Lhe green investment gap – the gap between how much we should invest to adapt to climate change and how much we actually invest – continues to grow. According Climate Policy Initiativean NGO that analyzes and advises on the integration of climate change into economic policies, the annual financing needs amount to 4,300 billion dollars (4,128 billion euros), a gigantic sum compared to the 653 billion invested in 2019-2020 (of which only 49 for adaptation).
A priori, the funds are available: assets under management globally stood at $110 trillion in 2021. Financial institutions have become aware of climate risks, as indicated by the growing number of initiatives ( Glasgow Financial Alliance for Net Zero; Asset Owners Alliance for Net Zero; etc.).
So why is funding for mitigation and adaptation still insufficient, particularly in emerging and developing countries? This is explained by the uncertainty surrounding climate policies and the inconsistency of the signals sent to the markets. No financial intervention, whether public or private, can respond to climate change in the absence of credible economic and energy policies. The credibility of policies is the key to the commitment of the parties ; it makes investors’ expectations and risk assessments self-fulfilling, which is essential for redirecting capital towards mitigation and adaptation.
Green finance initiatives
Multilateral financial institutions (MFIs), such as the World Bank, the International Monetary Fund or regional development banks, have an important role to play in the relationship between climate policies and financing. Emerging countries generally have limited budgetary leeway and difficult access to international markets. Moreover, they face high levels of public debt, high inflation and high interest rates, and the growing impact of natural disasters. These challenges limit the scale of public and private investment. And a non-existent or inadequate response can have repercussions on their sovereign risk and financial stability, with cascading consequences abroad.
To contribute to increasing climate finance, MFIs need to change their theoretical framework. They must accept that climate risks are forward-looking risks, and that the risk associated with carbon-intensive projects is higher. These differences in risk for the various scenarios envisaged must result in differences in the financial evaluation of the projects. Many MFIs that have started to finance climate action have not yet internalized these climate risks, which produces heterogeneous results in terms of climate impact.
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