Climate finance: Economic recovery and transformation

15 May 2022

Climate finance: Economic recovery and transformation

15 May 2022

By Dennis Mombauer Due to the impacts of the Covid-19 pandemic and other global risks, countries are vulnerable to financial and economic difficulties. In this context, the ongoing climate emergency adds additional pressure on economies and societies across the globe, including Sri Lanka. In 2015, the Paris Agreement was adopted as a legally binding treaty under the United Nations Framework Convention on Climate Change (UNFCCC) to address this challenge by scaling up climate action and keeping global warming, the primary cause of climate change, well below 2°C (and ideally 1.5°C) above pre-industrial levels. To achieve this goal as well as to adapt to the climatic changes that are already taking place, countries need significant amounts of resources, including finance and technical support. While the exact needs are highly context-specific, climate finance is a crucial component to enable and catalyse climate action in developing countries such as Sri Lanka and can unlock co-benefits in terms of rendering the economy more resilient and sustainable. The basics of climate finance Climate finance is funding to support climate action in some form, be it climate change mitigation (the reduction of greenhouse gas emissions) or adaptation and resilience-building. It can be local, national, or transnational and come from public, private, bilateral, multilateral, or alternative sources (such as export credits or debt-for-climate swaps), encompassing a broad range of instruments and delivery channels. Under the Paris Agreement, developed countries have agreed to mobilise a total of $ 100 billion of climate finance per year from 2020 onward, which will be channelled to support climate action in developing countries. This $ 100 billion commitment constitutes a floor and is expected to further increase through a new collective finance goal for the years beyond 2025. However, the real costs for developing countries to adapt to climate impacts are estimated to be far higher than $ 100 billion, and even this target has not yet been reached, with developed countries struggling to jointly mobilise the required resources. Furthermore, as there is no universally agreed-upon definition of climate finance, there is also a danger of double-counting other kinds of finance, making it essential to ensure transparency, accountability, and evidence-based processes. Several dedicated funds have been established for the distribution of climate finance, including the Green Climate Fund, the Special Climate Change Fund, the Least Developed Countries Fund, and the Adaptation Fund. In addition to these specialised funds, other main delivery channels for climate finance from developed countries include bilateral agreements between donor and recipient countries as well as multilateral development banks, such as the World Bank or the Asian Development Bank. Furthermore, there are other financial instruments that can serve to distribute climate finance, such as green and catastrophe bonds, weather derivatives, insurance schemes, or premium and capital support commitments. Accessing climate finance for adaptation and resilience-building So far, the majority of climate finance around the world has been mobilised for mitigation actions, such as renewable energy or green infrastructure. According to an OECD analysis of climate finance flows, only one-fifth of funding provided by developed countries has gone to adaptation in 2019, with another 8.7% for cross-cutting interventions. According to the UNEP 2021 Adaptation Gap Report, the estimated costs for adaptation measures in developing countries are up to 10 times greater than the current flows of adaptation finance from public sources. This highlights the need to increase adaptation finance – as well as climate finance in general – and use available public funding to leverage private investment and funding from other sources. Investment in adaptation is on the rise, and there is significant potential to tap into additional funding sources for adaptation and resilience-building. If climate finance can be accessed for such interventions, it can offer a range of co-benefits and synergies with development funding and an economic transition. In many ways, supporting economies and climate-proofing businesses and livelihoods will enhance their risk management and resilience in general, allowing them to better withstand climate as well as non-climate-related shocks and impacts. For developing countries like Sri Lanka, it is therefore especially important to access climate finance from various sources and leverage it to build a more resilient and sustainable economic system that is fit for the challenges of today and the future. Key steps to achieve this objective include conducting climate risk assessments and mainstreaming climate resilience into all policy, planning, and implementation processes on the national and local levels. If projects and programmes align with climate action and a just transition towards a green, resilient, sustainable, and ethical economy, they can provide entry points to access climate funding from bilateral, multilateral, or private sources. Climate action and resilience-building Resources are needed to rebuild economies and recover from large-scale impacts such as the Covid-19 pandemic, global supply chain issues, shortages, and other difficulties. However, as every economic situation today takes place in the context of a climate emergency, economic recovery can be turned into an economic transition, following the principles of ‘building back better’ and ‘leaving no one behind’. A business that uses fewer resources, has a smaller footprint, is more efficient, and has developed a comprehensive risk management framework is not only less vulnerable to climate change, but it can also adapt much more swiftly to changing economic circumstances and survive shocks such as disaster events, economic crises, or the Covid-19 pandemic. Multi-actor engagement, awareness creation, capacity-building, skills development, data and technology, identifying and scaling up priority sectors, and developing concrete actions as well as monitoring, evaluation, and reporting systems are all important requirements to access climate finance. From scoping exercises to proposal writing and project design, it can be a long road to receiving money from one of the major funds, but there are alternative sources of funding available as well. Development institutions, private companies, philanthropies, scientific institutions, and many other entities can provide climate finance across different scales to support climate action and resilience-building and potentially even address issues of loss and damage, which means those climate impacts that cannot be averted and are beyond the (hard or soft) limits of adaptation. In some cases, it could be possible to connect climate finance to development finance, disaster risk financing, funding for the ecosystem- or nature-based interventions, or humanitarian funding; in other cases, climate finance could be used to scale up components of existing projects or replicate resilient systems in a different area or sector. In particular, climate action can serve to support the transition of key sectors such as energy, transport, waste management, or industry, and risk-proof sectors that are highly vulnerable to climate impacts and other shocks, such as food systems, ecosystem services, the coastal and marine sector, or tourism. Furthermore, entrepreneurship and start-up ecosystems can pivot towards being climate-smart and climate-friendly, incorporating elements of climate action and resilience into their founding principles, operations, products, and services. Climate finance and technical support are necessary to scale up climate action and resilience-building across all economic sectors. While mitigation is of high importance, adaptation funding also provides many opportunities to identify and harness co-benefits for a resilient and risk-aware economic recovery, growth, and sustainable development. (The writer works as Director – Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular writer for several international and local media outlets.)

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Climate finance: Economic recovery and transformation

Climate finance: Economic recovery and transformation

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