On March 23rd, the first edition of The Governance Post Event Series took place. Closing the Gap of Climate Finance event was part of a series of student-led public event initiatives at the Hertie School. Racien Nowak and Jose Imer Campos, both Master of Public Policy Class of 2018 candidates, chaired the gathering.
“The more we delay, the more we will pay”, declared former UN General Secretary Ban Ki-Moon in 2014.
2017 ranked as the second warmest year since 1880, following only 2016. In fact, 17 of the 18 hottest years have occurred since 2000. According to a recent World Bank report, more than 140 million people are likely to migrate their countries by 2050 to escape the impacts of climate change and this is in just three regions of the world. At the current rate, the world’s oceans will be 60cm higher by the end of the century. In short, the impacts of global warming are here and are expected to intensify each year.
Climate change may be the greatest challenge currently facing humanity and as its consequences spread around the globe, financial markets and banking sectors have begun to intensely discuss how to contribute to a sustainable transformation. The Paris Agreement on Climate Change and the United Nations Sustainable Development Goals point at a major shift in global financial flows to counter the effects of climate change.
Article 2 of the Paris Agreement established a precedent to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” and developed countries agreed to continue their goal of mobilising $100 billion dollars per year by 2020 for climate action in developing countries. The recent G20 in Hamburg also focused on the power of sustainable financial markets, where the $100commitment was reemphasised -as well as its intention to continue it through recalling that climate finance from private sources is key for adaptation and mitigation needs. G20 countries not only account for 85% of global GDP and 80% of CO2 emissions, they also have far-reaching influence on the rest of the world through innovation, trade and development finance.
However, despite these efforts, the world is falling short. Sustainable investments that generate environmental benefits are lacking.
An additional $600 billion per year over the next fifteen years is needed, solely for infrastructure, to be consistent with the 2ºC 66% scenario. In terms of energy-sector investments, $3.5 trillion per year, twice the current investment level, will be necessary until 2050 to limit the temperature rise to well below 2ºC. In comparison, climate investments both from private and public sources, averaged $410 billion between 2015 and 2016. Although the numbers are hard to pin down specifically, the underinvestment is in the realm of hundreds of billions.
Moreover, developed countries’ is projected to be close to $ 67 billion, thus, creating a financial gap of more than $30 billion vis-à-vis the committed $100 billion.
Furthemore, vis-à-vis the committed $100 billion of the Paris Agreement, developed countries public finance to developing countries is projected to be close to $67 billion in 2020, thus, creating a financial gap of more than $30 billion.
With targets falling short across the board, who will step in to fill the gap? What is missing in current financial markets that could address this issue? What needs to be done from the public and private sector to trigger more investments in climate finance? Is the problem on the demand side, the supply side, or both? Which mechanisms and instruments need to be introduced or adjusted to speed up the growth of green financial flows in the short term?
The complexity and urgency of this challenge motivated us to bring the discussion to the Hertie School and to put together a panel of public and private sector representatives in the field of green and climate finance. The aim of the discussion was to serve as a platform to connect different relevant stakeholders, discuss the governance dimensions of climate finance, contribute to the debate on why the world is falling short on this type of investments and foster the discussion on necessary steps to boost ‘green’ funds.
We believe that having an open, informed debate with key stakeholders can contribute to forming a desired climate finance future for the global community, especially within the G20 group.
On March 23rd Norbert Gorißen (Christine Majowski (Gesellschaft für Internationale Zusammenarbeit) and Jochen Wermuth (Wermuth Asset Management) came to the Hertie School to discuss the climate finance gap challenge, moderated by Brigitte Knopf (Mercator Research Institute on Global Commons and Climate Change).
Mr. Gorißen emphasised building the right type of infrastructure to avoid ‘lock-ins’ with projects not consistent with the government’s climate goals. He further insisted on how countries should take their responsibility seriously – by picking projects that aim at capacity building in developing countries and thereby moving from voluntary to binding targets in the long-term. Lastly, he added that in terms of Germany’s climate policy, building trust among developed and developing countries would be necessary to aim for long-lasting influence and impact.
Similarly, Ms. Majowski built on the idea of having coherent policies, well-functioning markets and clear disclosure as conditions for an enabling environment for climate investments. “Better information is extremely relevant, but how you apply that information is key,” she said.
From an investors’ perspective, Mr. Wermuth pointed to a new normal where risk and return are accompanied by impact and insisted on always keeping in mind the magnitude of the challenge without decoupling it from its moral background. According to him, the amount of investment needed is low when compared to the amount of capital available and concluded that “climate finance is the sexiest topic right now” and one that everyone should be heading towards.
The panel agreed that in order to instigate this shift and work towards a sustainable solution, we must deploy trillions and significantly alter current financial flows. Addressing this issue requires a complete transformation of our energy, transportation and food systems and the deployment of new infrastructure at a global scale.
Today what we are investing does not match what we should be investing to achieve the 2-degree target. Up until now there has been a cavernous climate finance gap. Closing it depends on both public and private actors, both from the developed and developing world, as well as on policies and incentives that trigger more green investments.
The task may be daunting, but equally so, we are witnessing investments in renewable energy growing at record levels while costs keep decreasing. Green and climate bond markets skyrocketed in the last couple of years and sustainability factors are increasingly at the heart of investment decisions. We are witnessing a shift as financial flows align with the transformation we so desperately need. We are starting to build momentum, but our time is limited. As our panellists agreed, this process has to accelerate, and it has to happen now.
Jose Imer Campos is a Master of Public Policy candidate, specialising in climate economics and governance, policy analysis and quantitative methods. He holds a BA in Financial Management from Tecnologico de Monterrey in Mexico and is a recipient of a joint scholarship granted by DAAD (Germany) and CONACYT (Mexico)
Racien Nowak is a class of 2018 Master of Public Policy candidate. She obtained her Bachelors degree in Economics & Governance at Wageningen University & Universitat de Barcelona where she specialized in environmental policy and sustainable banking. Racien has an ongoing research interest in social change, political communication and advocacy.