Addressing Barriers to Scaling up Climate Finance

Dr. Ranjan Roy

9th February, 2020 12:32:40 printer

Addressing Barriers to Scaling up Climate Finance

climate,climate finance,United Nations Framework Convention on Climate Change,UNFCCC

Bangladesh is a highly climate-vulnerable country in the world because of its disadvantageous geographic location, that is, this country has a sizeable low-lying delta ecosystem owing to the confluence of three mighty rivers: the Ganges, Brahmaputra, and Meghna. Of late, Global Climate Risk Index 2020 estimates Bangladesh is the 7th most-affected country by extreme weather events such as floods, cyclone, and tornado. Germanwatch, an environmental think tank, shows the total losses of Bangladesh were 1686.33 million US$ PPP (purchasing power parity) due to weather-related events that occurred from 1999 to 2018. Driving climate finance today is, therefore, indispensable for the climate-resilient society of tomorrow. Climate finance refers to local, national, or transnational financing, which may be drawn from public, private, and alternative sources of funding for climate actions: mitigation and adaptation.

The United Nations Framework Convention on Climate Change (UNFCCC) reports, climate finance is key to reducing emissions and enhancing sinks of greenhouse gases (GHGs), i.e., mitigation. It is equally essential for adaptation, for which significant financial resources are similarly required to allow societies and economies to adapt to the adverse effects and reduce the impacts of climate change.

Climate finance is thus a crucial issue of keeping the pace of climate-compatible economic development. The latest evidence illustrates climate finance is the lynchpin to achieving Sustainable Development Goals (SDGs) and the country’s Paris Agreement commitments. However, global and country investment is dramatically off track to meet universal access to climate finance.

The least developed countries (LDCs) encounter daunting challenges in achieving the SDGs. LDCs, therefore, claim (global) climate finance is as “big gaps and little money.” In Bangladesh, critical challenges of arranging climate finance are its lowest tax revenue to GDP ratio (in South Asia), minimal private investment for climate actions, and heavy dependency on Official Development Assistance (ODA).

Despite these challenges of managing climate finance, the government of Bangladesh has taken substantial initiatives of reducing climate vulnerabilities. The country has increased climate-relevant allocation from TK. 10,113.39 crore to TK. 18,948.76 crore over the last five years, despite the huge challenge, lies in implementation. Initiatives are, therefore, essential and recommended to address barriers to scaling up climate finance.

First, accelerating and promoting climate-relevant financial policies are crucial to strengthen the financing for adaptation and mitigation. Studies highlight the need for central banks and financial regulators to recognise and respond to climate risks by using their authorities to enact smart fiscal policy, regulations, guidance, and enabling measures. Notably, the government should develop climate risk integration frameworks and action plans, undertake climate risk screening of public investment programmes, and ensure the costs of climate risks are integrated into disaster risk management projects.

It is essential to make climate-related financial disclosures a mandatory requirement, including those related to potential risks from physical impacts (both acute and chronic) to assets (both financial and real) that financial actors have a stake in. Moreover, we need to undertake economy-wide, sector-wide, and regional assessments of the impacts of physical climate risks—both acute and chronic—to overall economic growth and stability to strengthen the fiscal and monetary policy.

Second, developing, adopting, and employing climate risk management practices to remove barriers to financing climate actions. In this regard, two broad issues are critical (a) fully integrate climate risk management practices and employ data and climate risk management tools across the financial system governance bodies, and (b) employ climate risk management practices and tools for investment decision making and to enhance disclosure of climate risks.

Illustrative actions include employing and adopting a climate risk management approach at the level of governance of the financial system and engaging insurance companies to integrate into product incentives for ex-ante resiliency measures and investments. Economic actors should identify climate-related hazards to investments, assess the vulnerability (including financial) of those assets, and quantify that vulnerability into meaningful financial value at risk over relevant time horizons.

Third, all financial systems must accelerate efforts to adopt an initial set of climate adaptation metrics and standards. However, the creation of commonly agreed standards for defining an adaptation or resilience investment is complicated by several questions that are critically important for market adoption. Central issues include, inter alia, how to set clarity around hazards linked to physical climate risk exposure and how extensive “resilience” or “adaptation” needs to be for investments to qualify as resilience or as a resilient investment.

Financial system constituents require two significant actions. First, financial system governance bodies have to develop and employ resilience rating systems that can provide essential market signals about climate risks. Moreover, these bodies have to regularly integrate an enhanced understanding of climate resilience in all investments via the employment of climate scenarios used for stress testing at the level of the financial system and regulated entities. And, second, financial actors must adopt the common language, definitions, and classifications of hazards for physical climate risk and engage in ongoing efforts to define and describe measures for scoring climate resilience in all investments.

Fourth, building capacity among all financial actors is crucial. IPCC highlights the significance of the fundamental need to build human and institutional capacity in climate resilience (risk management and investment) across all financial system constituents. Financial institutions must create awareness and enhance internal technical and financial expertise and the ability to enable a proper analysis of climate risks and opportunities. They have to ensure that government bodies gain awareness, build capacity, and employ knowledge relevant for integrating climate considerations throughout governance, regulations, standards-setting, and other activities essential for financial system governance.

Financial actors should employ relevant expertise across several essential functions of the institution, including credit, risk management, portfolio, and investment staff. Moreover, they should deploy expertise by adopting or procuring climate risk management tools and continuing to build internal capacity for the use of those systems, data, and analytic tools.

Fifth, the government must highlight and promote investment opportunities across all sectors and segments of society present likely the more substantial investment opportunity of this generation. Financial system governance bodies need to incentivize opportunities to invest in adaptation and resilience. Financial actors of all types should seek out opportunities and scale up investments in adaptation, including utilizing climate risk management practices to develop and deploy new financial asset classes, instruments, and products, including such innovations as resilience bonds and expanded use of catastrophe bonds and contingency finance.

And, sixth, urgent actions are essential that leverage the public institutions to accelerate adaptation. Addressing adaptation investment needs will require both the public and private sectors to work together on several fronts: creating tools, investment screening criteria, standard climate adaptation definitions, metrics and standards, and developing ways to share public and private costs and benefits. Illustrative actions include ensuring the economic and financial impacts of climate risks are integrated into financial policy and enhancing the role of public financing mechanisms/institutions to incentivize adaptation and resilience investment.

 

There is no doubt that the world is warming, and the consequences of this warming are and will increasingly be far-reaching. Averting effects are contingent on the availability of climate finance. Hence, the country’s landscape of climate finance must be strengthened. Addressing barriers to scaling up climate finance should emphasis on the sources and intermediaries (public and private finance) and sectors such as mitigation and adaptation finance as well as funding with dual benefits.

The writer is an Associate Professor in the Dept. of Agricultural Extension and Information System, Sher-e-Bangla Agricultural University, Dhaka.

E-mail: [email protected]


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