Climate action: Who’s going to pay for that?

Motivated by extreme weather conditions and costly climate-related events, governments, organizations and investors are increasingly concerned about climate change risks and actions to reduce the impacts. As these concerns become more defined and increasingly urgent, climate resilience and sustainability have moved into the spotlight. We’ve seen countless strategies and action plans for addressing climate change across diverse scales around the world. Less ubiquitous, but perhaps more important, are thoughts on the question: how are we going to pay for this?

When it comes to climate change, there are costs associated with taking action — and costs associated with not taking action. Either way, these costs are substantial. And complicating the often-hefty price tag is the fact there is no clear, single party than can foot the bill.

Alongside the growing awareness of risks, felt through the direct impacts of insurance claims, are new types of financial markets — namely, sustainable finance and climate finance. These markets are acutely aware of both the impacts and costs of climate change, and the benefits of greening the financial system. Sustainable finance and climate finance are closely intertwined, but different in scope.

Sustainable finance vs. climate finance: What’s the difference?

Both sustainable finance and climate finance refer to local, national or international financing that can be drawn from public, private and/or alternative sources.

• Sustainable finance operates to integrate environmental and social factors into the market as a means of promoting long-term stability and sustainable growth
• Climate finance is more narrowly focused on supporting climate change mitigation and adaptation actions

Relative to developing countries, developed countries have historically contributed more greenhouse gas (GHG) emissions to the atmosphere, and therefore, have played a greater role in driving anthropogenic (human-caused) climate change. Developed countries also have a greater capacity to contribute money to fund climate action. Based on these realities, climate finance is structured for developed countries to provide more funding for climate action in developing countries.

Climate finance, although more specific in scope, is largely founded on an international perspective because of the global nature of the climate change problem. The principle of “common but differentiated responsibility and respective capabilities” is inherent in climate finance, because the contributions of developed and developing countries to climate change vary massively — and so do their capacities to prevent and respond to the consequences.

As such, there are large international efforts where developed countries mobilize financial resources for climate-related action in developing countries, which are disproportionately affected by climate change consequences and require support in mitigation efforts. At the signing of the 2016 Paris Agreement, developed countries committed to mobilizing $100 billion per year to finance climate-related action until 2025.

The public sector, including Multinational Development Banks (MDBs) and large organizations, have played the primary role to date in mobilizing funds for Climate Action, which is Goal 13 of the United Nations General Assembly’s Sustainable Development Goals (SDGs).

In these cases, climate action is largely forced by shareholders seeking transparency on climate resilience planning. In 2017, clear reporting mechanisms were introduced to provide some structure in this regard. The Task Force on Climate-related Financial Disclosures (TCFD) is a standardized, voluntary guidance for companies to report climate-related financial risks, and help appropriately measure and respond to climate change risks.

From Munday’s perspective, although the TCFD guidance is just one of many tools to govern climate risk reporting, it should be a game-changer in terms of how economies deal with climate risks. The guidance provides a clear framework for companies to answer shareholder questions about climate-related risks and mitigation strategies. In response to the increased demand for transparency, companies are directing more effort into confronting and disclosing the challenges of climate change within their business and across their supply chain.

With these factors at play, it no longer suits for the corporate world to leave climate change mitigation costs exclusively to governments or NGOs. As a result, companies are scaling up their engagement on climate change and its effects on their business. This is where engineers, modelers, scientists, and technical experts come into the picture — lenders and companies need people who understand the technical challenges and opportunities of climate change as trusted partners in delivering their often-complex projects. Integrating a climate change informed perspective into advisory capacities, feasibility assessments and due diligence services positions these technical experts as first movers in their own right.

The market forces generating engagement and financial support for climate action are already at play. This progress is positive, but there are some next steps to more fully support climate action. The top two? They may look something like this:

1. Mainstream climate resilience into the financial system through mandatory implementation of frameworks such as the TCFD guidance. Regulations hold organizations accountable for their actions and encourage them to consider the importance of their business in both adapting to and mitigating against climate change.
2. Fully integrate climate resilience into the fabric of organizations. Treat climate resilience like we would treat health and safety within a business. Strong action requires governance and a support structure with buy-in from executives.

“There has been an acknowledgement by governments and organizations that we’re seeing impacts of climate change, but we have to take this more seriously and we need to act,” says Munday. And taking action means sharing the costs of climate change mitigation, along with the responsibility to impact change.

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