The Road to Financing a Net-Zero Revolution

by Noor Sayyeda

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The Road to Financing a Net-Zero Revolution

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The aftermath of the latest United Nations Climate Conference (COP27) has made one thing very clear - the importance of climate finance mobilisation for developing nations has never been greater. By the end of the decade, developing countries, excluding China, will require $1 trillion annually in external financing to mitigate the impacts of climate change. Yet, how can this be delivered if, at the Copenhagen summit in 2009, rich countries failed to commit $100 billion to poor countries by 2020 for climate finance? Approximately $3 8 trillion in annual investment flows will be required by public and private organizations worldwide to achieve 'net-zero,' and only 16% of climate finance needs are currently being met. (BCG Research, 2022).

COVID-19 and other external shocks have weakened the ability of developing countries to finance the goal of carbon neutrality To make matters worse, vulnerable countries have faced losses of $525 billion in the past two decades due to climate change (V20, 2022). In these circumstances, there are pressures on the MDB system (multilateral development bank system) to prioritize large-scale investments in projects where global cooperation is required. (Center for Global Development Report, 2022). The latest G20 report concluded that MDBs are being prudent, preserving their AAA issuer ratings, which means that MDBs can lend a lot more without having to go through a capital increase of about ‘several hundreds of billions of dollars over the medium-term’ (Expert Panel on MDBs’ Capital Adequacy Frameworks, 2022). MDBs like the World Bank need organisational and operational changes to scale up mobilisation as well as incentivise countries to tackle challenges through climate-related investments (Center for Global Development, 2022).

Innovative financial instruments such as green bonds and sustainability-linked bonds are gaining popularity among institutional investors like insurance companies and pension funds. In particular, green bonds are being used to finance climate-related projects and the green bond industry is growing rapidly, with the market valued at $2 trillion as of 2022 However, within the realm of private finance, there are challenges; these include a lack of investable green projects, poor climate information infrastructure, and ineffective carbon pricing (IMF, 2022). Figure 1 showcases the disparity between the data disclosure by major corporations in emerging markets and advanced economies; Indonesia, India and Thailand are lagging on data disclosure, notably compared to other EMs, where the average ESG disclosure score is 40. Developing global sustainability standards through enhanced data disclosure requirements would allow investors to price in risk. As a result, this can create a viable, sustainable finance market, particularly in emerging markets (IMF, 2022). essential to unlocking the necessary capital. Several serious suggestions have been offered in the most recent report from an expert group on climate finance headed by economists Vera Songwe and Nicholas Stern, some of them which have been discussed in this article. We are nearing a humanitarian crisis and it is obvious that leaders around the world must collaborate immediately.

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The reduction in financing costs, which is a barrier to lowcarbon investment, can be done through concessional loans; these loans are offered generously at below-market rates. Africa, for example, needs cheap energy solutions to meet its development goals and according to the IEA, power generation capacity will need to increase ten-fold by 2065 to meet projected electricity demands with 7 out of the 10 most vulnerable countries subject to climate change lying in the African subcontinent. The concern of accumulating more public debt is a major concern when moving economies toward more green projects, especially in this era of rising interest rates. Oxfam research has revealed that loans are dominating over 70 per cent of provision ($48.6 billion) of public climate finance, adding to the debt crisis across developing countries. The South African Government is right to be concerned about the level of public debt from borrowing to finance the $8.5 trillion transition away from coal. These funds come from the United Kingdom, the European Union, the United States, France, and Germany through concessional loans, which make up 54% of the climate finance package However, less than 3% of the deal is of grants, and the remaining 43% comes from commercial loans and credit guarantees. Overall, there is a greater need for political collaboration between developing countries to form and deliver energy-transition plans, while developed countries should provide financial support, through concessional loans or cheaper solutions from the private sector.

Ultimately, to achieve a net-zero revolution, greater participation from MDBs, as well as more cooperation between developed and developing countries, would be

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