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What’s the bang for 100 billion bucks? Climate finance needs to be based on science

Posted by Tom Delay | 29 April 2016 | Viewpoint
Climate finance

You can do a lot with $100 billion a year. You may even be able to solve the challenge of climate change. At least this is the ambition behind the Green Climate Fund, the banner under which vast sums of public and private sector capital will be brought together to support green growth in developing countries, build low carbon infrastructure and support the most vulnerable countries to cope with the impacts of climate change.

 

This money has been pledged in good faith and will be delivered through strong and credible channels. It will be hugely important if we are to have any hope of following through with the commitments put on paper in the Paris Agreement. However, as it stands it won’t deliver - other than by sheer chance - the scale or pace of carbon emission reductions that the science tells us will be required.

In many ways this makes the Green Climate Fund a lot like the Paris Agreement itself, where the combined outcome from each country’s intended contributions will get us nowhere near the pathway to maintain warming below 2 degrees. This is worrying because one of the best ways to address that shortfall in ambition will be to make sure that projects delivered through climate finance have the biggest impact possible.

We have already seen plenty of examples that show that “green” investment doesn’t necessarily provide any reduction in carbon emissions. Past evidence shows that even when there is a positive effect, the amount of carbon saved per dollar invested is often low. And, there is currently no single body with overall responsibility for quantifying the impact of all these projects and sector initiatives, reconciling them with science-based outcomes.

It is important to ask whether being better than business-as-usual is going to be good enough. If you finance a modern coal-fired power plant that is more efficient than the one it replaces, but still emits far more carbon emissions that one using gas, should that be considered climate finance? Does building a new gas-fired power plant displace investment in renewable power, locking-in additional carbon emissions for years to come?

Far too often it is a matter of snap judgement and expediency. When the pressure is on to conclude investments, light green may be good enough. Investors have principles, guidance and rules aplenty, but nothing to guarantee that climate finance delivers environmental aims and provides value for money.

So is there a way of ensuring that $100 billion a year is focused on investments that, in aggregate, will build a low carbon future?

This is an occasion where development banks and investors might be able to take the lead from the corporate sector. Almost 150 big businesses – including Ikea, Unilever, Axa, Toyota and BT – are now committed to science-based sustainability targets based on a 2 degree trajectory. This allows them to take a long term view, ensuring that their contribution to a low carbon future is both meaningful and aligned with the science of climate change.

There has been a lot of methodological groundwork done to help businesses in different sectors to set targets and meaningful metrics for progress. Taking the best available science, companies consider the contribution that their sector can make in reducing carbon emissions and develop targets in line with this.

A similar approach can readily be adapted to the needs of climate finance. Where corporates consider long term global outcomes, development banks and investors with an investment horizon and geographic focus would align their aims to country INDCs, knowing that over time these will converge on internationally agreed outcomes from the UNFCCC process.

But taking a lead from the corporate sector won’t be enough. The awkward reality is that most development finance looks to deliver a threshold financial return alongside social, economic and environmental benefits. It is therefore no surprise that climate change impacts are vaguely defined as part of the mix. If we want climate finance to deliver carbon emission reductions we need that to be its primary purpose, challenging though that may be.

Paris brought together the nations of the world in a common cause and secured the resource necessary to address climate change. Aligning climate finance to science-based targets will both increase the chance of success and reduce the cost of delivering it.

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