Keynote for P4G Seoul 2021

This week’s P4G Summit is an important opportunity to build momentum to deliver global climate change ambitions whilst also realising the Sustainable Development Goals.

The ambition is there - as the P4G slogan states: Green we go, change we make!

But to realise that change, we need climate finance.

And today, I am proud to be able to launch a GCF's publication to contribute to the dialogue on how we can achieve this: Scaling up climate finance in the era of COVID-19.

The report is the result of a collaboration between IPCC and GCF experts from many disciplines. It aims to help financial decision-makers incorporate climate change in the valuation of financial assets and accelerate the transition to a net- zero, climate resilient economy, based on the latest scientific findings and policy developments.

While some financiers are already factoring the financial implications of climate change in their investment decisions and capitalizing on the new opportunities of a climate economy, a key finding of the report is that the financial system will not be able to redirect private capital at the needed scale in the absence of policy interventions. The report discusses past and on-going efforts to align finance with sustainable development. It recommends a better integration between the two main approaches in vigor: market fixing and market shaping and proposes four interventions to achieve this objective in the context of Covid- 19.

In my remarks this evening I would like to give you a summary of the main arguments in the paper, and its recommended solutions to respond to the twin challenges of climate and COVID-19.

Ladies and gentlemen, the Paris Agreement aims to limit the increase of mean global temperatures since pre-industrial levels to well below 2°C, while pursuing efforts to stay within 1.5°C.

But we are not on track to achieve this.

The full implementation of all the individual pledges made under the Paris Agreement through the Nationally Determined Contributions is projected to result in an increase of temperatures somewhere between 2.9 and 3.4 degrees Celsius.

We have already reached a warming of 1.2 degrees Celsius above pre-industrial levels last year. This is affecting all earth systems and many human systems. Climate change is not only materializing faster but its impacts are more severe than initially anticipated.

If we reached a 2°C increase then this could wipe out 90% of coral reefs and endanger the security and economic livelihoods of hundreds of millions of people.

If we reached a disastrous 3°C or 4°C of warming this would trigger very large, abrupt, or irreversible changes in the climate system with cascading impacts on nature and humans.

To stabilise the global mean temperature, global CO2 emissions must decline to zero. So we need to step up global action.

The net impact of warmer climates on people, ecosystems and the economy is the result not only of temperature increases, but also of the capacity to prevent damage and adapt to the changing circumstances. Poorer countries, where access to information, mobility, infrastructure, and state support is more limited, are typically the most exposed and the impacts of a warmer world so far have been experienced unevenly.

However, there are also some positive signs. Over the past 2 years, 123 countries responsible for 63% of emissions have adopted or are considering net zero emission targets. These net-zero targets have put the Paris Agreement’s goals within striking distance. A key challenge now is to translate these political commitments into detailed emission reduction pathways and financing plans.

We know that we need to get to net zero. And we also know that there are different routes to get there.

The IPCC’s 1.5 Celsius report set out four different pathways to reduce emissions: P1, P2, P3 and P4. The first two pathways emphasise eliminating CO2 emissions quickly in the next decades by limiting demand for CO2 and increasing energy efficiency, whilst the third and fourth pathway rely to a large extent on removing carbon dioxide from the atmosphere through biological solutions such as tree planting or technological solutions such as direct air CO2 capture and storage, where CO2 is extracted from the air with chemical processes.

Analysis of the development implications for each of these pathways gives a clear conclusion: quickly reducing CO2 emissions along the P1 and P2 pathways is the best strategy to optimize development co-benefits of climate action. It is the most closely aligned with the Sustainable Development Goals and gives us a better chance of adapting to climate change.

In contrast, delaying CO2 reduction, and relying on unproven technologies to remove CO2 from the atmosphere along the P3 and P4 pathways is likely to create tensions and trade-offs between mitigation, adaptation, and sustainable development goals.

That is because it would increase the risks of trade-offs between carbon removal interventions and other societal goals such a food security and biodiversity conservation. Hard limits to adaptation could also be reached if we delay emission reduction, such as thermal limits of survival for species, or sea level rise so great that permanent relocation will be the only viable adaptation strategy for low-lying areas.

The good news is that we can still just remain within the 1.5 degree threshold if we act now.

But to do so will require us to dramatically scale up climate innovation and climate investment.

Financing a rapid transition to a net-zero emission, climate-resilient economy will require significantly more investment, investment in a different set of assets, and investment that addresses the humanitarian imperative of social inclusion and poverty alleviation.

Global low-carbon investment needs are estimated at between 3.9% and 8.7% of the world’s GDP over the next two decades.

More challenging is the need to reduce the existing infrastructure investment gap in developing countries– the difference between available finance and what they needed to complete their infrastructure development. The infrastructure gap could reach a cumulative value of $14.9 trillion worldwide in 2035, meaning a doubling of the global deficit to 15.9%.

With an estimated $14 trillion of negative-yielding debt in OECD countries and $26 trillion of low carbon, climate resilient investment opportunities in developing countries by 2030, capital in search of higher yields should flow from developed to developing countries to address this infrastructure investment gap.

But the paradox is that this is not yet happening. That is because there are barriers to this flow of capital: political and regulatory barriers; macroeconomic barriers; and technical barriers. These barriers translate into higher investment risks. Entrepreneurs will therefore expect higher returns before investing their time and personal resources in an infrastructure project.

Similarly, finance providers will demand a higher margin and offer less attractive terms to protect themselves from these higher risks, affecting the attractiveness of the investment. The additional financing costs are even higher in less developed countries in which infrastructure projects would not reach investment grade.

We need to overcome these barriers to align finance with sustainable development, and two approaches are explored to incentivize the changes needed: market fixing and market shaping.

Market fixing relies on price signals to create a demand for low carbon and low- climate-risk goods and services and shift financial flows towards climate-friendly investments. To achieve these objectives, it calls on scaling up carbon pricing and promoting climate risk disclosure and taxonomies.

There is a widely shared consensus in economics that, in a frictionless world with perfect capital markets and without uncertainty, carbon prices would be sufficient to secure the attractiveness of low carbon options for capital markets. In the real world, however, the carbon price signal is swamped by the noise of other signals, such as oil prices, interest rates, and currencies exchange rates in addition to business uncertainty. The political capacity to set carbon prices at a level high enough to cover these noises is uncertain.

Market shaping intervenes at the level of sector policies and endeavours to create a demand for, and directly de-risk the supply of, climate-friendly investments to crowd-in private finance. Thousands of climate policies and instruments to shape markets are currently in use to foster climate-friendly investments globally.

A common limit of these instruments lies in the fact that the higher their cost on the public purse, the tighter the public funding constraints, the lower the political credibility of their maintenance over time.

Furthermore, the use of blended public and private finance to de-risk market creating investments has proven effective for mature technologies in mature markets, but not for early-stage technologies in early-stage markets. And the overall leveraging ratio of blended finance in climate change was low. On average, every $1 of public resources invested leveraged just $0.37 of private finance in LICs.

The good news is that experience to date shows that these two approaches of market fixing and market shaping are mutually supportive and should be deployed in tandem. The combination of the two approaches helps overcome the constraints inherent to each approach and increases the overall efficiency and effectiveness of public policies and finance to accelerate the transition to net-zero climate-resilient economies.

But the challenge of deploying and combining these two approaches must now be faced alongside another global threat: the COVID-19 pandemic.

The COVID-19 pandemic has pushed the global economy into its deepest recession since the Second World War. The pandemic has been particularly devastating for developing countries. It has led to an increase in the number of people facing food insecurity from 135 million in 2010 to 272 million now, as well as to a large increase in unemployment, and to 500 million additional people falling below the poverty line.

To stimulate the economy and mitigate the impact of Covid-19, governments are undertaking large-scale expansionary fiscal measures. Depending on their green contents, these stimulus measures can either entrench our dependence on fossil fuels or accelerate our transition to net zero emissions by 2050.

The UN Environment Programme estimates that so far only 18% of recovery spending and only 2.5% of total spending will enhance sustainability in the 50 largest economies.

Equally concerning, developed countries have spent 17 times a greater amount on a per capital basis in stimulus measures than developing countries. One of the key reasons for this disparity is the difference in the cost of additional debt. For most high-income countries, the cost of additional debt is close to 0% per annum. For developing countries, with low credit ratings, interest rates are significantly higher, increasing the cost of any new debt thus burdening and stretching fiscal budgets.

It is imperative to increase the ability of developing countries to implement green, climate resilient recovery packages without increasing their debt burden.

So how do we find financial solutions to the twin challenges of climate action and COVID-19's economic impact?

Four complementary solutions are set out in more detail in our new publication,

Scaling up climate finance in the era of COVID-19.

First, we need to support integrated policies on climate action, sustainable development, and COVID-19 stimulus.

Nationally Determined Contributions (NDCs) are at the heart of the Paris Agreement. They could serve as a vehicle to support such an integration as countries are currently in process of updating them. Doing so could allow countries to reduce investment needs by up to 40% according to some estimates, as well as leverage the stronger economic multiplier of climate action to build back better and raise the climate ambition in their revised NDCs. This will require to translate the NDCs into detailed investment plans.

Second, we must alleviate debt burden so that developing countries have the fiscal space to finance their green, climate-resilient recovery plans.

One bold way to do this would be through ‘debt-for-climate swaps’ at scale - a partial cancellation of debt by the creditor government transforming the remaining part into local currency and directing it to investment in climate action.

This would be additional, not an alternative to the commitment of developed countries to mobilize $100 billion in climate finance per year by 2020 for developing states.

Third, we need to leverage sovereign and multi-country guarantee funds to reduce investment risk and catalyse private finance.

The experience of blended finance highlights the importance of sovereign guarantees to overcome the barriers hindering climate-friendly investments in nascent technologies in nascent markets. Such guarantee funds reduce upfront risks, provide a broad risk coverage, a lower cost for public budgets, and a high leverage ratio of public to private capital.

They can allow developing countries to increase their access to capital markets, as well as to help strengthen climate disclosure and increase the effectiveness of carbon pricing.

Finally, we must increase developing countries’ access to the green bond market.

The potential of the green bond market is estimated at €29.4 trillion by 2030 but so far has only reached $1 trillion in the ten years since their launch. Realising the potential of the green bond market can drive new public-private partnerships and increase access of developing countries to long-term affordable debt.

We can do this by creating new assessment methodologies to ensure first, strong country ownership to optimize development co-benefits; second high climate impact to guard against green washing; and third clear additionality to mitigate the risk that public de-risking generates windfall profits to investors for projects that would have been undertaken anyway.

Finally, these new assessment methodologies should also ensure an accurate evaluation of the risk/return profile of climate resilient infrastructure investments against conventional infrastructure and enable them to be recognized as a new asset class.

Together these four approaches can allow us to build back better, to reach our climate ambitions, and to keep global warming well below 2 degrees Celsius.

Thank you very much for your kind attention.