Climate financing refers to the financial support that is aimed at mitigating and helping the adoption of actions that address climate change. The financing is drawn from public, private and alternative sources and can be from local, national or transnational institutions.
Why Finance Mitigations Measures Aimed at the Effects of Climate Change?
Human Activities such as burning of fossil fuels produces heat trapping gasses that result in long-term temperature shifts and disruption of weather patterns. Global Impact Investment Network (“GIIN”) reports that the climate change is the single biggest threat to sustainable development and its widespread, unprecedented impacts disproportionately burden the poorest and most vulnerable communities.
The impacts of climate change such as flooding and drought, displace millions of people annually exposing them to hunger, and even going as far as denying them access to health services, and education. This further stretches inequalities, stifles economic growth and sometimes even cause conflict. With these impacts in mind, it is also worthy to note that the United Nations estimates that about 700 million people are at a risk of displacement by drought alone by the year 2030 if action is not taken to combat climate change.
Clear as day, climate emergencies are on the rise in the world over calling for a collective action by both the private and public sectors to pull together and address the ever increases threats of climate change and limit global temperature rise to nothing more than the goal of the Paris Agreement of 1.5 degrees Celsius annually.
The United Nations in Sustainable Development Goal 13 (“SDG”) aims to mitigating the impacts of climate change and estimates that $3-5 trillion is needed annually to achieve this. This SDG look at the adoption and use of renewable energy, sustainable forestry, sustainable water management and sustainable agriculture. If properly financed through sustainable investment, the SDGs can guide mitigation of the impacts of climate change and pave the way to low carbon-economies by lowering greenhouse gas emissions and providing greater access to clean energy solutions.
Bearing in mind the large amounts of capital needed for a low-carbon transitions and actions that mitigate the impacts of climate change and reduce greenhouse gas emissions, climate financing is more urgent now than it has ever been! Furthermore, investment decisions now will determine whether we create or destroy wealth and potential paths to prosperity. It is increasingly clear that the world cannot afford to burn all of its fossil fuel reserves if we are to succeed in limiting climate change to sustainable, livable, levels.
To wit, large-scale investments are required to significantly reduce emissions.
Who Should Finance Climate Action?
The public sector and civil society are best poised to lead the march towards climate financing by adopting sustainable investment. Equally, the private sector and impact investors play an important role in climate financing. Capital from institutional investors is also a key lever in driving in driving changes needed to fill funding gaps in address the climate crisis.
Collectively, banks and other private financial institutions; institutional asset owners, including pension funds, insurance companies, and sovereign wealth funds; private wealth advisors and family offices; foundations; development finance institutions; and public agencies and international development organizations should lead the way in climate financing.
The United Nations Framework Convention on Climate Change (UNFCCC) while recognizing the principle of “common but differentiated responsibility and respective capabilities” sets out that developed countries should provide financial resources to assist developing country implement programs aimed at the mitigation of the impacts of climate change. The Paris Agreement on the other hand also reaffirms the obligations of developed countries and goes further to invite other parties other than developed countries to finance the mitigation of the impacts of climate change.
Anyone keen on sustainable investment as well can be part of climate financing and should ensure that capital flows consistently with a pathway towards low greenhouse gas emissions and climate-resilient development.
How should Investment in Mitigating the Effects of Climate Change be Carried out?
Impact Investors should evaluate their subsisting as well as prospective investments using Environmental, Social and Governance (ESG) principles for sustainable investment. ESG is a term used to represent an organization’s corporate financial interests that focus mainly on sustainable and ethical impacts. While ethical, sustainable and corporate governance are considered non-financial performance indicators, their role is to ensure accountability and systems to manage a corporation’s impact, such as its carbon footprint.
To best understand ESG, a good first step is to identify what issues fit into the categories of environmental, social and governance. For Environmental factors consideration is majorly on the preservation of our natural world i.e. climate change, carbon emission reduction, water pollution and water scarcity, air pollution, deforestation, and Greenhouse gas emissions. Social considerations factors in what makes up humanity and our interdependencies i.e. customer success, data hygiene and security, gender and diversity inclusion, community relations, and mental health. Governance on the other hand focuses on logistics and defined process for running a business or organization i.e. board of directors and its makeup, executive compensation guidelines, political contributions and lobbying, venture partner compensation, and hiring and onboarding best practices. Collectively, this is referred to as sustainable investment.
Over time, consumer behavior has changed and now focuses on becoming more sustainable. Consumers look to recycle, minimize waste and make greener choices. This behavior also influences decisions around finances and investment choices. This thus calls for investors want to use their money to finance companies and undertakings committed to sustainable investments. ESG investing, has seen exponential growth as investors seek to provide capital for companies whose values on environmental sustainability and social responsibility align with their own.
Many ESG investment vehicles have emerged, including green bonds, mutual funds, and index funds. These publicly traded instruments make it easier for investors to align their investment to mitigate the impacts of climate change.
How Much Climate Financing Has been Undertaken So Far?
The United Nations SDGs and the Paris Climate Accord impact investors and motivates them to make investments towards mitigating the impacts of climate change. A survey conducted by GIIN reveals that a majority of impact investors finance the mitigation of effects of climate change because they are desirous of contributing towards the achievement of the goals set by the SGDs and Paris Climate Accord. The survey further revealed that they go as far as aligning their portfolios to the goals and 40% of those surveyed tracks the performance of all their investments to the SGDs. 20% track the performance of some of their investments while 15 % plan to track the performance of their investments in the future.
Conclusion
Impact investors and every other financier need to play a role in mitigating the impacts of climate change. Those seeking investment into their ventures also need to remain conscious of the impact their ventures have on the environment. Through blended finance solutions and adopting ESG strategies for sustainable investments in clean energy access, climate mitigation and adaptation, investors need to lead the world transition to a low-carbon economy. The risks are too high for capital to underperform.
By Otieno R.
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