based and guided by good governance as well as participatory and collaborative processes provides avenues to address existing climate vulnerabilities. Such actions also can help countries ensure that their adaptive capacities are strengthened through planned processes that integrate sustainability and climate resilience into development interventions and processes. 

The Working Group III report of the Sixth Assessment Report (AR6) of the Intergovernmental Panel on Climate Change (IPCC) provides key findings which interlink climate action, just and equitable transition, climate finance flows, international cooperation, and good governance. It presents key entry points for actions by different actors to create change, build climate resilience, and sustainable pathways for development at all levels. 

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Climate Finance

Climate finance is defined as finance that extends to local, national or transnational financing which stems from public, private and other forms of financing aimed at contributing to activities related to climate change mitigation and adaptation. Under the United Nations Framework Convention on Climate Change (UNFCCC), the principle of “common but differentiated responsibilities and respective capabilities” plays a key role and is important for climate finance mobilizing and accessibility. 

The UN Climate Convention provides that developed country Parties are to provide financial resources to developing country Parties to assist them in implementing the objectives of the UNFCCC. For example, Sri Lanka, a developing country and Party to the UNFCCC, is in a position to access climate finance. In turn, developed country Parties have a responsibility to contribute to the mobilizing of finance for climate action by developing countries. This is reaffirmed by the Paris Agreement as one of the obligations of developed countries, which extends to mobilising climate finance through a wide array of sources, instruments, and channels, among which a pivotal role that is allocated to public funds.

Climate finance is intended to support country-driven strategies taking into account the priorities and needs of developing countries. To ensure that evidence-based prioritization and needs for climate finance are identified, it is important for governments and stakeholders to understand the financial needs of developing countries, sources of finance to be mobilized, and also how such finance, once mobilized, could be allocated for climate action in an equitable and balanced manner. This includes the effort that the benefits of those actions that are financed through mobilized climate finance reach those most vulnerable through transparent and accountable processes. 

Assessing Finance Flows

Assessing finance flows plays an important role in global climate action and building climate resilience at all levels. Transparency and enhanced predictability of financial support are highlighted in the Paris Agreement, a legally binding international treaty on climate change which was adopted in 2015. The WGIII Report of the IPCC indicates that tracked financial flows are not at sufficient levels to achieve mitigation goals across all sectors and regions. Further, it indicates that the existing gaps on finance to address climate risks is the largest in developing countries.

To ensure these finance gaps are addressed and sufficient finance flows are mobilized, it is important that clear policy choices are made and actions from government and the international community taken. Among such actions are accelerated international financial cooperation and climate finance for just transition in different sectors which scale up climate actions. 

Barriers to Redirecting Finance

The IPCC report provides that there remains sufficient global capital and liquidity which could bridge global investment gaps. However, the report also points to existing barriers that hinder the progress in bridging these gaps. Among these barriers are macroeconomic headwinds facing developing regions as well as barriers within and outside the global financial sector. For example, this includes the lack or limitations of assessments related to climate risks and investment opportunities as well as low synergies between available capital and investment needs. Additionally, other barriers include country indebtedness levels, aspects linked to economic vulnerability, as well as limited institutional structures and institutional capacities.

For challenges outside the financial sector, one could refer to examples such as limited local capital markets, unattractive risk-return profiles, the need for accountable and strong regulatory environments, aggregation scalability, and replicability of investment opportunities and financing models. Additionally, the WGIII Report indicates with high confidence the need for a pipeline ready for commercial investments.

Scaled-up Climate Finance

It is estimated that there is a 60% increase in annual tracked total climate finance flows for climate mitigation and adaptation since 2013/14. However, the IPCC Report indicates that climate finance flows have slowed since 2018. Climate finance mobilized in this year were unable to meet the collective goal under the UNFCCC and Paris Agreement, which is to mobilize USD 100 billion per year by 2020.

Stronger alignment of public finance and policy interventions, strong and clear signals by governments and the international community could enhance the certainty as well as reduce transition risks for the private sector. This could provide avenues for public-private partnerships which are focused on accessing climate finance aimed at opportunities and interventions for economic empowerment of the countries and communities in need of enhanced climate resilience. 

Additionally, many actors could support climate action and contribute to shifting the continued underpricing of climate-related risks. Such stakeholders include central banks, financial regulators, investors, and financial intermediaries. Activities that could benefit this shift include increasing transparency and accountability of financial flows, integration of climate risk into financial planning processes, and identification of climate-friendly and scalable investment opportunities.

 International cooperation could play a key role in scaling up climate action and resilience. 

Such cooperation could focus on finance to enable innovation for climate action, institutional capacity-building that enhances the ability to access climate finance, providing benefits to local communities and value chains, and empowering key stakeholders to better understand and identify opportunities to access scaled-up climate finance.

Furthermore, the WGIII Report indicates that transnational partnerships could support policy development as well as technology transfer and diffusion, which facilitate enhanced climate action by creating links between key stakeholders.

Policy & Good Governance

Policy instruments and good governance also provide opportunities for accessing scaled-up climate finance. Many countries apply diverse policy instruments for climate-related activities interlinked with climate finance at both national and sub-national level. Over 20% of global GHG emissions were covered by carbon taxes or emissions trading systems by 2020. Effective laws and policies on climate change, interlinked with national financial processes which are transparent and accountable could expand the opportunities to increase climate finance. 

Climate governance which integrates actions through laws, strategies, and other mechanisms based on national circumstances is a pivotal element of scaling up the accessibility of climate finance for a country. Climate finance is higher in its effectiveness when it can interlink and build synergies across multiple policy domains. Good governance in climate finance builds on the engagement of multiple stakeholders which include policymakers, private sector, labor, civil society, youth, media, Indigenous Peoples, and local communities.

Transparent and accountable processes which are based on just transition principles could contribute to enhanced climate action as well as scaling up climate finance. Further, it is important that institutional mechanisms facilitating climate action at all levels needs to apply collective and participatory decision-making processes which ensure the application of equity principles into policies. It would also be beneficial if these processes were formalized through legal and policy mechanisms which ensure and heighten the accountability and transparency of processes relevant to climate action at national and local levels.

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Note: This article has been published on The Morning as part of the author’s weekly column. 

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