1 December 2022

How public-private finance could be a tipping point for planetary action

A 'loss and damage' fund agreed at COP27 should be the precursor for more efficient use of blended finance to support developing countries, argues Pradeep Kurukulasuriya

COP27's agreement to a historic "loss and damage" fund for climate impact in climate vulnerable countries is a hard-won deal and a potential turning point in acknowledging the vast inequities of the climate crisis.

Pradeep KurukulasuriyaFor the first time in 30 years of climate talks, governments agreed to provide finance to help rescue and rebuild poorer countries stricken by climate-related disasters through this new fund.

While it is critical that the moral imperative surrounding our different climate futures secured place on the centre stage, the hard work to deliver such a fund lies ahead. Serious concern was expressed that the goal of developed countries to mobilize jointly $100 billion per year by 2020 has not yet been met and, while new pledges, totalling more than $230 million, were made to the Adaptation Fund at COP27, this is still short of the call to double adaptation finance.

The funding level must meet what is required to avert a climate catastrophe and secure a thriving future on a healthy planet.

We have seen the limiting factor of politicising climate financing in play as countries have equivocated and sought to attach conditions, and we cannot risk climate financing becoming a zero-sum game.

A plaster or a remedy?

Global leaders must realise that mobilising public-private finance is the only way to keep pace with the scale and urgency of the planetary challenges in front of us. Doing so requires us to make the case not only from the moral perspective but also from the pragmatic one.

The public sector should focus on enacting policy shifts that nudge private sector investment that helps us collectively address the global challenges we face in time. This pool of money is vast and largely untapped.

The OECD estimates that $6.9 trillion a year is required up to 2030 to meet climate and development objectives. Furthermore, current energy, transport, building and water infrastructure make up more than 60% of global greenhouse gas emissions. This transition is not asking for a blank chequebook, but instead represents the scale of the investment potential.

Carrot or stick?

Many opportunities already clearly exist to unlock the full potential of private finance. Most are not new but have simply not yet been implemented.

Firstly, we must implement widespread reforms to sectors that impact climate and biodiversity most, such as agriculture, energy and transport. This includes "true cost" pricing of externalities, legislative and regulatory updates, and the removal of harmful subsidies. For instance, the world spent an estimated $700 billion in 2021 alone to subsidize polluting fossil fuels. Likewise, the majority (87%) of $540 billion annual support to agricultural producers is either price distorting or harmful to nature and health. It is not hard to imagine this funding transitioning to incentivize renewables or regenerative agriculture.

Secondly, we must transform the scale of support to small- to medium-sized businesses already in the sustainability space of their sectors, and to entrepreneurs driving the pace, scale and innovation on a trajectory aligned with a healthy planet. Nature-based solutions like habitat restoration, reforestation, coastal protection and invasive species removal create jobs at over 10 times the rate of the fossil fuel industry.

"Countries have sought to attach conditions to the fund. We cannot risk climate financing becoming a zero-sum game"

Thirdly, we must seek new and better ways to de-risk private finance flowing into this field. Policymakers can nudge investment through tax credits, guarantees, insurance and disclosure requirements. Innovative models can also be developed for blended finance, which matches government or philanthropic contributions with private ones. For instance, the green bond market increased from just $3 billion in 2011 to $163 billion in 2018, or to $895 billion when including climate-aligned bonds.

This will all accelerate and scale key sectors like renewables and help them become more competitive. Since 2010 alone, there has already been a sustained decrease of up to 85% in the costs of solar and wind energy, and batteries.

Lastly, we must support the most vulnerable groups in countries by providing social protection, including a temporary basic income. This not only complements the commitments from COP27 on loss and damage, but it also sustains local economies and livelihoods to experience a just transition with wider benefits to stability and security.

Short-term vs. long-term

When the average person on the street is struggling with the rising cost of food and fuel prices, it is easy for political leaders to reach for quick wins that solve the issue in the short term.

However, our planetary challenges are not a blip in the road. They are a gaping chasm and obvious risk towards which we are barrelling full speed. As we move now from the COP27 climate conference to the COP15 biodiversity conference in Montreal, financing continues to be a central focus.

As with climate, finance must be mobilised more broadly for nature as a whole: to halt biodiversity loss and better leverage natural capital as an asset at scale. Yet a $700 million finance gap exists on the former and only 2-4% of climate financing is spent on nature-based solutions.

Innovative, imaginative public-private financing solutions should recognise and seize this huge opportunity. Investing in climate and environmental safeguards inevitably goes hand in hand with our long-term economic prosperity.

Pradeep Kurukulasuriya is director and executive co-ordinator of the Nature, Climate and Energy Portfolio at the UN Development Programme (UNDP).