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Sustainable finance increasing, but large gap remains: UN

13 April 2022 Kevin Adler

As the world's economies continue to recover economically from the COVID-19 recession, the divide between the haves and have-nots has widened, the UN said in a new report about achieving global climate and sustainability goals.

In "2022 Financing for Sustainable Economic Development," released on 12 April, the UN said that a record $1 trillion in sustainable bonds was issued in 2021, and private equity and venture capital investment in developing countries reached a record $230 billion last year. But those commercial funds, even in combination with rising official development assistance from governments in wealthy countries, "remain insufficient for the vast needs of developing countries," the report stated

In a report last year, the International Energy Agency and the World Bank said that for the world to reach net-zero emissions by 2050, clean energy investment in emerging and developing countries needs to increase to over $1 trillion per year by 2030.

There is no excuse for inaction at this defining moment of collective responsibility, to ensure hundreds of millions of people are lifted out of hunger and poverty. We must invest in access for decent and green jobs, social protection, healthcare, and education—leaving no one behind," said UN Deputy Secretary-General Amina Mohammed in a statement on 12 April.

The UN's focus on sustainability reinforces comments made by last week by the Working Group III of the Intergovernmental Panel on Climate Change (IPCC) in its report calling for a substantial reduction in fossil fuel use beginning by 2025, if the world is limit global warming to 2 degrees Celsius by 2050. Among other measures, it called for reducing emissions as much as possible from transportation, through reforestation and modified land use, "balanced, sustainable health diets", and mass-scale recycling of plastics.

The UN's sustainability report added in the need to support biodiversity and improve healthcare.

The passage of programs last year such as the EU Next Generation recovery plan and the US Infrastructure Investment and Jobs Act are positive signs, Mohammed said. But the fact that these are focused on wealthier countries reflects the ongoing funding gap for developing nations. The report estimates that developing nations are spending 14% of their gross national product to repay interest on their debt, compared with 3.5% for developed countries.

Neither climate change nor sustainability overall will be properly addressed without ending that disparity, the report said, and lifting that burden lies with wealthy nations.

The $100 billion per year in climate finance announced by wealthier nations in support of emerging economies "is very unlikely to have been met in 2020," the UN report said, though it added that the goal may be met in 2023 and subsequent years. But it added that $100 billion must be the annual "floor" starting in 2026 if the world is to move towards an equitable, sustainable future.

Missed opportunity

The report highlights the missed opportunity from spending on the COVID recovery, said Tom Moerenhout, resident scholar at Columbia University's School of International and Public Affairs.

"In the beginning during the economic recovery, there was a clear narrative that … a good chunk of stimulus funding should go to clean energy and sustainability," Moerenhout told Net-Zero Business Daily by S&P Global Commodity Insights. "Unfortunately, that has not materialized. We saw some good investment in renewable energy, electric vehicles, and batteries, but not nearly enough."

Compounding the difficulty of reaching global climate goals, Moerenhout said that government support for fossil fuels production in the last year has been substantial, in part to help oil and natural gas companies when prices plummeted early in the pandemic lockdown. In the US, for example, the Main Street lending program that was intended only for small businesses was soon opened up to oil and gas fracking companies.

"But that funding was not conditioned on environmental performance or with environmental targets. That's unfortunate," he said.

Long way to go

As a result, the global community has a long way to go to meet its climate targets, the UN report stated. It estimates about $5.9 trillion in capital is needed by 2050 to meet nationally determined contributions (NDCs) towards the Paris Agreement's climate goals. "Furthermore, around 60% of identified needs in NDCs have not been costed, indicating that finance needs are higher than currently estimated," it said.

On the positive side, the report noted that the world's large banks and other commercial financial institutions are expanding their investments, which it attributes to avoidance of climate risks and the opportunity to profit on clean technology. It cited the launch of the Glasgow Financial Alliance for Net Zero (GFANZ), which coincided with COP26 last fall, as indicative of the recognition across the private sector of the necessity and opportunity in climate change. Through GFANZ, more than 450 investment firms with over $130 trillion of private capital under management committed to transforming the global economy to net-zero.

S&P Global Commodity Insights has said that more than a trillion dollars in private capital is waiting on the sidelines to back clean energy and climate risk solutions.

Tracking funding

Beyond the issue of more money being allocated to sustainability measures, the UN report offered numerous recommendations about how that funding should be directed and how its benefits are tracked, particularly on the murky matter of what investment should be counted as "new" or "additional" when it comes to sustainability goals.

The report noted that 1992 Rio Convention established that climate finance for developing countries should be "new and additional" commitments, but those definitions still vary widely. For some countries, the definition is as simple as funds newly disbursed or committed in the reporting year. Other nations use earlier years as their baseline, and other countries consider any capital in excess of the UN sustainability guideline of 0.7% of their gross national income as additional investments.

Multilateral development banks (MDB), such as the World Bank, Inter-American Development Bank, and the European Bank for Reconstruction and Development, can play key roles in solving some of the issues, the report said. Not only can they provide more funding, but they can standardize reporting.

But MBDs are not doing enough so far. "MDBs are an important channel for climate finance, accounting for just over one third of climate finance to developing countries. In 2020, climate finance flows by MDBs to developing countries declined by 2.2% to $45 billion due to COVID-19; as a consequence, all MDBs except the World Bank Group failed to meet their 2020 climate finance targets," it stated.

On the plus side, the Asian Infrastructure Investment Bank and Islamic Development Bank adopted climate finance targets for the first time in 2021, joining other major MBDs. On the still-to-be-accomplished side, the UN said most MBDs still have not defined their criteria for ending fossil fuel investments or fully aligned their guidelines with the Paris Agreement goals.

Another issue is how spending is allocated. To date, climate finance has favored mitigation investments over adaptation—for example, projects such as renewable energy are preferred over wetlands and coastline restoration. The latest data from the Organisation for Economic Co-operation and Development (OECD), cited in the report, calculated adaptation finance at $20.1 billion and mitigation finance at $50.8 billion in 2019.

At the conclusion of COP26, developed nations were asked to at least double their collective provision of adaptation finance from 2019 levels by 2025, the UN report said.

Boosting adaptation spending can be encouraged through a global tax on carbon that would deliver added value to adaptation projects, the report added.

Moerenhout observed that carbon taxes would provide incentives for reducing emissions, but they have to be paired with other social mechanisms in order to avoid harming people with low incomes. He said the World Bank has helped countries accomplish something akin to a carbon tax when they have reduced subsidies on fossil fuels such as cooking oil, but then provided payments to those hardest hit by rising energy costs.

One area in which the UN report said progress has been made is the pace of approval for international funding for adaptation and mitigation projects, such as through the Green Climate Fund (GCF). The UN said the time from the start of a review of a GCF project proposal to first disbursement was 26-28 months in 2018, but this was down to 12-17 months in 2021. Speedier approvals will not only move projects ahead more quickly, but make them more attractive to private investment partners as well, it said.

The GCF, established through the UN Framework Convention on Climate Change in 2010, is the world's largest climate fund directed at developing countries, and its portfolio has passed $10 billion, according to a report the fund issued on 1 April. The fund's most recent expansion is an agreement to scale up climate action across 13 African countries, announced on 4 April. This will back the Great Green Wall initiative to reverse land degradation along 8,000 square km of the African continent, aiming to create "the largest living structure on the planet," three times the size of the Great Barrier Reef.

The idea is to get ahead of adaptation needs, when possible, explained GCF Climate Science Lead Kevin Hosburgh and Africa Adaptation Adviser Hanane Hafraoui in a commentary in March. "Effective adaptation planning and implementation has been observed across all sectors and regions to some effect, though many gaps remain, especially around funding, knowledge, and effective implementation," they wrote.

IPCC sounds the alarm again

The IPCC Working Group III's recent report estimated that limiting warming to Paris Agreement goals would require global GHG emissions to peak at the latest by 2025, and to be reduced by 43% by 2030 compared with 2019. Methane emissions would need to be reduced by about a third by 2030.

The report recommended an all-in approach that includes a rapid transition to clean energy, reductions in carbon emissions across all sectors, and carbon capture and storage and direct air capture for specific hard-to-abate sectors, such as industrial production.

"If we are to make the Paris Agreement mean anything at all, then we must work together," states Kathleen Rogers, president of US-based, after the IPCC's report was released. "This means everyone from individuals, businesses, governments, and other parts of civil society have to commit to a transformative shift in the global economy as we know it."

Moerenhout said that his concern is that volatile energy prices now are driving the discussion away from that long-term vision. He said that short-term fixes to produce more fossil energy now and in the next few years will have negative consequences for decades. As the UN sustainability report indicates, the best solution is to invest now with an eye towards the long-term energy transition, he said.

"You have people who are on the side of energy security of supply and affordability and others who are on the side of environmental sustainability. I think it is a completely artificial discussion," he said.

"Every investment has an opportunity cost," he continued. "Europe should [be investing in] heat pumps now. But instead of that, there's whole lot of talk about building LNG terminals. We really need to explicitly ask the question: What is the opportunity cost … of locking ourselves in [to natural gas]?"

Posted 13 April 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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