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December 03, 2012
Climate Financing Improves, but Falls Short of What is Needed
    by Robert Kropp

The Climate Policy Initiative identifies $364 billion in financing the transition to a low-carbon economy, but the amount falls far short of what is needed to keep global temperature increases below two degrees Celsius.

Two important facts underline the global transition to a low-carbon economy. The vast majority of funds will have to come from private investment; in 2009, the United Nations' Principles for Responsible Investment (PRI) observed, "At least 80% to 85% of the finance and capital required in our collective response to the mitigation and adaptation needs of climate change will come from private investment sources and capital markets."

But even while government representatives meet in Qatar for another international climate change conference, it is clear that legislative and regulatory action is insufficient in its response to climate change. Last month, seven of the world's largest investor networks wrote a letter to the governments of the world's largest economies in which they warned, "Current policies are insufficient to avert serious and dangerous impacts from climate change. Further delay in implementing adequately ambitious climate and clean energy policy will increase investment risk for institutional investors and jeopardize the investments and retirement savings of millions of citizens."

Given the prevailing gap between what is needed and what is getting done, it's instructive to look at a recently published report from the Climate Policy Initiative (CPI). Entitled The Landscape of Climate Finance 2012, the report updates an analysis published by CPI last year.

A superficial comparison of the two reports might suggest that investment in renewable energy and other pathways to a low-carbon economy has increased dramatically over the past year. After all, in its 2011 report, CPI found that at least $97 billion was "being provided to support low-carbon, climate-resilient development activities;" in 2012, the amount is approximately $364 billion.

But CPI points out in its new report that it has expanded the geographical scope and coverage of public and private funding sources, and that the expansion accounts for most of the increase. And even with the increase, the amount still falls far short of the $1 trillion per year that the International Energy Agency says is needed.

Sixty-three percent of the financing, as much as $243 billion, came from private sources, CPI found, with most of the private investment originating in developed nations. While private investment accounted for $85 billion in financing in developing nations, 83% of that investment came from domestic sources. Only 15% of private investment in developing nations came from investors in member countries of the Organization for Economic Co-operation and Development (OECD).

Considering that emerging markets made up more than half of the global gross domestic product (GDP) in 2012, and that persistent low returns and volatility have prevailed in developed markets since the financial crisis, the potential for sustainable investors to increase their exposure while accounting for environmental, social, and corporate governance (ESG) factors seems considerable.

However, institutional investors contribute less than one percent of overall climate financing, the report found.

"The fact that the public policies and incentives are starting to unlock private investment is good news for policymakers dealing with limited budgets," report co-author Barbara Buchner of CPI stated. "However, the level of available investment still falls far short of the total amount needed to limit global warming to two degrees Celsius. We must focus on the policies that are working and act quickly to scale those up around the world."

Public and private financial institutions played an important role in climate finance, distributing approximately $77 billion. National and sub-regional development banks contributed another $54 billion, mostly in the areas in which they have operations. Public intermediaries are necessary for unlocking additional private investment, the report observed.

Almost the entirety of the $364 billion was distributed to mitigation initiatives such as renewable energy projects and energy efficiency. "Weaknesses in defining and tracking adaptation finance, partial reporting by some multilateral players, and the inability of existing efforts to capture private flows dedicated to such activities hampered our understanding of adaptation finance flows," the report states. With such effects of climate change as extreme weather events and sea level rise already underway, an increased focus on adaptation is urgently needed.

"Private capital is essential and makes up the lion's share of global climate investment flows," the report concludes. However, "Well-targeted, public resources are an essential element of transformational climate investment structures," as well.


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