It’s possible that 2021 may be regarded as the year when we finally reached a tipping point on climate action – and not a minute too soon. Heat waves that have broken records from North America and Western Europe to the Middle East, Africa, and Asia are unavoidable. Industrialization-based greenhouse gas emissions are primarily to blame for rising global temperatures.
Global Landscapes Forum (GLF) recently hosted a hybrid conference GLF Climate: Forests, Food and
Finance – Frontiers of Change. The event took place in Glasgow, Scotland, on the sidelines of the 26th session of the UN Climate Change Conference of the Parties (COP26) to the UN Framework Convention on Climate Change. The event aimed to tackle issues of forest land restorations, food security and sustainability, and financing for sustainable land use activities.
If nothing is done about climate change, the financial sector will face higher costs. Banks and investors, in particular, require a clear regulatory framework on climate policy that they can adapt and use to make investment and lending choices, while insurers are at risk of suffering significant losses. Climate change could result in a compounding of risk throughout the entire company spectrum, undermining some of the benefits of diversity, according to integrated financial organizations.
Nature-based solutions (NbS)
During the ‘Increasing Local Impacts: From Finance Commitments to Bold Action’ plenary session the Minister of Environment and Sustainable Development in Madagascar, Baomiavotse Vahinala Raharinirina urged the private sector to invest in NbS and sustainable supply chains “collective efforts in the area of NbS finance, as well as greater benefit distribution, are required”. In developing nations, less than 2% of climate funding flows reach small-scale farmers. Environmental and social concerns must be addressed in sustainable financing. Nature-based solutions (NbS) involve working with nature to address societal challenges, providing benefits for both human well-being and biodiversity. Specifically they are actions that involve the protection, restoration or management of natural and semi-natural ecosystems
Investment loans, from developmental banks, have been the most common form of project-based financing, reflecting their flexibility in supporting a wide range of projects on a wide range of terms. Loans can be structured flexibly to provide profiles that match client and project needs, based on the expected cash flow of the project and the ability to pay back over time. When addressing their major turn point to supporting local farmers in East Africa, Vivienne Yeda, Director General at East African Development Bank said “we have set aside a special fund which deals with farmers and business people in East Africa to lend them money. No paperwork is involved. Money is disbursed in mobile phones with the help of fintech”.
Climate change adaptation is one of the main strategies to address global climate change. The least developed countries and the small island states that lack financial resources to adapt to climate change are the most vulnerable nations to climate change. Although it would be more economical to adapt to climate change compared to the anticipated damage of not doing so, the demand for capital is estimated to range to hundreds of billions. The crucial question is how to manage investments to adapt to climate change globally.
The private sector needs to play a vital role in financing adaptation. Firstly, it should invest in its own adaptation strategies. Climate change poses risks for businesses, both physically and through climate related changes in regulation, technology and market dynamics. At the same time, it can open up new opportunities for companies, e.g. by stimulating demand for adaptation products and services.
What is more, societies and economies depend on the private sector for employment, infrastructure and products or services. Companies should thus invest in their own resilience to ensure their survival and growth and to protect their stakeholders. Secondly, private financial institutions and investors, such as banks, pension funds, insurance companies or impact investors can invest in or provide funding for adaptation of others, e.g. through (micro) loans, bonds or venture capital. Finally, private entities can also support adaptation and adaptation finance of others by providing specific products and services, e.g. credit ratings that take climate risk into account.
Vivienne Yeda said “the most important thing particularly the private sector and private sector engaging in fossil fuels and carbon intensive sectors, to think how they can reduce their carbon by a huge 30% and change the 2030 deadline to 2025”.
One other key point that can be used to catalyze private sector investment for climate action is blended finance. Blended finance combines donor or philanthropic funding and private capital to reduce risks and increase opportunities for private investors while generating positive development outcomes.
Blended finance models have been used to pioneer and scale-up financing of new technologies in renewable energy, energy efficiency, urban transport, and other related fields. Most blended finance transactions have gone towards mitigation activities within the energy sector; however, as a result of the involvement of development assistance organizations, there is emerging experience in blended finance for adaptation.
Indeed there is hope in combating the climate crisis; financing green has never been so crucial.