Climate finance will be a central theme in recently held Leaders Summit on Climate.
How is the existing performance on climate finance?
In 2009, developed countries promised developing countries $100 billion by 2020 in climate finance.
OECD estimated that $78.9 billion of climate finance was provided in 2018.
But India called this as green washing of finance as the committed aid had been diverted from other purposes to climate activities.
The new and additional finance was only $2.2 billion which is far lower than the committed one.
Oxfam reports that in 2017-18, only $19-22.5 billion were paid, after discounting for loan repayments, interest and administration costs.
This stand in sharp contrast to other estimates that pegged global climate finance at more than $530 billion in 2017.
Thus, developing countries claim they are not receiving what was promised to them and the claims of developed countries are a fraction of total global climate investment.
What can be done to address this issue?
In dealing with climate finance four shifts are necessary- Scale, balance, risk and regulation.
First, capital commitment should be in far greater scale than what has been negotiated.
Developing countries need $3.5 trillion to implement climate pledges up to 2030 and according to RBI India alone needs $2.5 trillion.
The capital requirement could be two-three times this value for deep decarbonisation of the energy sector.
Secondly, there must be balance between public and private sources and public funds cannot sufficiently pay for a low-carbon transition.
OECD estimates showed public climate finance at $64.3 billion against only $14.6 billion of private capital mobilised.
The world’s largest sovereign wealth funds, pension funds shy away from developing countries considering them risky destinations and there is still very limited insurance against climate shocks.
According reinsurance giant Swiss Re, of $146 billion in damages from natural disasters in 2019, only $60 billion was insured.
So a rebalancing of climate finance is required- more blended capital, more insurance for climate-resilient infrastructure.
Thirdly, without de-risking instruments, capital requirements for transitions in clean energy, sustainable mobility would be impossible to meet.
Developing countries need three categories of blended finance:
De-risking utility-scale renewables in emerging markets by targeting non-project risks (exchange rate fluctuations, policy);
Reduce the finance cost for distributed energy solutions for small businesses to clean their energy mix ;
Risk capital for R&D investment in disruptive technologies is required;
Fourthly, regulation in developing countries must create an ecosystem for green finance.
RBI has only taken tentative steps, giving priority sector lending status to small renewables in 2015 and a call for deep green bond markets.
SEBI has issued green bond guidelines in 2017 and ministry of finance’s Climate Change Finance Unit has mostly focused on representations in international forums.
What more can be done?
First, regulation must report on climate risk exposures and planned infrastructure must prioritise resilient projects and write down stranded assets.
Secondly, a green taxonomy would help in identifying genuine investments from green washed investments.
Green tagging increases visibility of assets and their climate impacts for potential investors.
Thirdly, tax incentives could encourage green bond issuances.
Fourthly, reducing information asymmetries (investment opportunities, risks, market developments) can create larger portfolios of investment for emerging markets.
Fifthly, public funds should create pipelines of securitised, low-risk green projects so that developed countries could reduce cost of capital in developing and emerging markets.
Finally, there must be greater coordination in regulatory forums-the Basel Committee on Banking Supervision, Network for Greening the Financial System-to set standards & for capacity building.
Also developing countries must hold rich countries accountable for not honouring climate finance commitments.
