Climate Finance: The State of Play and Future Direction
Definition: Climate finance refers to local, national or transnational financing, which may be drawn from public, private and alternative sources of financing. Climate finance is critical to addressing climate change because large-scale investments are required to significantly reduce emissions, notably in sectors that emit large quantities of greenhouse gases. Climate finance is equally important for adaptation, for which significant financial resources will be similarly required to allow countries to adapt to the adverse effects and reduce the impacts of climate change.
Taken from UNFCCC website.
Climate Financing takes up a significant proportion of the discussion in Lima’s Convention of Parties (COP 20). On the 9th of December during a COP side event on International Climate Finance, a number of esteemed speakers from various international financial organization took the stand and shared the current state of play of climate financing.
Mr. Luis Enrique Berrizbeitia, a board member of the International Development Finance Club (IDFC) opened the session and stressed the importance of climate financing for the global fight against climate change. He also reiterated the common but differentiated responsibility (CDR) principles that guides climate financing. Also present in the panels are Fakhrouk Khan from the Executive Office of the UN Secretary General, Ousseyno Nakoulima from the Green Climate Fund (GCF), Amal Lee Amin, a private sector advisor in the GCF and Christian Grossman from the World Bank.
In his capacity as the executive vice president of the Development Bank of Latin America (CAF), Mr Berrizbeitia highlighted some of the sectors in Latin America that are forecasted to be attractive for investments are energy, water treatment and waste management, and the process would incorporate the public, private and local agents and authorities.
Private investors are expected to be key players in climate financing in the near future. Mr. Khan discussed about the strategic importance of the mobilization of GCF’s financial resources. A key move would be to use GCF’s financial commitments to leverage larger funding volumes from private investments for long term projects. This has the potential to exponentially increase the volume for climate finance. To further smoothen the process, donor and recipient countries can incentivize private investment through direct financial support and risk coverage in the forms of feed-in tariffs, risk sharing agreements, long term concessionary loans, equity investments and guarantees
The benefits of private involvement is are clear. Ms. Amin forecasted that USD 0.5 billion to 1 billion of GCF resources can be used to leverage up to USD 10 billion private funding. This is a particularly enticing forecast given that country pledges to date still amounts to less than USD 10 billion out of the estimated $100 billion needed to combat climate change by 2020. Ms Amin proposed a focus on 2 sets of issues: mobilizing funds at scale and using GCF funds on supporting investments in green SMEs in developing countries.
This development, however, has to proceed with caution. Intimate involvement of the private sector gives new nuances on the dynamics of international climate finance. Already, some global finance institutions such as the IMF and the World Bank are seen suspiciously by some developing countries for fear of hidden political agenda behind the financial resources. Private investors with massive financial leverage can influence or even dictate the distribution or terms that come with the climate funds. The key challenge for the international institutions like GCF is then to ensure independence and transparent and fair involvement of all stakeholders in their strategic decision making processes.