he planet is hurtling towards a sixth extinction, but concrete actions to reduce green house gas (GHG) emissions are slow and lack ambition. It has taken the world 30 years from first acknowledging the need to protect the environment at the Earth Summit in Rio, to present-day negotiations – and there are still glaring gaps between commitment and delivery.
Unfortunately, the exponential increase in risks from a warming planet does not give us the luxury of another 30 years to reach net zero.
As part of the Paris Agreement, the signatory countries had to share their declared intent for setting net zero targets in the nationally determined contributions (NDC). While the desired timeline for reaching this target is 2050, some countries have decided to extend it to 2060 and 2070. All countries need to make an effort to reduce emissions, but the onus falls largely on high-emitting countries to ensure that the footfall of fossil fuel emissions is not at the cost of risking the lives and livelihoods of millions of people who are neither responsible for the chaos in nature nor the extreme weather events and resultant climate disasters.
Finance plays a big role in emissions as investments in energy need large amounts of capital investment. It also comes into play when large-scale transitioning is required to shift from dirty to clean sources of energy. Amid today’s challenges, ranging from the war in Ukraine to the rising cost of food and energy, disruption in supply chains and high inflation, the urgency in making the shift from existing to renewable has received a setback.
Along with public and philanthropic finance, private finance has a critical role to play in enabling the achievement of the Paris Agreement’s objectives. Just energy transition as a goal can be reached faster by blending public finance with private finance for accelerating transition and reaching net zero. Climate change has now reached a stage where without shifting the alignment of private finance with net zero, achieving the target of 1.5°C may not be possible. The ultimate aim of climate action is to achieve carbon neutrality. Net zero means striking a balance between the number of greenhouse gases produced and the amount removed from the atmosphere. Net zero is reached when the amount we add is no more than the amount we take away.
The Paris Agreement provides a durable framework guiding the global community towards a net zero emissions world. Making a shift from fossil fuel and coal intensive energy systems is not easy but not doing so is perilous. Given the slow progress and lacklustre performance of climate conferences after the hype and hope triggered by the Paris Agreement, the disenchantment with multilateralism is threatening to unravel the agreement reached so assiduously in 2015.
Private finance can become a game changer if, instead of greenwashing and misreporting, it takes on the role of a regulator to ensure that all future energy financing will be made available to those with demonstrable targets, interim plans for deep emission reductions and fossil fuel phase-out strategies. This will be a giant step forward in keeping 1.5 alive and reviving hope for meeting the mitigation and adaptation goals by 2050.
The war in Ukraine has roiled energy markets, making it harder to close down coal-fired power plants. Be that as it may, not achieving net zero means wildfires, droughts, floods, crop failure, famine, mass migration and the destruction of ecosystems, communities and wildlife. In other words, the end of life on planet Earth.
Against the backdrop of this apocalyptic scenario, it is important to track finance as it plays an enabling role across virtually all aspects of the real economy. Financed emissions span a broad spectrum, and it is critical to pivot away from business as usual investments in fossil fuels. It is estimated that the 60 largest global banks invested some $4.6 trillion in fossil fuel since the Paris Agreement was signed in 2015, including $742 billion in fossil financing in 2021 alone.
This is akin to financing risk and investing in a crisis. The longer private finance takes to stop financing actions that threaten the planet, the quicker we will move towards extinction.
Private finance can also enhance its role in adaptation and resilience finance and reduce the widening adaptation finance gap. Estimates that adaptation costs in developing countries are five to 10 times higher than current adaptation flows mean getting trapped in a plummeting spiral of a downward trajectory. The window of opportunity is closing fast and now is the time to call for deeper accountability for net zero targets and link it with private finance to build a true ambition loop. It is also important to protect the integrity of net zero as a tool for climate action and set clear standards and criteria to differentiate good plans from greenwashing. Not all countries are equal emitters and therefore net zero must embed the principles of equity and justice in setting the ambition targets. Highly developed countries should reach net zero significantly earlier than low-emitting countries to achieve the global average of net zero by mid-century.
Moving from global to national, the same principles should apply at the country level for aligning private finance with public and philanthropic finance to stop mitigation and support adaptation.
The floods in Pakistan in 2022 should serve as a preview of disasters that are likely to take place, as the difference between land and ocean temperatures continues to increase. The floods followed soon after a deadly heatwave in South Asia, where the highest temperatures in 122 years were recorded in parts of the region. Recurring disasters will result in an exponential increase in economic losses and at the same time, it will also result in an exponential decrease in coping capacity.
Projected losses from climate change in the GDP per capita for South Asian countries are higher than the global average of about seven percent, with Bhutan facing a potential loss of 18%, Nepal 13%, India 10% and Pakistan 10% in 2100.
The cascading impacts of climate change can prove to be catastrophic and push the region towards destabilisation. With 49 million people in Pakistan already living in areas where life quality indicators are expected to decline by four percent and 800 million people in the region residing in climate-vulnerable hotspots, the need for private finance to align with net zero is also important from a business point of view. Investing in green growth means investing in prosperity which is good for business and an opportunity for promoting ‘Green Peace’ in the region.
So far, private finance in Pakistan has not evolved to fully integrate climate risks into their methodologies to build economic resilience and thwart investments that contribute to GHG emissions. Climate solutions investment opportunities in emerging markets and developing countries often do not match investors’ risk/return requirements, requiring de-risking mechanisms to enable investment. Even as some relevant asset classes (such as climate bonds) have seen massive growth globally, their deployment is still nascent and limited in developing countries and emerging markets. Issues such as currency volatility, political and/or economic instability and regulatory unpredictability translate into investment risks that often exceed investors’ risk tolerance. These barriers can be overcome in many instances via the deployment of de-risking mechanisms such as blended finance that includes concessional public or philanthropic capital and financial guarantees.
In recognising the role of private finance and its alignment with net zero, it is important to point out that financial institutions and their regulators must reject the false narrative that acting on climate is somehow at odds with fiduciary obligations to prioritise returns.
Aisha Khan is head of Civil Society Coalition for Climate Change. firstname.lastname@example.org