Global Climate Finance: Insufficient, unequal and uncertain

A huge crowd of officials, including representatives of governments, international institutions, and leaders from the private sector and civil society, are currently gattered at the Conference of the Parties to the UN Framework Convention on Climate Change in Sharm El-Sheikh for climate negotiations.

Through their COP engagements, many countries have declared ambitious targets to get their economies on track and align with their Paris Agreement goals. However, despite the significant progress in raising global climate change awareness and continuous policy discussions around it, little has been achieved in aligning global financial flows with countries’ sustainable energy transition investment needs.

The vexing question is how to finance the multi-trillion investment requirement for energy transition, which appears to remain at the heart of the global climate agenda and this COP meeting.

Different entities, such as the International Energy Agency and McKinsey & Co., provide estimates on the investment needs under different mandated emission scenarios, ranging between $3.4 trillion and $8.1 trillion annually, to achieve carbon neutrality globally by 2050.

However, the current climate finance to support the sustainable energy transition is  off track on many levels. The available climate finance resources are highly insufficient and unequally distributed as the Global South, on average, receives a tiny share of the support. Also, many uncertainties exist around their classifications, reporting and rating guidelines.

A recent study titled “Closing the Investment Gap to Achieve Paris Agreement Goals,” published by KAPSARC researchers, finds that substantial investment gaps exist between actual investment levels and those required to achieve a Paris Agreement-aligned scenario by 2050. Besides other potential reasons, the availability of climate finance is a daunting one, as the annual size of climate-focused funds, including the environmental, social and corporate governance funds, including the $100 billion climate finance pledge, are significantly insufficient compared to the needs.

Considering countries’ immediate investment needs, urgent coordinated and collaborative action is necessary across all parties to shore up the required finance.

The investment gaps are particularly severe in developing countries. However, the current allocation of global climate finance is far from addressing this issue and is unevenly small. For instance, developing countries only receive 18 percent of global ESG flows, the biggest part of global climate finance flows, even though they need more transition investments than developed economies to achieve their climate ambitions.

Historically, many developing countries had trouble accessing global funds given their relatively less developed financial markets and investment-related risks. They also needed help establishing local climate finance frameworks, such as the ESG, to adapt to the recently emerging financing trends. If these issues are not quickly addressed through global cooperation, the emerging situation could soon become a barrier to their access to finance. It can subsequently jeopardize their transition efforts and slow the global climate agenda.

In the absence of globally agreed guidelines for ESG, numerous frameworks have emerged based on fragmented views and definitions in the markets that reveal conflicting information available for investors. Such uncertainties around the current ESG investment conditions create issues like greenwashing, which can distort the allocation of capital according to the transition investment needs and impede the scaling-up efforts.

For instance, many ESG frameworks largely focus on renewable energy and electrification technologies, even though other technologies, such as carbon removals, will also play a critical role in achieving the Paris Agreement’s goals. Moreover, many carbon-management technologies, such as carbon capture, utilization and storage and clean hydrogen fuels, are either excluded from or vaguely defined in the existing global ESG frameworks.

As a result, despite the importance of these technologies in achieving net-zero emissions by 2050, they remain underutilized in many countries.

Global cooperation on climate finance should be expanded along multiple dimensions to scale up ESG finance by clarifying uncertainties surrounding these frameworks and ensuring a more equitable distribution of these funds.

Adopting an inclusive, holistic and flexible global ESG approach is a must. Recent efforts by the International Sustainability Standards Board, whose primary mandate is to harmonize the various global ESG frameworks to establish a global taxonomy for sustainability disclosures, are encouraging. Such an inclusive approach should also be extended to other dimensions of climate finance, such as the Paris Agreement discussions on the need for increased climate finance provision and mobilization by developed countries. Knowledge-sharing and capacity-building activities are also critical to establishing supportive legal and regulatory ESG infrastructure, especially in developing countries. International institutions can play a more active role in these processes while potentially providing seeding ESG funds for immediate investment needs.

• Fatih Yilmaz is a researcher at King Abdullah Petroleum Studies and Research Center.