The United Nations Framework Convention on Climate Change Conference of Parties (COP27) that began a few days ago will allow the world to review and report on progress on responses to climate change. This meeting hosted by Egypt, provides an opportunity to set out plans for the future and is being hailed as an African COP, one where the concerns of the developing world and the African region, in particular, can take center stage.
In this COP, like those that came before, the world will witness the friction between calls for carbon-intensive lifestyles of North America and Europe to remain unchanged, while at the same time getting urgent action on crises.
Within the last five years, the global private sector and in particular large financial institutions, have touted their leadership skills and size as important assets in the fight against climate change. Unfortunately, private sector leaders have mainly gone for razzmatazz over substance, and this has led to growing mistrust and disillusionment.
Many finance players do not act with ethics and societal betterment in mind. There have been investors that as a result of either path dependency or predatory delay double down on investing in fossil fuels. And, as has been the case in recent months, some investment companies and oil and gas companies have opted to reap short-term rewards from the Russian war on Ukraine.
As is too often the case, financial sector dysfunction hits the developing world hardest. In a recent report by the Climate Policy Initiative suggests that in developing nations only 1% of all estimated climate finance needs are provided from commercial sources.
Mainstream finance allows market players to bet on and profit from activities that result in unfavorable conditions for life itself. Civil society plays an important role in changing norms and values in giving corporations the social license to operate.
Physical conditions for billions are already affected by climate change, and even from a nuts-and-bolts commercial standpoint that begins to eat away at addressable markets and customer base. The heatwaves, wildfires and storms have already increased operational costs and rendered some losses uninsurable.
Acting together with solidarity, we can make investing in countries and firms that generate negative externalities for the planet increasingly untenable.
The future focused agenda called for here is one that addresses the grim reality facing countries in the global South, where scarcity of finance for all infrastructure projects is the reality.
Sustainable investments change the calculus for how society is organized. We set out why this is important, report on successful examples making progress and showcase a promising initiative that although it has only just begun promises to deliver demonstrable impact.
Progress on 2030 goals
The international community set 2030 as a target for sustainable human development goals (SDGs) and climate change response goals. Developing countries have resolutely called for advanced countries to acknowledge the disproportionate contribution of their economic systems and lifestyles to cumulative carbon emissions and to match that with assistance in financial capital and technical support.
Climate finance to date has predominantly been debt financing with inadequate focus on hybrid and blended forms of financial capital.
Continuing with existing systems makes this worse not better and also tears away at the fabric of society giving rise to epidemic levels of depression, anxiety, and hopelessness. The voices of billions must loudly send a message that finance, business, governments, academics, technologists and communities must come together.
The world can make progress by using innovative financing and bold policies.
Financial actors, especially banks and non-banking financial institutions that are proximate to large pools of capital have a critical role to play in responding to the climate catastrophe by changing the basis of their investing decisions. If they continue to focus only on profits without pricing in environmental and social risks, capital allocation decisions will continue to be misguided.
Remarkably, it is possible for finance to be forward-looking and innovative. The examples of Triodos, Generation Investment Partners, CAMCO, CDC/ British International Investment operating at different scales, moving dollars towards financing renewable energy, decarbonization and sustainable infrastructure and initiatives in agriculture, waste management, coastal zone management, green transportation systems and buildings are very encouraging.
These firms give priority to sustainability, green and regenerative projects and offer models for project selection and pricing.
Sovereign Wealth Funds (SWF) and pension funds can also provide patient capital that is explicitly focused on systems change– the Norwegian SWF being the most famous example of this genre of investing. Making investments in ventures and initiatives that are shifting production, consumption and the built environment sets up the conditions for changed attitudes and norms.
By being bold and intentional, SWFs can change target rates of returns across the entire financial landscape. These facilities can play an activator role as the anchor issuer in investment funds and crowd in other capital from commercial and public sources. This is de-risking through shifting of perceptions about what is important for society.
There are multi stakeholder and multilateral member state coalitions working together on important forward-looking initiatives. For example,
- The High Ambition Coalition for Nature and People (HAC) – at COP27, HAC with agreement from more than 100 countries, is advocating for the protection of 30% of the planet’s land and oceans by 2030.
- The Alliance of Small Island States, or AOSIS, represents the interests of 39 small islands and low-lying coastal developing states. At COP27, AOSIS will be intensifying their calls for ‘Polluters to Pay’ for their contribution to the climate crisis. While garnering support and attention to their Loss and Damage Finance Facility.
- The IMF has designed and is implementing a Resilience and Sustainability Trust which has already began to disburse finance with Barbados being among the first beneficiaries.
- And the US is back with a bang! Under the Biden-Harris administration, the machinery of the entire US government has been mobilized – the White House, federal government including several Departments (Energy, Treasury, Transportation, Commerce, Interior) and specialist agencies with high level direction coming from special Cabinet level appointees. The USG has pursued an ambitious legislative and policy agenda– The Inflation Reduction Act and the Infrastructure Act – that together mobilized billions of dollars for clean energy generation and adoption by households and businesses, decarbonization of transportation systems, and funding of climate-tech startups. Of significance, this government’s climate policy and strategy development has included issues of diversity, justice and gender equality as core features rather than afterthoughts. The anti-intellectualism and outright climate denialism of the Trump years is gone and with a re-emergence of industrial policy, the government has been using every tool at its disposal.
There is still work to be done as the United States has also been as insistent as any of its Quad partners in resisting calls for reparations for historic “loss and damage” despite being the leader in cumulative emissions.
Showcasing: The Bahamas
Resilience Capital Ventures is using its Triple B Framework that centers around the role of reimagined blended finance architectures to guide the sustainable investment strategies of The Bahamas, a sovereign Caribbean nation, characterized as a small island large Ocean state.
We are only just beginning on a multi year program of work (The Bahamas Sustainable Investment Program) that will produce a coherent national strategy, transformed institutional landscape and financial facilities that respond to the climate catastrophe. Our approach challenges the notion that developing countries should have less access to and pay a higher price for financial capital because of an increase in systemic risk that they did not cause on their own.
We will be working with the government of The Bahamas to engage global financial capital markets on their own terms, but with a keen eye on securing sovereign strategic interests. The approach utilizes smart partnerships and recognizes the power and reach of commercial finance as well as the distinctive role of development finance and philanthropic dollars.
All financial players that are prepared to do the heavy lifting of defining actual risks and pricing securities accordingly are welcome as partners. The target size of the Bahamas Sustainable Investment Facility will be set in a range large enough to whet the appetite of impact investors, DFIs and commercial institutions.
This work program provides an opportunity to implement the best ideas regarding Nature Based Financing and Blue Carbon. The Bahamas is an archipelago consisting of some 700 islands; this presents a unique opportunity to monetize Blue Carbon. The country is blessed with what is estimated to be the largest seagrass meadows in the world, reported to be “as large as 35,521 square miles – double the size of a seagrass ecosystem off the coast of Australia that was previously thought to be the world’s largest.
The new find expands the known seagrass coverage globally by about 41 percent, per the study.” The science underlying Blue Carbon is very compelling and notes that seagrass meadows are a particularly effective means of carbon sequestration. Seagrasses are among a type of marine habitats that contribute to carbon burial and also play other useful roles such as dissipating wave energy and raising the sea floor to counteract the effects of rising sea levels.
The policy, legislative and regulatory apparatus has been advanced with the passage of the Carbon Credit Trading Act 2022, and the Climate Change and Carbon Markets Initiative Act 2022. The national framework to price, trade and use proceeds from natural assets includes the setting up of a joint venture management company between the government and local financial service companies and benefit sharing arrangements with NGOs.
Under the sustainable investment program, Blue Carbon, energy system financing, adaptation projects and insurance linked facilities for natural hazards, among other priorities will be brought to global and regional investors in market-ready investment vehicles. What is also important to stress, is that lessons learned from not doing investment as an enclave strategy will mean that this is done in a manner that rewards and respects the local communities that have stewarded these assets while providing financial returns for financiers.
In this all hands on deck approach to change, there is a role for market based initiatives such as voluntary carbon credits and carbon offsets. These will be implemented with robust regulatory systems and transparency so that they deliver social benefits.
Blended finance architectures in our view are best suited for responding to climate change as these facilities are well designed to provide more than cash and that is what is needed at the inflection point of a change of paradigm.
Moving forward and making genuine progress on responding to climate emergencies will require more than techniques and individual actors operating in silos. It calls for finance-plus strategies that build economic and financial ecosystems and tackle pernicious problems.
Dr. Gillian Marcelle is the chief executive officer of Resilience Capital Ventures.