How will 'climate finance' help tackle climate change?

• Can you explain what ‘climate finance’ means for the uninitiated?

Climate change is a global threat and perhaps the most challenging issue faced by countries all around the world. It induces not only economic and social costs but sometimes an unbearable cost on peoples' lives - for example just in the last few months we have seen several “once-in-a-century” floods occurring in Germany and China.

The severity and the urgency of these issues require countries, particularly developing countries, to shift away from fossil fuels and invest heavily in “green” infrastructures in the next decades. Such shifting is expensive; hence we need “climate finance”, which refers to the financing of projects specifically related to climate change, and the allocation of adequate financial resources to mitigate climate risks and reduce the impact of a changing climate.

• Where does the money come from?

A large number of climate-related projects are financed by the public sector. For example, the UK government established a committee, the International Climate Finance (ICF), to support developing countries in their response to the challenges and opportunities of climate change.

In addition, the private sector also plays an important role in financing low-emissions and climate-resilient projects. This is partly driven by policy interventions, and also because investors have been raising awareness of climate-related issues as well as the potential losses induced by climate risks.

• Are certain countries leading the way?

Developed countries, because of their historical emission of carbon dioxide, bear greater responsibilities in leading climate-related actions from a “climate justice” perspective. Also, they have significantly greater financial resources, instruments and channels, in other words capabilities, to address climate-related issues.

Based on the Paris Agreement, developed countries pledged to mobilize 100 billion USD annually in climate finance to support the need for developing countries.

The UK has a great opportunity to show leadership by hosting COP26. COP is important to assess the progress in addressing climate change and plan subsequent actions. COP26 could be particularly important because it is the first COP since the pandemic – and many governments are making plans on how to rebuild the economy in a post-pandemic era.

The UK’s leadership is largely dependent upon whether it can orchestrate related parties to come up with actionable plans and whether the UK itself is ready to make adequate climate-related investment. Increasingly, large emerging economies are showing their willingness to support climate-related projects, and so for a number of reasons including but not limited to, addressing their own environmental concerns.

For instance, China has invested heavily in renewable energy such as solar and wind power in recent years, and has pledged to stop financing coal energy plants abroad, potentially directing capital to renewable energy projects.

• Is there a danger that private finance/big business sees it as an easy way of greenwashing?

Greenwashing is a legitimate concern. There is large and alarming evidence to suggest that a number of so-called “sustainability funds” did not direct their capital into sustainable or climate-related projects, and misled asset owners who prefer green investment opportunities.

Greenwashing behaviours such as selective disclosures and symbolic actions are not only ethically and legally questionable but more importantly detrimental to investors’ confidence in green investment, causing long-term harm in addressing the climate crisis, a threat extending far beyond the financial sector.

Policymakers and regulators have been enhancing regulatory scrutiny. The EU, last year, issued new laws against greenwashing. The taxonomy regulation provides a classification system to label sustainable investment projects. Such moves are applaudable, but more efforts are certainly needed in addressing fraudulent and deceptive environmental claims.

• Can you highlight a few key examples of where climate finance can make a tangible difference?

There are many examples in the UK or elsewhere around the world. The Department of International Development (DFID) funded the BRACED (Building Resilience and Adaption to Climate Extremes and Disasters) project, which aims to help people in South and Southeast Asia and Africa to improve climate resilience and encourage climate adaptation.

A recently released report suggests that some BRACED investments in Kenya are making extraordinary progress in terms of addressing clean water issues and livestock disease outbreaks, which had been worsening due to the changing climate.

Another example is Ci-Dev (Carbon Initiative for Development) funded by the World Bank. It mobilises private finance to address clean energy issues in low-income countries. By 2025, it aims to mobilise 250 million USD in private finance to help 10 million people.

In Ethiopia alone, the World Bank project is helping to distribute 2.8 million solar lanterns and more than 200,000 solar home systems to households that are not connected to the electrical grid. Such investments have also been made in countries such as Laos, Kenya and Mali, marking the importance of climate finance in making a material difference.

Indeed, here at the University of Nottingham, we are committed to carrying out cutting-edge climate finance research that yields important practical solutions to climate-related challenges. For example, we are currently developing an international collaborative project with academic and industry partners to create a climate-risk indicators platform that focuses primarily on small and medium enterprises (SMEs).

We are developing this platform because many SMEs are facing tremendous challenges in assessing climate-induced physical and transition risks, which, given their novelty, are difficult to measure using conventional means. Our platform will allow these firms to self-assess and mitigate these risks. This will further help them to develop successful adaptation strategies.