With COP27 just around the corner, the question on many peoples’ minds is: what about the money? Indeed, at COP26, the issue of how to address the cost of losses and damages that result from climate change became a contentious one. The problem of funding will once again rear its head at COP27, as finance permeates all the themes of the conference. In this article, we explore the core topic of finance at COP27 and explain how it can play a key role in facilitating progress toward the Sustainable Development Goals (SDGs) at COP27.

What is climate finance?

Climate finance has no singular definition from the UN. However, it can generally be understood as “local, national or transnational financing – drawn from public, private and alternative sources of financing – that seeks to support mitigation and adaptation actions that will address climate change” (UNFCCC). A narrower understanding of climate finance limits its definition to the transfer of funds from the Global North to the Global South in accordance with the Paris Agreement. 

An example of climate finance in action can be seen in Egypt, the host nation of COP27. Benban solar park lies in the country’s western desert region and now constitutes the world’s fourth largest solar power plant. Funding for the project came from a group of nine international banks organised and spearheaded by the World Bank. The reduction in carbon emissions from this switch to a renewable energy source equates to taking hundreds of thousands of cars off the road. Thus, this externally funded project contributes meaningfully to Egypt’s nationally determined contributions (NDCs).  

Why is climate finance important?

Climate finance plays a vital role in global climate action because of its influence across all phases of a project or process. It plays a particularly important role in facilitating implementation efforts worldwide, especially in the Global South. Climate financing has historically been primarily geared towards mitigation, rather than adaptation, the latter of which disproportionately affects the Global South. The Global North intends to significantly increase its funding for adaptation measures by 2025. However, the goals are still far short of what is needed to protect vulnerable peoples and communities from the effects of climate change.

In addition to its environmental and social benefits, climate finance also creates tremendous financial value in the long term. The World Bank estimates that investments in the green economy yield $4 of benefit for each $1 of investment. Post-COVID, UN Secretary-General António Guterres has laid out several economic priorities for recovery, including:
•    investing in decent jobs
•    no bail-outs for polluting companies
•    abandoning fossil fuel subsidies
•    ending investment in and construction of coal-fired power plants
•    taking climate risks and opportunities into account in all financial and policy decisions
•    increasing international cooperation.
Plans for the greening of the world economy present exciting opportunities but will require significant collaboration and investment from stakeholders across sectors.

Where will climate finance come from?

Less clear than the benefits of climate finance are where the funds for these measures will come from. Currently, various climate funds such as the Green Climate Fund (GCF), and development banks such as the European Bank for Reconstruction and Development (ERBD), work to deliver climate financing worldwide. However, under the Paris Agreement, Global North countries pledged to provide US$100 billion to the Global South by 2020, an aim that has still not been achieved. Such financing gaps need to be bridged if the 1.5 °C goal is to be achieved. At COP27, Global South countries will seek assurances of this previously pledged funding.

It is likely that both public and private financing will be needed to overcome this funding gap. There is increasing private interest in investing in climate action projects worldwide, but private financing remains lagging overall. Nevertheless, many options exist for governments to incentivise private sector involvement. For example, according to UN Special Envoy on Climate Finance Mark Carney, a climate-friendly financial system is gradually being established to further encourage private investment as a complement to government policy. This includes efforts such as the Task-Force for Climate-Related Disclosures (TFCD), a voluntary framework which will address climate risk management and reporting for financial decision-making.

Financing the Future

Ultimately, finance is a critical issue at COP27 because of its cross-cutting nature and role as a driver of both mitigation and adaptation. Progress in developing international climate financing efforts has been lacking. The Global North must follow through with the pledges of funding made to the Global South. Additionally, a blended approach of public and private financing is best suited for eliciting the large sums of money necessary to transition to a green economy. The long-term benefits of doing so far outweigh the short-term costs, in both financial terms and for the long-health and well-being of the planet and its people.

For more information on COP27, check out our climate action insights or contact us.