Financing Climate Mitigation and Adaptation

With the United Nations (UN) climate change conference in Glasgow in full flow, it is being subject to the customary attention deficit media blitz. After the speeches, elbow bumps and photo ops, there is the real possibility that we will continue with life as normal. More coal and fossil fuels might be burnt, rich countries may kick the can further down the road when it comes to financing green transition in poorer countries, and Small Island Developing States (SIDS) will still face the persistent threat of climate and environmental catastrophe.

As an eternal optimist, I believe that life needs not continue as normal after events in Glasgow peter out. However, this requires moving from narrative to action. One way that we can act is with respect to finding innovative solutions to finance climate mitigation and adaptation, especially for SIDS.

At the moment, private finance is not meeting the climate mitigation and adaptation needs of poorer countries, including SIDS. There is also the added challenge that many poorer countries find it difficult to access global capital on favourable terms. Meanwhile, rich countries continue to fall short of their commitment to mobilise climate finance for developing countries.

Given these unfortunate set of circumstances, the World Economic Forum (WEF) suggests that blended finance instruments could plug the financing gap for SIDS and other developing countries. The Organization for Economic Cooperation and Development (OECD) defines blended finance as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.

According to the WEF, blended finance can help countries to provide support to sectors where adaptation and mitigation needs are the greatest, such as agriculture, water, ecosystem preservation and public health. For example, the Green Climate Fund (GCF)’s sub-national Climate Fund, an impact equity fund, mobilises long-term public and private investment for mitigation and adaptation projects in developing countries, including SIDS. How the GCF works is that its $150 million equity investment will bear the first losses (if any) from any project. Thereafter, equity contributions of an additional $600-750 million are raised from private investors.

Private investors are not often keen to invest in micro-markets, especially where profit margins are slim, or the risk of failure is heightened. Therefore, where a blended instrument such as the GCF absorbs potential losses upfront, private capital is then incentivised to follow with enough funds to deliver real impact.

Furthermore, a growing number of investors around the world are showing an interest in investing in places and sectors that contribute to sustainable development. According to the Global Sustainable Investment Alliance, sustainable investing assets in Europe, the US, Japan, Canada, Australia and New Zealand were USD 30.7 trillion prior to the COVID-19 pandemic. PricewaterhouseCoopers (PwC) also notes that generally, sustainable financial products are on the rise.

Whether it is called blended finance, sustainable finance or impact investment, the bigger point is that options are available for SIDS to finance climate mitigation and adaptation. However, a few key things are needed. First, there must be clarity on the priority areas for mitigation and adaptation. Second, there must be a clear strategy, including which markets and investors will be targeted.

Some of the sectors which are ripe for climate adaptation and mitigation include manufacturing, farming, transport, energy, construction, waste management and tourism. Investing sustainably in these sectors could advance the twin objectives of driving profit whilst simultaneously saving the planet.