Beyond pledges: Inclusive partnerships to move towards climate resilience

The same spirit that mobilized policymakers, financial institutions, civil society and local communities to come together in the face of the pandemic, raises hopes that similar momentum could be created to accelerate climate action.

In this vein, last November's COP26 in Glasgow presented itself as an opportune moment to bring together the world for a serious discussion around the climate agenda.

With wide participation of diverse stakeholders, including the private sector, COP26 managed to make a number of positive announcements as participating countries reaffirmed their commitment to the Paris Agreement goal of keeping the increase in global temperature to levels below 2°C, and moreover, to keep the goal of the 1.5°C alive.

Participants also recognized that this is a critical decade for action on the climate agenda, calling for a phase-down of coal. Glasgow also urged developed countries to deliver on the $100 billion pledge and to double financing for adaptation.

In light of Egypt hosting COP27 this year, the presidency announced that its main objective is to move from pledges to implementation.

It is within this context that the ‘Sharm El-Sheikh Guidebook for Just Financing’ aims to outline the key role of each stakeholder in translating financial commitments into implementable projects and address the critical challenges of leveraging and catalyzing needed finances and investments to support the climate agenda.

As depicted by the Climate Policy Initiative, the tracked global climate finance averaged $632 billion in 2019/2020, which is significantly lower than the needed annual financing estimated at $4.13 trillion.

The map demonstrates regional disparities, with Africa among the lowest recipients with a share less than 5.5%. Meanwhile, the continent is considered the most vulnerable to climate change. Therefore, the guidebook will target developing and emerging economies, with a special focus on Africa to unlock investment opportunities in green projects.

Pledged global commitments, particularly from the private sector, may not make their way to the countries that need them the most. Innovative solutions, such as de-risking instruments and blended finance, are therefore more important than ever.

A deeper analysis of these instruments is crucial to attracting investment for green, sustainable, inclusive, and resilient development – particularly within developing countries and emerging economies.

Moreover, concessional financing resources from multilateral development banks (MDBs), in addition to pledges by philanthropic groups, may help the origination of these finances to help achieve the climate ambitions over the longer term.

The proposed initiative instigates a consultative multi-stakeholder process that includes governments, multilateral and bilateral partners, the private sector, civil society, philanthropic organizations, research centres, and think-tanks to coordinate collective action to foster a green and resilient transition.

It aims to outline a roadmap whereby developing countries and emerging economies can translate international pledges into investable projects.

As an outcome of these consultations, stakeholders will draft a guidebook that incorporates a practical guide for innovative climate financing, leveraging their comparative advantage and strengthening effective inter-coordination mechanisms.

The guidebook will focus on identifying priority sectors that have a direct impact on accelerating climate adaptation and mitigation, with a special emphasis on energy, water, and agriculture sectors; develop clear guidelines to enhance the bankability of adaptation and mitigation projects; clarify strategies to mobilize resources towards climate adaptation projects in developing and emerging countries; and create conducive markets for green projects, aligned with national and international policy frameworks.

According to the World Economic Forum, developing countries need to invest an additional $800 billion per year on climate mitigation projects by 2025, dwarfing the $100 billion pledge.

In view of the growing climate finance needs to respond to the climate agenda and the sustainable development goals, the international community needs to drive more focus on mobilizing additional capital, allowing institutional investors to become key players.

This in return calls for promoting long-term partnerships with the business community to collaborate with governments and MDBs. Blended finance is therefore very significant in order to generate the needed funds.

In fact, blended finance, which is centred on combining commercial banks’ resources or bonds markets with concessional funds of development partners, has been in discussion since the Addis Ababa Agenda for Action.

However, little has been achieved so far as it is estimated that less than 2% of total official development assistance (ODA) is actually raised in the private sector, and almost only 1% of that is through blended mechanisms.

The success of catalyzing additional financing through blended mechanisms is dependent on the interplay and complementarity of all stakeholders’ efforts. Governments can be a starting point as they can create a conducive, secure and predictable investment environment through policy and regulatory frameworks and strengthening the role of institutions.

This will, in turn, help create the markets that can accommodate green projects and develop pipelines of bankable projects for the private sector that are aligned with the countries’ nationally determined contributions (NDCs).

Meanwhile, development partners, multilateral development banks and financing institutions have a key role to play. First through providing technical support to upgrade national institutional capacities and advance the investment landscape.

More importantly, they can push forward private sector engagement through concessional funds that are used for blended finance and grant elements to de-risk private sector investments and create first loss positions vehicles to improve portfolio ratings in developing countries. The role of development partners is thus indispensable in supporting projects’ preparation phases to attract needed private capital.

As for foreign investments, they rarely find their way to emerging markets or developing countries due to their weak credit ratings at B or below, which represents a higher level of risk.

Similarly, multilateral development banks are keen on keeping safe and high ratings themselves, and therefore avoid supporting investments in low-rated countries. As a result, it is essential to develop mechanisms to encourage MDBs and philanthropies to crowd in foreign investments and technical capacities.

When mapping the landscape of climate financing needs for climate action, there is a growing demand for the availability of reliable and updated data. Clear information is a prerequisite for endorsing targeted policies, building trust, and supporting a private sector-led development approach.

It is imperative that all stakeholders have a clear understanding of the opportunities, challenges and risks of investing in developing countries and emerging economies. The guidebook is therefore aimed at deciphering the climate financing ecosystem to allow different stakeholders to engage and collaborate based on reliable information systems.

In order to raise private investments for climate action, clarity is key in providing an overview of the main reasons leading to a significant shortfall of capital in emerging markets, the important techniques that should be adopted in these markets to attract investments and the required policies and reforms for ensuring the mobilization of funded capital in emerging markets.

The complex and multi-faceted dynamic relationship among partners must be sustained through trust and transparency, as well as accountability and commitment towards delivering these climate financing targets.

This will be challenging without a robust system to ensure that financial flows are well aligned with the identified targets. Therefore, an efficient governance structure is essential to guide and facilitate the interaction among all stakeholders.

Robust monitoring, learning and development mechanisms need to be in place to gauge the effectiveness of different approaches, pinpoint successful initiatives for replication and scaling-up, and taking corrective measures whenever necessary to ensure the achievement of results.

At this moment in history, there is little dispute on the importance and urgency of the climate agenda; the means of implementation remain unclear and the resources short. We are all ambitious for mobilizing collective efforts for recovery.

Equally, we need to act on exploring, advancing and implementing the means of leveraging finances, developing and transferring technology and building capacities on national and international levels.

As countries set their targets for the NDCs to be achieved by 2050 or beyond, it may be perceived that this is still in the far future. However, this may only represent one investment cycle for many capital-intensive industries. 2022 is, thus, a critical year – to lay the foundation for a more robust climate finance architecture that is mobilized from all sources through stronger coordinated efforts.

In this vein, the $100 billion target of the Paris Agreement, needs to be looked at as a floor – not a ceiling – for the path towards climate resilience.