Climate Change and Climate Finance Assignment

by

Sruthi Murthala

Kautilya School of Public Policy

Submitted to

Mr Udaibir saran Das

February 13th 2024.

Key takeaways from the course
1) The "queen" of the climate change chessboard, climate finance is a vital instrument in
the fight against climate change. This course gave me insights into various
gaps/limitations in the climate finance landscape and some of the notable problems
(notably in developing and emerging economies) are summarised below
There is a massive gap in financing climate action and the preconditions to climate
finance are macroeconomic and financial stability. The climate finance needs
estimation is developed from modelling based on narrow assumptions and technology
costs. The simplified representation can't capture real complexities/challenges.
Moreover, no established (standard) modelling methodologies exist to measure
climate risk. Mitigation projects receive significantly larger investments than
adaptation ones due to the difficulty of estimating adaptation costs, their lower
profitability, and the difficulty of tracking and quantifying adaptation's effects.
Although each $ put into adaptation can yield up to $ 2-10, the private investments are
meagre and the costs required for climate adaptation are massive. Thus, in such cases,
public investments are needed. I was surprised by the fact(s) that climate funds are
primarily going towards energy efficiency and renewable energy rather than
sustainable transportation and food systems—two things essential for a developing
country like India that depends heavily on agriculture. Emerging markets and
developing economies (EMDEs) rely heavily on private-sector funding support for
climate action. Because governments in these economies are in restricted financial
positions, the private sector is vital to the climate finance of EMDEs. There would be
political pressure and governments would have to borrow money, increasing the
national debt, if private financing were scarce or nonexistent in these economies.
International finance from developed countries is required in scale and the need of the
hour because of their climate pledges/commitments and historical obligations of their
emissions.
2) Another crucial insight I have gained from this course is about the vital role of banks
in climate finance (sustainable finance), which is crucial to achieving net-zero
commitments. The city bank case study helped me understand that apart from the
traditional role banks play, they also have an important role in action against climate
change. According to the World Economic Forum 2024, climate risk(s) top the chart
of severe global risks and extreme weather events are set to heighten with increased
frequency by 2030. The two types of climate financing risks are physical risk and
transition risk, and it is crucial to include them in the governance and risk
management framework. Climate risks may impact cash flows and the financial sheet
if they invest in brown projects like oil, mining, etc. Hence, I have explored a new
area, “climate risk”, a new work area for central banks and financial regulators.
Central banks can use regulations and design monetary policies that promote
sustainable finance by offering incentives for green investments and taxing high-
carbon investments. They can help to transition to a low-carbon economy by ensuring
the long-term health of the financial markets. However, the following are some
challenges that banks and financial regulators face
i) Lack of uniform taxonomy and the problem of aggregate confusion
ii) Large gaps in climate data and disclosures
iii) Lack of data and disclosures leading to problems in monitoring, reporting and
verification (MRV)
iv) Adding climate risks into the bank(s) purview can be an additional burden.
Mitigation and adaptation need strong balance sheets, and reducing macro-
financial risks in countries under “double jeopardy” is challenging for central
banks.
v) The problem of systemic risk and cross-border issues.
vi) The problem of Greenium and the lack of penetration of green bonds in the
markets must be addressed with policy interventions.
My key takeaway is that the share of money invested in creating a positive
climate impact is small and needs to be scaled up as the majority of the funds
investing based on ESG factors don’t focus on climate issues. Thus, policies
play a crucial role in advancing climate action.