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Climate and investment should go hand in hand. In this article, we delve into the needed coordination required between public institutions and the private sector to accurately channel climate finance solutions.
How to close the climate funding gap? Through sustainable finance. Climate and investment should go hand in hand. Human activity - manufacturing, power production… - needs energy. It is generated by the combustion of primary resources that result in the release of greenhouse gas emissions. This in turn engenders global warming, which is detrimental to humanity. Climate investments are needed to address this. We can bridge the climate funding gap with climate finance solutions. In this article, we delve into the needed coordination required between public institutions and the private sector to accurately channel climate finance solutions.
What is the role of finance in combating climate change? Industrial production is vital for economic sustainability, yet it often involves burning raw materials, leading to the release of carbon emissions. These emissions are significant contributors to global warming, which in turn poses risks to human health, infrastructure, and triggers mass migration. In other words, the imperative to maintain economic activity results in the generation of harmful gases. Addressing these damages incurred in turn requires investments for healthcare, infrastructure restoration, housing reconstruction…
Human activities have increased atmospheric carbon dioxide levels by 50% in just under two centuries. These emissions are driving global warming, with 2023 ranking as the hottest year in the past 125,000 years. Who is responsible? The industrial sector is the primary producer of greenhouse gases, responsible for 47% of the EU's total emissions in Q3 of 2023.
The climate funding gap encompasses the difference between the financial resources needed to address climate change effectively and the actual funds that are deployed for this purpose. It is the shortfall in financing required for implementing climate change mitigation and adaptation measures worldwide. Bridging this gap is crucial to safeguarding the planet's future - should we not invest enough today, the consequences for tomorrow will end up being catastrophic.
A recent report by the Institute for Climate Economics evaluates the financing required to address the gap in the European Union. They estimate that €813 billion is needed annually between 2024 and 2030 to respond to the climate emergency, equivalent to 5.1% of the EU GDP. However, as of 2022, only €407 billion had been invested, highlighting the significant effort still needed to bridge this funding gap. In France alone, achieving the National Low Carbon Strategy would require €15 billion in additional investments every year.
Worldwide, the World bank estimated that the climate funding gap requires up to $5 trillion by 2030 to reach the international climate objectives. Other reports suggest even higher figures - the Climate policy initiative declares that up to $9 trillion will be needed to keep fighting against global warming.
There are still challenges in climate finance funding. A negative externality is a harm made to society by the production or consumption of a good or service. In other words, the actor who is involved in the economic activity hurts the environment through its manufacturing operations, but does not compensate for this negative impact. In the case of pollution, for example, a factory emitting detrimental pollutants into the air imposes health and environmental costs on nearby residents and ecosystems, even though they are not directly involved in the production or consumption of the goods produced by the factory.
Markets structurally lack incentives for polluters to reduce emissions - this is why negative externalities need to be fixed by a government getting involved. One such policy tool is carbon pricing and the EU Emissions Trading System (ETS). This system establishes a cap on the amount of carbon emissions allowed, creating a carbon budget over a specified period. Carbon allowances are then issued and tradable, with higher prices incentivizing industrial producers to decarbonize their operations.
Another form of governmental intervention related to both climate and finance is the increasing regulation concerning climate finance assets. The recent "Closing the Climate Gap: The Rise of Green Finance" report elucidates that banks and other financial institutions face an increasing pressure to enhance their disclosures due to the "carbon double materiality" requirements. This means not only disclosing the risks that climate change poses to an organization but also showing impacts that the organization's operations may have on climate change.
What are the current opportunities in green finance? In the past few years, climate has emerged as a significant topic in the finance world. Climate bonds volumes have seen significant growth, reaching a cumulative volume of $4.2 trillion for green, social, sustainability, and sustainability-linked (GSS+) debt in 2023 since their inception in 2006. Despite experiencing a slight decline in volumes between 2021 and 2023 due to global macroeconomic instability, GSS+ bonds continue to play a central role in financial markets.
Carbon markets, engineered by policymakers, leverage free-market dynamics of supply and demand to determine the price of carbon. This blend incorporates both real-life financial forces and legislative intervention. With the creation of Homaio's EUA trading platform, individual investors now have the opportunity to contribute to the battle against climate change by participating in carbon investments.
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