As climate change accelerates, so too does climate risk and the potential for economic losses from impacts such as extreme storms, drought and heat waves. At this point, we need to reduce greenhouse gas emissions to mitigate further warming, but we also need to adapt our built environment and societies to be resilient to the impacts that higher concentrations of greenhouse gases in the atmosphere will continue to cause.
It is well understood that this will require major investment far beyond the capability of public balance sheets. Private capital will need to be leveraged and directed towards projects that address climate risk and support the transition to a resilient, low-carbon economy.
Given the speed of warming today, ignoring or delaying investment in either mitigation or adaptation brings a higher likelihood of increasing loss and damage, and of compounding and cascading impacts on the most vulnerable communities. Warming has already reached approximately 1.15 [1.02 to 1.28] °C above the 1850-1900 pre-industrial average, costing approximately US$1.3 trillion in damages and reduced productivity over the last decade. This equates to an average of 0.2% of annual global GDP. On our current trajectory, this could hit 20% by 2050, with low and lower-middle income countries suffering losses 3.6 times greater than richer ones.
This means climate investment must not only be scaled, but also targeted to deliver the most sustainable outcomes and ensure that no one is left behind.
Right now, there is a significant financing gap. Although investors increasingly understand that climate risk equates to financial risk, funding to address global warming and its impacts falls well short of levels needed. In 2019/20, the total amounted to only US$653 billion, according to Climate Policy Initiative, far below the US$4.3 trillion of investment it conservatively estimates will be required annually by the end of this decade.
This also failed to reach the communities that are most vulnerable to climate change. Three-quarters was concentrated in North America, Western Europe and East Asia and Pacific (primarily China), while less than 25% went to regions where the majority of low and middle-income countries are located. In 2019, of the US$79.6bn of climate finance provided by developed countries to developing countries, Least Developed Countries received 0.2% and Small Island Developing States just 0.02%.
It's clear that financial flows aren’t adjusting fast enough to mitigate climate risk, to accelerate resilience at the pace and scale needed, or to capture opportunities to avoid carbon lock-in. But as they catch up, there is also the risk that capital becomes increasingly costly, or of outright capital flight, where private funders in particular shift to assets that are more climate-resilient. The most exposed will bear even more risk if the funding they need to adapt becomes scarce or unavailable. This is not only about flows of capital from the developed to the developing world – it has universal relevance, because climate change threatens to exacerbate inequity everywhere, including in the US and other major developed economies.
While public sources of capital will not be able to shoulder all of this on their own, well-designed policy can set the direction of travel. Public balance sheets can be used strategically to catalyze and incentivize investment to enhance resilience and support low-emission models of growth. Public bodies are well positioned to integrate concepts of climate justice and equity into their spending – as the Biden administration in the US has done with the Justice40 initiative to direct 40% of climate and clean infrastructure investments to help frontline communities adapt. It is in policymakers’ best interests to press for this transition, because increasing inequity brings many negative knock-on effects, reducing ability to recover from shocks while increasing the investment needed to do so. Capital flight has the potential not only to cause major economic losses and to pile pressure on public balance sheets, but to destabilize governments and regions, and contribute to displacement and migration.
The availability – and affordability – of finance may be one of the single most important factors in determining whether the transition to a low-carbon, climate-resilient economy helps close the inequality gap, or exacerbates it. The vision for the upcoming COP27 negotiations in Sharm El-Sheikh is to “move from negotiations and planning to implementation” for national decarbonization plans as well as other net-zero commitments. Increasing finance for adaptation will be an important key to progress. While the COP negotiations tend to have an emphasis on climate action of public sources of capital, all types of investors – from banks, pension funds, infrastructure investors, private equity and others - need to be mobilized to scale up funding for inclusive and equitable climate investment. Understanding the needs of those who are most exposed to climate change and prioritizing that investment will help ensure a more liveable future for all.