CLIMATE FINANCE: REALITIES AND PROPECTS
For several years and in particular since the 2015 Paris Agreements within the framework of COP21, we have been talking more and more about Climate Finance / Green Finance. Since then, regional initiatives and programs have been put in place to support its development on a global scale.
So where are we today and what are the prospects for Climate Finance?
1. What is Climate Finance?
According to the United Nations Framework Convention on Climate Change (UNFCCC), Climate Finance refers to any local, national or transnational financing, regardless of its public, private or alternative source, which aims to support mitigation or adaptation to combat climate change.
In other words, Climate Finance is a financial activity whose objective is to support the fight against climate change that is harmful to the Earth and People. This is done through the financing of two main types of actions or projects:
- Actions that reduce the negative effects of activities of all types on the climate – mitigation actions (for example: producing with less energy consumption allowing the quantity of greenhouse gases emitted to be reduced)
- Actions that make it possible to change our ways of life and production preserving the Climate – adaptation actions (for example: use of solar energy in the production of electrical energy or to heat water)
Note the importance of developing a precise, common and broad taxonomy relating to Climate Finance to strengthen the confidence of investors and the various stakeholders in this finance. In this regard, we can mention the taxonomy established by the European Union for Sustainable Finance adopted in June 2020.
Taxonomies are classification systems for sustainable finance. They aim to be more exhaustive and to have a systemic approach, compared to simple definitions of sustainable financial products. From simple definitions to more comprehensive systems of taxonomies, defining what sustainable finance is can bring economic benefits. These include improving market transparency. More precise and consistent definitions of “green” and “sustainable” finance can facilitate investment by giving investors more confidence and certainty. In addition, these definitions can make it easier to measure sustainable financial flows, so as to monitor their evolution, or to implement economic policy instruments supporting an increase in these flows. (source OECD: Building definitions and taxonomies of sustainable finance)
2. The challenges and objectives of Climate Finance
Climate Finance has developed to better mobilize and direct financial resources at all levels towards actions and investments that preserve the climate against harmful, even destructive changes. This supports the achievement of the Paris Agreement target of limiting the average temperature increase to 1.5°C in the 21st century, compared to the pre-revolution industrial period.
The main challenge of Climate Finance is to redirect a large part of financial resources towards the financing of investments that preserve our environment and our climate against harmful and irreversible change. This will ultimately lead to a reduction in the emission of greenhouse gases and a reduction in carbon intensity.
3. Efficient collaboration between different stakeholders
The development of Climate Finance requires both collective and global awareness and mobilization of the various parties concerned of all kinds. It goes without saying that this requires the commitment of public authorities and regulators to prioritize the protection of the environment and the climate.
However, public financial resources are insufficient to reverse the trend. Thus, it is essential to also mobilize the private sector and its financial resources to direct them towards all that mitigates the risks on the environment and preserves it. Finally, civil societies and people also play an important role in pushing both public and private operators towards this path, while imposing this on them through a change in behavior in terms of consumption patterns (consuming Bio– using green means of transport – …).
4. Mobilization of financial resources
Keeping the increase in average temperature below 1.5°C requires a lot of investment in mitigation and adaptation, the realization of which requires very significant public and private financial resources. However, green investments are still low today. Indeed and according to a recent study published by Novethic in November 2021, entitled “the limits of green funds in Europe”, the share of green investments represents only 1.3% of total assets as of June 30, 2021, with an amount of 202 billion euros.
In addition, several initiatives and mechanisms to direct more financial funds towards green investments have been developed at the regional level, including in particular:
- Green Climate Fund 
This fund was created in 2010 as part of the Cancun agreements in Mexico (COP 17). It is a financial vehicle dedicated to developing countries in the global climate approach, as a financial mechanism for the implementation of the United Nations Framework Convention on Climate Change and the Paris Agreements. Since its inception, this fund has been able to raise approximately USD 10 billion to date.
- Green – sustainable Bonds
For the mobilization of many resources for Climate Finance, it was appropriate to mobilize the financial partners for this activity. It is with this objective that several parties have worked on the development of bond issue manuals/guides in relation to Climate Finance:
o Green Bonds
o Social Bonds
o Sustainable (Green & Social) Bonds
This has enabled the mobilization of significant resources for Climate Finance via the financial markets. Thus, the global green bond market has grown strongly since its inception in 2007. Over the period 2014-2020, there were 6,984 green bond issues (deals) for a total amount of USD 945 billion .
The United Nations Environment Program Finance Initiative (UNEP FI) is a partnership between UNEP and the global financial sector for the mobilization of the private financial sector in sustainable development.
UNEP FI works with over 450 banks, insurance companies and investors to develop a financial sector with a positive impact for people and the planet.
UNEP FI has enabled alone or in collaboration with other institutions and programs to establish frameworks for a positive and significant contribution of the financial sector in the sustainable development of economies. Examples include the following frameworks:
The Principles of Responsible Banking: Launched with over 130 banks collectively holding USD 47 trillion in assets, a third of the global banking industry.
The principles of sustainable insurance: established in 2012 by UNEP FI and applied today by a quarter of global insurers.
The principles of responsible investment: established in 2006 by UNEP FI and the United Nations Global Compact, applied today by half of the institutional investors in the world (USD 83,000 billion).
5. Regulatory and prudential framework
To direct more and more financial resources towards financing projects that preserve the environment and limit negative climate change, it is absolutely important to enact laws and regulations that both encourage and penalize financial institutions by in relation to the subject of climate change.
These regulations are also of a protective nature for financial institutions against the financial risks induced by climate change. It is in this sense that several financial sector regulatory and supervisory institutions and bodies have created the Network of Central Banks and Supervisors for Greening the Financial System – NGFS.
This network was created in 2017 by 8 central banks and supervisors during the “One Planet” summit that took place in Paris. Since then, the number of members of this network has evolved to stand today at 105 members and 16 observers.
The objective of this network is to contribute to strengthening the global response required to achieve the objectives of the Paris Agreement and to strengthen the role of the financial system to manage risks and mobilize capital for green and low-emission investments. of carbon in the broader context of environmentally sustainable development. To this end, the Network defines and promotes best practices to be implemented within and outside NGFS members and conducts or commissions analytical work on green finance. Through its 5 working groups, NGFS has developed several reference documents for the development of Climate Finance.
6. Climate Finance in Africa
In its latest report “The Finance in Africa”, the European Investment Bank dedicated an entire chapter to Green Finance in Africa. We discuss below the main elements developed in this EIB report:
The African Climate Policy Center has calculated that a 1°C rise in global temperatures would lead to a 2% contraction in Africa’s gross domestic product.
The green bond market in Africa remains small compared to other regions. Africa represents only about 0.2% of the global green bond market.
African banks are making green investments, although these still represent a small share of their portfolios. African banks consider the low demand for green finance and the lack of technical capacity of their staff to be the main constraints to investing in this sector.
Although microfinance institutions represent lower volumes of green financing than banks, they contribute to meeting market needs in terms of financing green investments
Private Equity can support investments ranging from large infrastructure projects to high growth start-ups, although in practice infrastructure absorbs the largest volumes. Green investments in 2020 alone totaled at least $450 million, or 12% of total private capital invested in Africa.
Several African countries are implementing initiatives to promote Green Finance. Central banks are generally the main policy makers and implementers of the financial sector, including in the area of Green Finance.
The GCF has a particular focus on Africa. As of March 2021, it has committed about $3.1 billion (37%) of its total portfolio to projects in African countries.
Active greening of the financial sector is already underway in Africa. However, the green finance sector in Africa is still relatively underdeveloped
In summary, Climate Finance is taking better and better shape and is developing from one year to the next despite all the obstacles and hesitations it encounters at all levels. Overall, its genesis was essentially at the end of the Paris Agreements within the framework of COP21.
As a Consulting, Technical Assistance and Training firm, AMEF Consulting has developed its expertise and its offer in the field of Green Finance through several missions of studies, Consulting, Technical Assistance or Training carried out since 2015. We continue to capitalize on our experience in this area and to offer our clients our support services for the development of their Climate Finance activity, both for the good of their Clients and for their own sustainable and profitable development. .