Review: “Rethinking Climate Finance: Taking Action Against Climate Change” by BlueOrchard

This study, developed by BlueOrchard in cooperation with the FINEXUS Center for Financial Networks and Sustainability  of the University of Zurich, provides a compelling analysis of how the growing impact of climate change (and its associated risk) can be tackled in a smart and proactive manner by private financial actors – with the support of development finance institutions- in an effort to create financial portfolios that are more resilient to climate-related risks and that can thrive in low-carbon economies.

According to the definition provided by the UNFCCC’s Standing Committee on Finance, climate finance refers to funds directed toward mitigating and adapting to climate change. It is an integral part of the economic contribution to achieving the targets set in the 2016 Paris Agreement, as well as the SDGs. Depending on the context in which the term climate finance is used (e.g., industry-, region- or sector-wise), it can encompass a wide range of different aspects and nuances.

As illustrated by the paper, preliminary estimates reported by the Climate Policy Initiative show that global funding for climate finance in 2017 amounted to a total of US$ 510 billion, which represents a positive growth of 12% relative to 2016. Despite this increase, the total funding engaged is still very far from the US$ 16.8 trillion target investments expected for 2030 by the UN Agenda for Sustainable Development in climate adaptation and mitigation.

The paper argues that public concessional finance by itself will be most likely unable to fill this gap in climate financing. That is why private financial actors should begin by evaluating climate change risks and take advantage of the related opportunities –at global level- to scale up their investment efforts in this domain. In this day and age, notable commercial incentives can be found for private financial actors to increase their participation in this sense. Nevertheless, this potential growth in private sector participation is still limited by a range of widespread constraints, such as a lack of strong business models, little knowledge of adaptation and mitigation activities, and a perception of high risk.

The study advocates for a blended finance approach to overcome these constraints, in which bilateral organizations and development finance institutions assume a supporting role to foster private investors’ engagement in climate finance, through credit enhancements and other complementary services, while being fully subordinated to them in the fund capital structure.

Blended finance products (such as debt, equity, guarantees) can be delivered in tandem with grant-funded capacity building to support climate finance initiatives through sector-specific educational and awareness programmes directed at a range of different targets (such as local beneficiaries and government representatives). Through these blended finance arrangements, led by impact objectives, scalable climate finance initiatives can foster financial flows and deploy investments at market rates in even the poorest countries.

Investing private capital in a smart and diversified manner – in both emerging and frontier markets- can make the difference in bridging the financing gap for the 2030 Agenda and in scaling up successful finance instruments. Ultimately, blended finance arrangements should be a function of each market development stage, and their implementation should be calibrated as the market develops.

Finally, the paper also puts a strong emphasis on the importance of transparency and consistency in reporting standards on the part of the private financial sector, as this is essential to be able to recognize worthwhile and impactful green investments into which to channel private funds, as well as to avoid “greenwashing”, i.e. the use of green investments as public relations’ spins to deceptively promote a company’s image as environmentally friendly. In this sense, the publications mentions the 2019 “Taxonomy Technical Report on Financing for a Sustainable Economy” report, developed by the EU Technical Expert Group on Sustainable Finance, as a valid tool for investors to classify investment products as environmentally sustainable, and make informed decisions on where to allocate their funds.

[1] BlueOrchard is a leading global impact investment manager dedicated to fostering inclusive and climate-smart growth, based in Zurich, which was originally founded in 2001 as a UN initiative. BlueOrchard is a commercial manager of microfinance debt investments with a focus on boosting growth in the developing world. It operates credit, private equity and sustainable infrastructure funds.