NEW YORK, NEW YORK – AUGUST 02: Stock market numbers are displayed on a screen at the New York Stock … More
Tariffs, trade wars and Trump. The world has seldom been on such uncertain territory. Yet while these issues “flood the zone”, in the words of the US president’s former strategist Steve Bannon, climate change continues unabated.
Public budgets that should be targeted at the climate crisis are increasingly focused on dealing with geopolitical instability and even preparing for war. In such circumstances, the private sector must step up and, more than ever, play its part in financing the adaptation to extreme weather and the growth of clean energy. Failure to act represents a surrender to increasing volatility and systemic risks that in the words of one top insurer are “threatening the very foundation of the financial sector”.
Massively scaling up private finance for climate action in poorer countries will only happen, though, if significant changes are made to the financial system. What these changes should be are the focus of our submission to the United Nations that outlines how we believe the pledges made at last year’s climate summit, COP29, in Baku, Azerbaijan can be turned into reality.
In our paper, we identify six key issues that need to be tacked in the “Baku to Belem” roadmap that will be drawn up by the COP presidencies and considered at COP30 in Brazil this autumn.
First, the roadmap must define clear pathways for finance mobilisation, outlining structured mechanisms for mobilising public and private capital. This includes setting measurable targets, aligning investments with national adaptation plans and nationally determined contributions, and ensuring that concessional finance plays a catalytic role in unlocking further private sector participation.
It will also be necessary to leverage innovative financial structures. Financial institutions remain hesitant to invest in climate finance due to perceived risks in emerging markets and developing economies. The roadmap should highlight innovative financial instruments that can help de-risk climate investments and attract private capital at scale.
Similarly, the effectiveness of catalytic capital must be enhanced. The pace and scale of blended finance deployment are insufficient to meet the urgent climate financing needs of developing countries. Strategies to optimise the use of catalytic capital—such as concessional loans, guarantees, and equity investments—are needed to crowd in private sector financing. These should include clearer guidelines on risk-sharing between public and private entities to maximise capital mobilisation.
Strengthening risk management and guarantees will also be important to make climate finance mechanisms more resilient to crises, including economic shocks and climate-related disasters. Done well, the roadmap can encourage the development of flexible financial instruments that can adapt to changing conditions. Additionally, expanding and strengthening currency risk hedging capabilities will be critical to enabling more local currency lending, reducing foreign exchange risks for borrowers in developing countries.
Another vital change is an improvement of data transparency. A lack of transparency in financial flows, risk assessments and credit rating methodologies can act as a barrier to investment. We would like to see the roadmap encouraging greater collaboration between multilateral development banks, credit rating agencies and shareholders to enhance the availability and clarity of financial data, such as loss histories. This will help investors make informed decisions and reduce the cost of capital for developing countries.
Finally, we need to promote collaborative platforms. Accessing climate finance remains complex and fragmented for many developing nations. Taking action to foster partnerships and coordination mechanisms among public and private stakeholders will help streamline finance flows, improve technical assistance and build local financial capacity. This includes establishing platforms that facilitate knowledge-sharing, matchmaking between investors and projects, and the standardisation of financing application processes.
The long and the short of it is that we are living in unprecedented times. Business-as-usual is not an option, not least because the relative stability — in terms of geopolitics, economics and the climate — we have enjoyed in the western world since the end of World War Two no longer exists. We can and we must adapt.
This process includes shifting the way we think about climate finance to ensure the transition continues, the risks of climate change are contained and the poorest do not suffer unduly from richer countries’ increasing focus on arms rather than action to reduce emissions and help with adaptation to floods, heatwaves and drought.
The need for change is also the central message of our report, Competing in the Age of Disruption, published this month, which calls for a shift in strategy overall, to move from cautious incrementalism to more ambitious innovation and a conscious effort to reset the rules, incentives and expectations that shape the global economy.
What we are suggesting is not rocket science. But it will require a willingness to do things differently and for organisations to work together. We must end any pretence about the ability of the public purse to pay for the plethora of challenges facing the world. The private sector has an important role to play, but the rules need to change — to boost investor confidence and ensure finance arrives where it is needed most.
