The SDG Knowledge Hub of the International Institute for Sustainable Development (IISD) provides the January update on global developments in climate finance.
January 2017 Climate Finance Update: Businesses Line Up for Low-Carbon Transition
During the month of January, global business leaders gathering in Davos and Abu Dhabi voiced their optimism regarding momentum achieved on climate financing. A number of companies and investors took steps to align their businesses with climate change, either through carbon pricing, carbon disclosure or asset decarbonization. The year also kicked off with positive news on the green bonds front, with France’s first issuance raising €7 billion.
In the Paris Agreement on climate change, countries agreed to make “finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development.” Developing countries will receive financial resources for both mitigation and adaptation actions, while developed countries are expected to continue leading in mobilizing climate finance from a variety of sources, with public funds playing a significant role in reaching the previously agreed USD$100 billion annual target by 2020. Monthly Climate Finance Updates published in the SDG Knowledge Hub aim to help track multilateral financing to support the finance goal agreed under the UNFCCC, which will in turn contribute to the implementation of Sustainable Development Goal (SDG) 13 (Take urgent action to combat climate change and its impacts). This Update covers news and developments from 19 December 2016 until 29 January 2017.
Business Leaders in Davos, Abu Dhabi Optimistic about Momentum in Climate Finance
Climate change was highlighted as “one of the truly existential risks to our world” at the Annual Meeting of the World Economic Forum (WEF) in Davos, Switzerland. Business and political leaders convening in Davos also identified sustainable business as a USD$12 trillion opportunity. They noted that businesses, investors and governments are already “making significant progress on solutions,” and “markets are recognizing that fossil fuels are a bad bet.”
The Abu Dhabi Sustainability Week included the seventh session of the International Renewable Energy Agency (IRENA) General Assembly, the second Abu Dhabi Global Action Day and the tenth World Future Energy Summit.
Key climate finance-related announcements at Davos included the launch of the Green Digital Finance Alliance, a partnership led by the UN Environment Programme (UNEP or UN Environment) among financial institutions using digital technology to advance green finance in lending, investment and insurance, and a fund sponsored by Norway that aims to raise US$400 million by 2030 in support of deforestation-free tropical agriculture investments. The fund, which was launched in partnership with the Global Environment Facility (GEF), UNEP, the Sustainable Trade Initiative (IDH), major food companies and environmental non-governmental organizations (NGOs), includes an initial commitment of up to USD$100 million from the Norwegian Government.
In Abu Dhabi, the United Arab Emirates (UAE), businesses and political leaders convened for the Abu Dhabi Sustainability Week, which included the seventh session of the International Renewable Energy Agency (IRENA) General Assembly, the second Abu Dhabi Global Action Day and the tenth World Future Energy Summit. Speaking at the Global Action Day, UNFCCC Executive Secretary Patricia Espinosa noted there is “solid appetite to transform our economic into low-carbon powerhouses,” and stressed that, moving forward, two priorities requiring concerted action are: translating the goals of the Paris Agreement into actionable strategies; and mobilizing finance and shifting global financial flows onto low-carbon pathways. During a panel discussion, business leaders stated that, inter alia: businesses no longer perceive the fight against climate change as a constraint; numerous banks and investors are already decarbonizing their portfolios; investors require stable, clear and long-term, regulatory frameworks; and a carbon price “at the appropriate level” will create significant incentives for integrating climate change into investment decisions.
Carbon Pricing and Markets in Headwind
Carbon pricing was highlighted at a high-level dialogue hosted in Zurich, Switzerland, by the Carbon Pricing Leadership Coalition (CPLC), which is led by the World Bank and the International Monetary Fund (IMF), as well as the Government of the Netherlands, in the run-up to the WEF meeting. During the dialogue: information technology company Infosys announced it would set an international carbon price of USD$10.50 per tonne of carbon dioxide (CO2); the Dutch Ministry of Infrastructure and the Environment committed €1.9 million to the Coalition; and the climate disclosure initiative CDP launched the Carbon Pricing Corridors initiative, which will be led by industries and will seek to define the carbon prices needed for industry to meet the Paris Agreement’s goals.
In other carbon pricing and market news, the African Development Bank (AfDB) announced that the Swedish consultancy CPMA International will develop a global Adaptation Benefit Mechanism (ABM) with support from the Bank and the Climate Investment Funds (CIF). Drawing from the Kyoto Protocol’s Clean Development Mechanism (CDM) and the payment for ecosystem services (PES) model, the ABM model will seek to make “adaptation solutions marketable and adaptation projects profitable.”
Also in January, the World Bank Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) held its third auction, allocating USD$13 million. The auction, which targeted reductions in nitrous oxide, included five projects, which, if redeemed, will reduce the equivalent of 6.2 million tons of CO2 emissions. The PAF model engages “private companies to compete against one another for scarce public climate funds to deliver the most emission reductions at the lowest cost.”
Redirecting Investments with Green Bonds, Platforms, Decarbonization, Innovative Projects
The year 2017 opened with positive news on the green bonds front, with France’s first ever issuance reaching €7 billion. This followed Poland’s issuance, in mid-December 2016, of its first green bonds, with a total sum of €750 million. According to the Climate Bonds Initiative, estimates for green bond issuance in 2017 range from USD$130 billion to nearly USD$200 billion, and eight other countries have indicated the possibility of sovereign issuance in 2017, including Sweden, Nigeria and Morocco.
In an attempt to “engage developing countries in the mainstreaming and mobilization of green finance,” the German Group of Twenty (G20) Presidency launched the GreenInvest platform, which will be developed and managed by UNEP. According to NAMA News, the platform seeks to ensure a voice for developing countries in the “evolution of green finance initiatives and practices across the global financial system.” The initiative will feed into the G20 Sustainability Working Group and will focus on the themes of: greening foreign direct investment (FDI); the role of financial technology in advancing green finance; and enabling developing countries’ participation in international cooperation in green finance.
In an effort to incorporate climate considerations into investment decisions, 13 major international asset owners and five asset managers with over £2 trillion under management launched the Transition Pathway Initiative (TPI), which will assess how companies are positioning themselves for low-carbon transition. The assessments are conducted through a public online tool, designed to support the requirements of the Task Force on Climate-Related Financial Disclosures (TCFD). In a preliminary assessment, the TPI found that 39 out of 40 companies assessed are “acknowledging climate change as a business issue” but only few are “at the level of strategic assessment.”
Aligning itself with the global efforts to decarbonize institutional assets, the US’ third largest pension fund New York State Common Retirement Fund, which holds USD$184.5 billion in assets, joined the Portfolio Decarbonization Coalition (PDC). Lance Pierce, CDP North America, noted “significant international collaboration among leading asset owners to push on climate issues.”
Innovation in transformative climate finance instruments will be supported by a project by the Global Innovation Lab for Climate Finance, which will support the analysis, development and preparation of three ideas, in preparation for potential piloting. The selected projects are: a fund for restoration and conservation of cloud forests in Latin America; a platform to drive private institutional equity into renewable energy projects in emerging markets; and a blended finance investment vehicle for companies managing climate risk.
Greening finance will also be the focus of a study by the European Bank for Reconstruction and Development (EBRD), which will assess the potential of developing a green financial system for Kazakhstan.
Institutional News: MBDs Report on 2016, GCF Calls for Inputs to Environmental Management System, CIF Moves on Gender Action Plan
With 2016 closing, a number of multilateral development banks (MDBs) took stock of their past year’s record in climate financing. The European Investment Bank (EIB) reported it had exceeded its target for the seventh consecutive year, providing more than €19 billion in support for climate change mitigation and adaptation, which represented 26% of the Bank’s total lending in 2016. The Inter-American Development Bank (IDB), reported it approved a total of USD$11.7 billion in 2016 for projects in Latin America and the Caribbean, with 12% of IDB-led sovereign guaranteed operations going to projects in the area of climate change.
At the Green Climate Fund (GCF), the Fund’s recently-appointed Executive Director Howard Bamsey started in his office in the beginning of 2017. Three days prior to the change in the US administration, on 17 January, the US State Department announced it had provided an USD$500 million grant to support the GCF, bringing the total US contribution to US$1 billion out of its US$3 billion pledge.
The GCF also issued a call for public inputs for the development of its environmental and social management system (ESMS), which will aim to improve “environmental and social outcomes while addressing any unintended adverse impacts in all the GCF-financed activities.” The deadline for submissions is 24 February 2017.
The CIF announced it is moving to Phase 2 of its Gender Action Plan, which will emphasize outcomes under a transformational goal titled ‘Women’s improved asset position, voice, and livelihoods status through access to benefits from CIF-funded investments.’
In Project Financing, Agricultural Sector Receives Attention
In late December 2016 and January 2017, MDBs and other development funds announced funding and reported on lessons learned in climate change mitigation and adaptation projects in the agricultural, industrial and transport sectors.
Burkina Faso will receive a US$4 million loan from the AfDB and CIF for supporting a sustainable cashew market in the country while sequestering carbon in cashew tree plantations and reducing deforestation. In Benin, a GEF-supported investment fund forged a partnership with a local cashew processing company, with the aim of developing “a world leader in the production of sustainable and ethical cashews.”
In Georgia, a €73,000 grant, provided by EBRD and the GEF, will fund the construction of a CO2 recovery plant for a local brewery as part of a €18.5 million syndicated loan.
A loan provided by the Nordic Environment Finance Corporation (amount undisclosed) to the Danish company Rus Agro Team will support the modernization of the company’s operations in the Russian region of Kaliningrad, with an expected CO2 reduction of 704 tonnes, among other environmental benefits.
Adaptation and resilience
Belgium committed €14 million to support the capacity of the Food and Agricultural Organization of the UN’s (FAO) and its member countries, including Mali, Haiti and Iraq, to “respond immediately to disasters and crises, and to strengthen the long-term resilience of vulnerable farmers and herders.”
Sudan will received a USD$13.3 million grant from the International Fund for Agricultural Development (IFAD) that will support the continuation of a project initiated in 2008 that supports the goals of food security, drought resilience and poverty reduction through governance reforms and infrastructure. IFAD also reported on ongoing discussions with Mozambique and Malawi where the Fund is supporting sustainable agricultural livelihoods projects.
Sri Lanka will receive a USD$125 million loan from the World Bank for modernizing its agricultural sector and making it more environmentally sustainable and resilient to climate change.
In Benin and Togo, AfDB will provide a USD$40.8 million loan for the upgrading of a road linking the two countries’ capitals, which is estimated bring benefits to 1.7 million people living in the area by easing traffic congestion and strengthening climate resilience of the road infrastructure.
Lessons from multilaterally-funded projects
A Nordic Development Fund (NDF) -funded project supporting climate resilience and gender equality through integrated watershed management in Nepal has ensured active involvement of women and is “laying the foundations for more equal participation of women in making local development decisions that will enhance the resilience of mountain communities to the long term impacts of climate change.”
The AfDB’s Development Effectiveness Review on Agriculture for 2016, which rates 97% of the Bank’s agriculture projects as ‘satisfactory,’ stresses that “agricultural development must be reoriented to factor in climate change” in Africa, noting that 65% of the region’s arable land is degraded, and moisture and fertility losses in soils are worsening.
January Resources and Reading List
Recommended climate finance-related reading and audiovisual resources from the month of December 2016 and January 2017 include:
- A CIF report titled ‘Climate Adaptation in Developing Countries: Landscape, Lessons Learned and Future Opportunities,’ which explores ways for development finance institutions to support companies in making their assets and operations more climate resilient and closing the “financing gap.”
- The Global Facility for Disaster Reduction and Recovery’s (GFDRR) annual report, according to which, in 2016, the Facility supported 70 countries in disaster risk management initiatives through a total funding of USD$240 million.
- A presentation by the World Bank on ‘Making Climate Finance Work in Agriculture,’ which inter alia, highlights a financing gap for adaptation in agriculture in Africa of USD$20-40 billion per year through 2030 and identifies ways to leverage financing.
- An updated ‘Projects’ section on the GCF website, which includes descriptions for projects approved by the GCF Board in December 2016, and the December 2016 edition of the GCF Dispatch newsletter. [GCF Projects Webpage] [GCF Dispatch – December 2016]
- A CIF Talk video, featuring CIF Program Manager Mafalda Duarte’s pitch on the role of climate finance in: incentivizing policy and regulation changes; enabling technology deployment in developing countries; and addressing technology-related risks.