Climate Finance has an important role to play in relation to helping us adapt to and mitigate the effects of climate change. COP27 finished in mid-November, and a number of key financial instruments were considered at the conference.
We urgently need to make the transition to becoming climate neutral. Climate change has caused enough devastating disasters that have displaced many people. And this is only expected to get worse.
In particular, the European Investment Fund (EIF) and the agreement on a new ‘loss and damage’ fund for vulnerable areas. Continue reading as we discuss the key financial instruments discussed at this year’s climate conference.
Importance of global financial agreements
Climate finance essentially includes national, transnational, and local financing drawn from private, public, and alternative sources. These funds help to support adaptation and mitigation actions that will directly address climate change. Climate finance was called for in both the Kyoto Protocol and the Paris Agreement to help those who are more vulnerable to climate change impacts.
As a result, climate finance recognises the contribution of countries to climate change and their capacity to cope with its consequences and prevent it. The biggest reason climate finance is so important is for mitigation. This is because large-scale investments are required to reduce the impacts and adapt to the adverse effects of a warming climate. We have a huge amount to do to help the planet and a very short timeline to work with.
Under the Paris Agreement, richer countries committed to offering developing countries at least $100 billion per year by 2020 for climate adaptation and mitigation. Additionally, they agreed to increase adaptation finance significantly. Progress has indeed been made on both of these goals; however, it has still fallen short. Therefore, it was essential for climate finance to be pushed harder, and this was a central topic at the recent Conference of the Parties(COP27). As a result, a number of key financial instruments were considered at the Conference.
Climate finance can make a huge difference in the overall climate change picture. For example, Nepal, a much less developed country, has used global finance to scale-up climate-smart agriculture, enhance its disaster preparedness and drive ecosystem-based solutions.
Cambodia is another great example. They have developed solar energy and brought electricity costs down by two-thirds, all the while transitioning from long standing dependence on hydroelectric power and coal. Chile is also a great example and is putting a monetary value on greenhouse gas emissions avoided by decarbonisation. For example, if a company closes a coal plant, it would receive financial benefits for creating renewable energy. As you can see, climate finance can be an important tool in helping us adapt and manage the effects of a warming climate.
Charting a sustainable future for developing countries through new funds
One financial instrument considered and passed at the COP27 was the loss and damage fund for developing countries. This was a breakthrough agreement to offer loss and damage funding to vulnerable countries that are hit hard by climate disasters. Creating a specific fund for loss and damage was a crucial point of progress. The issue was added to the official agenda and implemented for the first time at COP27.
Governments made the decision to establish this new funding arrangement as well as a dedicated fund to help developing countries respond to loss and damage as a result of climate change. They also agreed to create a transitional committee to make recommendations on how to operationalise the new funding arrangements at COP28 in 2023. New pledges, which equated to over 230 million, were made to the Adaptation Fund.
These pledges will assist many vulnerable communities in adapting to climate change via strong adaptation solutions. Another intriguing financial instrument to come out of COP27 was the European Investment Fund which committed to 250 million euros with five equity funds to mobilise 2.5 billion of climate action and environmental sustainability investment across Europe. These ventures include the Growth Blue Fund I, Zintinus Fund I, Eiffel Transition Infrastructure Fund, the SUMA Capital Impact Fund III, and the PureTerra Ventures.
The funds will be invested in renewable energy, food innovation, the circular economy, energy efficiency, water, and the blue economy. Four out of the five agreements are also supported by the InvestEU programme, which is bringing EU financial tools to support investment by making project financing more efficient, easy, and flexible. The new financing contributes significantly to the European Green Deal, which is the roadmap for Europe to become the very first climate-neutral continent by 2050.
It also contributes to REPowerEU, which refers to the aim to rapidly lessen dependence on Russian fossil fuels and fast-track the green transition. The investment agreed upon will assist fund managers reaching the first close or maintaining their target fund size. The European Investment Fund agreed to 28 million to the Growth Blue Fund I, which is a private equity fund focusing on sustainable economic activities relating to the oceans (the blue economy). It will primarily invest in Portuguese small and medium businesses across all sectors.
A total of 30 million was agreed to PureTerra Ventures, which is a water technology early growth fund investing in small and medium enterprises across the European Union. These enterprises are scaling game-changing technologies which radically alter the conservation, treatment, and usage of water. PureTerra is the very first-of-its-kind specialist water-focused fund in Europe and the first water-focused investment to be in the European Investment Fund’s venture capital portfolio.
The European Investment Fund agreed to 39 million to the Zintinus Fund I, which is a venture capital fund focused on growth-stage investments within sustainable food innovation across Europe. This fund focuses particularly on clean nutrition, functional food, alternative proteins, and food waste reduction.
Additionally, 75 million was agreed to the SUMA Capital Climate Impact Fund III. This is an infrastructure fund targeting circular economy and greenfield energy transition projects in Spain. Finally, 75 million was agreed to by the Eiffel Transition Infrastructure Fund. This is an innovative fund designed to provide equity bridge financing for renewable energy infrastructure assets across Europe.
Exploring the impact of new financial instruments on SMEs
Small and medium-sized businesses are generally the ones who are innovative and create climate solutions to help us tackle climate change. Therefore, the financial instruments passed at COP27 will have a significant impact on helping businesses scale their solutions.
SMEs that are creating innovative solutions that align with any of the European Investment Fund’s categories will be able to benefit from having their solution supported. This is essential as a big barrier for SMEs creating groundbreaking solutions is finance because it is generally quite expensive to action these solutions. Additionally, the loss and damage fund also benefits SMEs, especially those in developing areas that are more susceptible to the effects of climate change.
SMEs have a vital role to play in our economies, but they are also very vulnerable to the effects of climate change. As a result, building their resilience is incredibly important. For example, disaster floods in 2011 in Thailand have had devastating impacts on SMEs. As a result, climate finance and the financial instruments considered at COP27 will play a catalytic role in supporting SMEs to manage climate risk and explore opportunities to build resilience.
SMEs are very necessary for addressing climate change because they are creating the solutions that can tackle this global crisis. In saying that, climate change technology can be expensive, so it is certain that SMEs need this support. Thanks to the financial instruments considered at COP27, SMEs will be able to build their resilience and create their solutions.
In addition to the above financial instruments, there are others that have been available for quite some time. In particular, ESG investing which is where people invest money to work in companies that positively impact society and the planet. There are also green bonds which finance projects that help to reduce the impact of climate change and protect the environment.
These, too, fall under the ESG category. Both types of sustainable finance have benefits for investors. Green bonds generally finance waste management, energy efficiency, and sustainable mobility projects. In addition, pollution prevention and control and sustainable infrastructure are other areas you can invest in with green bonds.
Sustainable finance is quickly becoming crucial to developing initiatives that reduce the negative effects of climate change. At the recent COP27 conference, a number of key financial instruments were introduced that will help developing countries adapt to the effects of the climate crisis.
Additionally, the European Investment Fund is also heavily investing in sustainable development projects to drive a more sustainable world. There are also other options like green bonds and ESG funds that are too making waves. Sustainable finance is what will help us mitigate and adapt to the effects of climate change. Moreover, it will push us forward to achieving the necessary climate goals.