Will COVID-19 derail climate finance?

2020 was supposed to be a pivotal year for climate action, reaching its crescendo at COP26 in Glasgow this coming November. The UK Government also intended to create a watershed moment for climate finance — public or private financing for mitigating climate change — and even appointed Mark Carney as its Finance Adviser. Then the pandemic happened, taking the spotlight off climate change and forcing the UK Government to postpone COP26. Here’s what it could mean for climate finance going forward.

 

Bad news for climate finance commitments

Article 2.1c of the Paris Agreement commits signatories to “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” Whilst the concept of consistency carries both a quantitative and a qualitative meaning, the investment community has so far prioritised the first by focusing on the mobilisation of capital. And indeed, global climate finance has been increasing in recent years. In the two-year period of 2017 and 2018, it crossed the half-trillion-dollar mark (on average), a 25 percent increase from 2015/2016.

COVID-19 will almost certainly disrupt this trend. In the short-term, governments will concentrate on mitigating the pandemic’s impacts on public health and the economy. These are the right priorities. Yet the generous stimulus packages intended to soften the impending recession will stretch public finances, threatening the green deals the world so urgently needs.

Some governments will seize the moment and link their economic relief packages to their climate agendas. Yet many will not, or only half-heartedly. After all, the purpose of stimulus is to push economic output, which runs counter to the goal of environmental protection. Further, the urgency of the crisis forces parliaments and bureaucrats to draft recovery plans in a hurry, with little time to explore the incorporation of sustainability provisions. In the United States, for instance, the Senate negotiated its $2-trillion CARES Act within 5 days, producing what the New York Times calls “a mixed bag for climate change.”

Will we see more governments considering sustainability targets in the second and third wave of economic stimulus, as the European Commission has promised? Probably not. The reason is that the pandemic has limited impact on political power structures, at least in the short term. It will reinforce pre-pandemic policy positions but do little to change the minds of those governments that have opposed firm climate action before the coronavirus outbreak.

The consequences are particularly dire for North/South flows of climate finance. In 2009, industrialised nations pledged to support low-income countries with $100 billion in aid each year by 2020. Not only are they off-track today, but the pandemic will make matters worse. Whilst the virus has sparked unprecedented solidarity within countries, it has produced the opposite on the international stage. The UN Security Council recently embarrassed itself after being “paralysed by squabbling” among major powers, not least because of a petty fight over what name to give the virus. And the World Health Organization’s Solidarity Response Fund, whose goal is to raise $675 million for “critical response efforts in countries most in need of help,” has raised a paltry 23% of its target so far.

The lack of international solidarity is consistent with what we should expect according to psychologists Joshua Conrad Jackson and Michele Gelfand. Their research shows that when cultures feel threatened — whether by war, disease, or economic upheaval—they tend to become “tighter.” Voters are then more likely to support politicians who espouse xenophobic, homophobic, or racist rhetoric, who tend to be those who prefer weak environmental regulation. None of this bodes well for international climate aid.

How long will the situation last? If the financial crisis of 2008/2009 is any indication, climate change will remain low on the political agenda for several years. The MSCI World, a global equity index, hit its low point in early 2009. It took until late 2015, the year the Paris Agreement was adopted, for global warming to make a serious comeback on the political stage.

 

Less quantity, better quality 

Bleak as the outlook for the size of investment pledges may be, the pandemic could well produce a breakthrough in a different sense — by changing how we go about deploying climate finance.

SARS-CoV-2 lays bare the complexity, interconnectedness, and vulnerability of modern civilisation. That a virus can shut down entire countries demonstrates that our economies are not wired to cope with the gravest challenges of the 21st century. What we experience now gives us a taste for how the world might react to those catastrophes triggered by a warming planet, such as extreme weather events, biodiversity loss, breadbasket failures, and forced mass migration.

It’s therefore no surprise that the pandemic is invigorating an ongoing conversation about the future of capitalism. Once this conversation spills over into the arenas of climate finance, it will make us look beyond aspects of quantity and toward a range of qualitative questions we have neglected so far. What type of assets, exactly, should we invest in if the goal is not only to reduce carbon emissions but also to strengthen resilience, social justice, and inclusiveness? Who should take part in these investments and how should we distribute risk and reward? What instruments and mechanisms should we use to make these investments? And which metrics should we use to assess progress and measure success?

One area set to benefit from these developments is climate change adaptation, which has been severely overlooked by climate investors in the past. Going forward, greater resilience in society will mean reduced volatility in financial markets, making adaptation an attractive area of investment.

Yet deploying climate finance in more effective ways — whether for mitigation or adaptation — requires a shift in mindset. The framing of the challenge must evolve from the narrow “green” to the broader “sustainable,” which will mean a stronger emphasis on social goals. The focus of action must increasingly target the real economy — where emissions occur and resilience emerges — instead of secondary markets such as stock exchanges. And the primary unit of action must shift from the single project to integrated portfolios that span multiple asset classes, composed not only to minimise risk but also to amplify value. 

This paradigm shift will require investors to develop a set of new capabilities and approaches. They must become proficient in systems thinking. They need to dissolve internal silos, particularly across asset classes. They must learn how to develop investment opportunities instead of lamenting about the dearth of viable projects. They must collaborate more strongly with other actors outside of the finance industry, including governments and civil society actors. And they need to develop ways of engaging ideas that haven’t been part of their discipline so far, most notably social justice, inclusiveness, and resilience.

These aren’t just idealistic musings. Scotland’s National Performance Framework, New Zealand’s well-being budget, and European Union’s Just Transitions Mechanism are examples of where these ideas have become policy. COVID-19 will motivate other governments to follow suit.

Sometimes, progress means one step back before two steps forward. This may well be true for climate finance in 2020. We should use the hiatus in international climate action to re-examine how we direct investment capital in service of a low-carbon, climate-resilient, just, and inclusive future — so that once the attention turns to climate change again, we are ready to invest in a way that’s appropriate for our complex adaptive world.

This article originally appeared in Future of Good.

 

EIT Climate-KIC’s COVID-19 Response: We believe the world needs a simultaneous, multi-dimensional response to COVID-19, to address both the devastating immediate impacts on people, health systems and economy, and longer-term considerations. This includes the need to act now to ensure that economic recovery is aligned with climate and Sustainable Development Goals commitments as we consider ways to protect, reboot and regenerate economies. EIT Climate-KIC’s COVID-19-related communications will respond to all of these needs.  

Please visit our COVID-19 Response Hub for more information.

 
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