By Mette Frederiksen and Mia Amor Mottley
NEW YORK – Around the world, we are witnessing the devastating effects of changing temperatures. Droughts, floods, and sweltering heat are taking lives, eroding hard-earned socioeconomic gains, and leaving countries’ future hanging in the balance. Worse, those who have contributed the least to the climate crisis are being hit the hardest.
For all countries, the tasks are clear: they must strengthen their green ambitions to limit global warming and build resilience against mounting climate-related hazards. But that will require mobilizing finance on a massive scale.
At last year’s United Nations Climate Change Conference in Dubai (COP28), governments committed to “transitioning away from fossil fuels in energy systems, in a just, orderly, and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050.” Looking at this month’s UN Summit of the Future and ahead to COP29 in November, the need to reform the global financial architecture and set an ambitious new goal for international climate finance has become even clearer. Both are essential to deliver on the key tasks of climate mitigation and climate adaptation.
We know that it is possible to shift from fossil energy to renewables at the necessary speed and scale. Three decades ago, Denmark was heavily reliant on oil and gas. Yet renewables now account for 90% of its electricity consumption, and are estimated to account for 110% in 2030. At the same time, Denmark’s booming wind industry has driven a jobs transition, creating a more sustainable and greener labor market.
Given these benefits, the global climate financing gap should be seen as an opportunity. Emerging-market and developing economies (EMDEs), excluding China, will need an estimated $2.4 trillion annually by 2030 for climate- and nature-related investments, which could drive climate-positive growth, help countries manage the effects of climate change, create decent jobs, expand capital markets, and strengthen resilience – all at the same time.
The good news is that many EMDEs are home to some of the best climate-related investment opportunities. Moreover, technology tipping points are increasingly making low-carbon, nature-positive, equitable solutions commercially attractive.
The bad news is that annual investments in clean energy in EMDEs (excluding China) need to increase seven-fold by 2030 to align with the Paris climate agreement. While Africa boasts 60% of the best solar resources globally, it hosts only 1% of installed solar PV capacity. And the figures are even worse when it comes to adaptation. Between 2016 and 2021, only 9% of the private climate finance mobilized across developing countries went toward adaptation. To say that we are not doing enough is putting it mildly.
What will it take for COP29 to deliver on climate finance? The Bridgetown Initiative outlines ways to finance not just climate action but also the rest of the UN Sustainable Development Goals. Launched by Barbados in 2022, the Bridgetown Initiative has been supported since its inception by a growing number of partners from the public, private, and third sectors. Looking ahead, we must dramatically increase the availability of, and access to, tools that have proven effective in unlocking the necessary investment.
For example, using public funds to derisk private investment – a method known as blended finance – is a tried and tested solution. Experience shows that every public dollar spent this way can mobilize around $5 of commercial capital for climate investments. Now, we must deploy such mechanisms on a much larger scale, and quickly. To that end, we call on the organizations that make up the international financial architecture for development – including the World Bank Group and national and other development-finance institutions (DFIs) – to pursue three changes.
First, these institutions must fund the development of a massive pipeline of green investments and climate adaptation projects. This requires becoming more comfortable with assuming greater risk, such as by boosting investment in early-stage large-scale projects and new technologies in EMDEs. Funding and scaling up private project developers will help create the financing ecosystem that is needed to catalyze many more green investments. It also will help reduce private investors’ perception of financial and operating risks in developing countries.
Second, to unlock private finance, DFIs must scale up the use of proven de-risking instruments. This includes loan guarantees, insurance, and other products that address perceived country risk and concrete barriers to project bankability. Setting a private capital “mobilization mandate” for multilateral development banks and DFIs would encourage the use of financial instruments that can unlock private capital for climate projects.
Third, DFIs must mobilize both external and domestic pools of capital, such as pension funds in developing countries. These local players often sit on the sidelines because of a thin investment pipeline or insufficient incentives to enter the market. Yet they know their own markets’ opportunities and risks the best, and they will be there for the long haul. At the same time, more blended finance instruments in local currency would help draw external actors into green and sustainable investments in EMDEs.
To leverage blended finance faster and on a wider scale, Denmark, together with the other Nordic countries and the United States, launched the Investment Mobilization Collaboration Arrangement at COP28. By gathering participating countries’ funds into competitive bids directly to the capital markets, the alliance aims to channel billions of dollars in new climate finance toward both mitigation and adaptation by 2026. This will allow countries to increase their ESG (environmental, social, governance) impact and mobilize private capital faster and in a much larger scale.
Securing tangible commitments to deploy the full range of blended-finance solutions is a key focus of the Bridgetown Initiative and a Danish priority in climate finance. Given both the opportunity and the urgent need for action, this approach should be front and center in international discussions leading up to COP29 in Baku. We invite governments, philanthropists, and private-sector partners to join us in shaping a meaningful contribution. The climate crisis is accelerating, and so must our response.
Copyright: Project Syndicate, 2024.