Climate finance plays a critical role in addressing climate change
Climate finance refers to "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." (source: UNFCCC)
Climate change presents the single biggest threat to sustainable development and its widespread, unprecedented impacts disproportionately burden the poorest and most vulnerable communities.
As the climate emergency intensifies, the public and private sectors need to unite to address the increasing threat of climate change to limit a global temperature rise to no more than a 1.5 degree Celsius increase, a target which the world is currently nowhere near on track to meet. Stakeholders around the world urgently need to take action and fund solutions to mitigate climate change impacts, pave the way to a low-carbon economy by lowering greenhouse gas emissions, provide greater access to clean energy solutions, and more. Several of the United Nations Sustainable Development Goals (SDGs) aim to address various environmental challenges; however, the UN estimates that we need $3-5 trillion dollars annually to make the SDGs a reality.
Given that large scale capital is needed for a low-carbon transition—to mitigate the effects of climate change, support solutions for climate adaptation, and reduce global greenhouse gas emissions—the need for climate finance is more urgent now than ever before.
What is climate finance?
The United Nations Framework Convention on Climate Change (UNFCCC) refers to climate finance 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.”
The public sector and civil society play a crucial role in climate finance, yet the private sector and impact investors in particular, play a crucial role as well.
Impact investors seek to generate positive, measurable social and environmental impact alongside a financial return. Many are focused on investing in climate solutions - a strategy which, in many cases, yields above market rate returns, depending on asset class and fund selection.
Mobilizing capital from institutional investors will be a key lever in driving the change needed to fill this funding gap to address the climate crisis.
Climate finance leadership landscape: United Nations Framework Convention on Climate Change, UN SDGs, and more
Various stakeholder groups have played a role in the evolution of climate finance. Some of the key frameworks and conventions that have paved the way for others to take action to invest in climate solutions in a coordinated way include:
Note: the following excerpts are derived from the UN's websites.
United Nations Framework Convention on Climate Change (UNFCCC) – The UNFCCC took effect in 1994. It was established to urge developed countries to lead the way “to stabilize greenhouse gas concentrations at a level that would prevent dangerous human induced interference with the climate system.” The UNFCCC also called for new funds to climate change activities in developing countries. Under the UNFCCC, “industrialized nations agree to support climate change activities in developing countries by providing financial support for action on climate change—above and beyond any financial assistance they already provide to these countries. A system of grants and loans has been set up through the Convention and is managed by the Global Environment Facility (GEF).” More about the UNFCCC here >
Kyoto Protocol – Adopted in 1997, this Protocol took things one step further by building on the mission of the UNFCCC, the Protocol “is an international agreement linked to the UNFCCC, which commits its Parties by setting internationally binding emission reduction targets.” The Kyoto Protocol also laid the groundwork for the Adaptation fund, which is part of the Protocol’s efforts to “facilitate the development and deployment of technologies that can help increase resilience to the impacts of climate change.” More about the Kyoto Protocol here >
Paris Agreement – To strengthen global efforts to limit global temperature rise, in 2015, the Parties to the UNFCCC “reached this landmark agreement to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future. The agreement builds upon the Convention and, for the first time, brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects, with enhanced support to assist developing countries to do so...Additionally, the agreement aims to increase the ability of countries to deal with the impacts of climate change, and at making finance flows consistent with a low GHG emissions and climate-resilient pathway." More about the Paris Agreement >
UN Sustainable Development Goals (SDGs) – Established in 2015 and adopted by the 193 UN Member States, the SDGs underpin the 2030 Agenda for Sustainable Development, which “provides a shared blueprint for peace and prosperity for people and the planet, now and into the future.” The 17 SDGs build on decades of work by countries and the UN, and call for the collaboration between the private, public, and philanthropic sectors to further social and environmental progress across a wide range of themes and sectors. More about the UN SDGs here >
How are investors taking action?
One of the unifying themes of each of these conventions/agreements/frameworks is the call for more investment into climate solutions. Both public institutions and private investors are responsible for mobilizing capital – and many around the world have been compelled to take action and are already aligning their portfolios to these frameworks.
According to the GIIN’s 2019 Annual Impact Investor Survey, 50% of investors surveyed said they “considered contribution to a global agenda, such as the United Nation’s Sustainable Development Goals or the Paris Climate Accord, a ‘very important’ motivator for making impact investments.” These frameworks and agreements have also played a key role in motivating more people to work in impact investing, as 51% of those surveyed by the GIIN said their motivation to work in the space was driven by a “Desire to contribute to progress against global goals (e.g., Sustainable Development Goals or Paris Climate Accords).” It is evident that investors are increasingly aligning their portfolios to these frameworks as well. The Survey also revealed that, “more than 40% of impact investors reported tracking the performance of all of their investments to the SDGs, and 20% reported doing so for some of their investments. Another 15% plan to do so in the future.” That said, even more needs to be done to raise new capital and mobilize more funding for climate solutions.
Climate change investors
A variety of financial institutions play a role in climate financing – both public and private funding is needed to address the scale of environmental challenges facing people and the planet. Impact Investors across the returns spectrum are investing in climate action, including:
- Banks and other private financial institutions
- Institutional asset owners, including pension funds, insurance companies, and sovereign wealth funds
- Private wealth advisors and family offices
- Development Finance Institutions
- Public agencies and international development organizations
Key steps in shifting to a low carbon economy
The GIIN’s Evaluating Impact Performance Study includes findings from a 2017 report by the European Environmental Agency, “Energy and Climate Change,” which state that: two-thirds of greenhouse gas (GHG) emissions are linked to fossil fuels burned for everyday use, with electricity usage alone accounting for an estimated 25% of GHG emissions. Adapting clean energy sources and reducing overall energy usage is therefore a crucial first step in mitigating climate change and achieving the Paris Climate Agreement targets. Successfully transitioning to a low carbon economy also requires partnerships that can successfully structure products that can absorb commitments to climate finance.
The GIIN's key climate initiatives & resources
Over the years, the GIIN has led activities that seek to arm investors with the knowledge and tools necessary to effectively make impact investments to a variety of climate-focused investments.
The GIIN believes that now, more than ever before, impact investors need to play a role in addressing the climate emergency. Whether through blended finance solutions, or other climate focused investment strategies such as sustainable forestry, investments in clean energy access, climate mitigation and adaptation, to name a few, impact investors must take action to help the world transition to a low-carbon economy. The risks are too high for impact capital to underperform.
Going forward, the GIIN is developing a multi-year agenda that aims to leverage its influence and network in meaningfully addressing the climate crisis.
The GIIN seeks to expand its portfolio of climate-focused activities to include:
- Mobilize Capital for Climate Investing in Emerging Markets through the GIIN’s Climate Investing Track
- Launch of Sustainable Forestry IRIS+ theme, including 5 Core Metrics Sets
- Data collection for Evaluating Impact Performance: Agriculture Investments
- Launch of Navigating Impact project Climate Mitigation theme
- Launch of Evaluating Impact Performance: Agriculture Investments
In addition, the GIIN will be conducting a carbon footprint analysis and aims to become a Carbon Neutral organization and will be focused on offsetting all business travel going forward with CarbonFund.
Furthermore, climate change is a global crisis, which means addressing the threats of climate change is a global effort. The GIIN is actively building relationships with stakeholders around the world. One area of strategic importance in particular in the year ahead is Sub-Saharan Africa, as the GIIN’s Climate Investing Track is conducting a research effort on climate finance in this region.
GIIN Resources on Climate Investing, Clean Energy, and Related Topics
The GIIN has led many efforts to produce research, tools, and other resources to help investors better understand how to address the climate crisis. These include:
Membership Working Groups:
- Climate Investing Track – seeks to mobilize capital toward investments that mitigate climate change. By engaging investors around targeted impact objectives and sectors, and working to build fit-for-purpose investment products, the track aims to support a low-carbon transition, help to prevent future emissions, and contribute to the sequestration of existing atmospheric carbon.
- Climate Finance in Sub-Saharan Africa - The GIIN has recently launched a research effort aimed at better understanding capital gaps for climate finance in Sub-Saharan Africa. It will bring together a coalition of investors and other actors to identify capital gaps, associated barriers, and actionable solutions for climate change. The effort seeks to mobilize climate finance in emerging markets, particularly the capital needed to support commercially viable climate mitigation strategies in the agriculture, transport, and energy sectors. The effort also aims to translate the commitments and goals being set by countries into usable information for GIIN members and other interested impact investors. Learn more here >
Measuring, Managing, and Optimizing Impact Performance:
GIIN Research and Case Studies:
- Scaling Impact Investment in Forestry - assesses asset owners’ motivations for and needs when investing in sustainable and impact forestry, a sector which offers both the commercial viability and the scale necessary to stem the effects of climate change. The report also describes the key features, revenue sources, and drivers of risk for asset managers active in the sector.
- Product Development Workshop paper on SDG 15: Life on Land – Impact investments aimed at achieving the targets of Sustainable Development Goal (SDG) #15: Life on Land have the potential to deliver critical social and environmental results at scale. The GIIN hosted two successive product structure workshops in 2019, bringing together asset owners with fund managers in the midst of structuring investment products. These workshops aimed to expose asset owners to a range of funds targeting SDG #15 and improve the alignment between investor needs and investable products. This issue brief is a synthesis of the workshops, including investor reactions to fund design attributes.
- Achieving the Sustainable Development Goals: The Role of Impact Investing – The GIIN profiled a variety of impact investors in September 2016, to demonstrate how impact investors have begun to utilize the SDG framework to map existing portfolios to the SDGs to address a variety of global issues such as access to clean water, improving health and well-being, climate change mitigation, and more.
- Financing the Sustainable Development Goals: Impact Investing in Action – This compendium of case studies reiterates the need for impact investors to raise and direct new capital to help meet the SDGs by 2030 and showcases how select impact investors are taking action. For instance, it describes how the SDGs can be woven into the various stages of the investment cycle, as well as investors’ motivations for doing so, advice for other investors, and outlook for the industry.
- The Financial Performance of Real Assets Impact Investments: Introducing the Timber, Real Estate, and Infrastructure Impact Benchmarks – This report is part of the GIIN's efforts to build a robust evidence base of financial performance data in various asset classes, which finds that some sectors see outperformance in the impact universe of investments. Real assets can play several roles in institutional portfolios, providing diversification, current income, the potential for strong, long-term returns, and an inflation hedge. In addition to these benefits, real assets impact investment funds can also help achieve important impact objectives. For example, many timber-focused impact funds in this study pursue sustainable timber production or land conservation; many real estate-focused impact funds focus on green real estate and/or affordable housing, and most infrastructure-focused impact funds target renewable energy generation.
- Evaluating Impact Performance Studies – Investors need to know how their investments are performing on both financial returns and impact. The GIIN’s Evaluating Impact Performance series provides the impact investing industry’s first collaborative effort, presenting an approach that advances investors’ ability to compare impact performance rigorously within a sector. Two installments published to date have been focused on access to clean energy and housing. The GIIN will be releasing two new installments of these impact performance studies on agriculture and financial inclusion in the Fall of 2020.
- Network Insights: Impact Measurement in the Clean Energy Sector – The report examines the impact measurement approaches of 13 GIIN members (including fund managers, foundations, development finance institutions (DFIs), and banks) who invest directly into clean energy companies— detailing the metrics, methodologies, and assumptions they use to measure impact as well as the challenges and limitations they face. The report aims to bring greater transparency to the diversity and limitations of current impact measurement approaches, facilitate shared learning, and provide a tangible resource for those who are new to the sector or seeking to improve practice.
- GIIN Case Studies:
- Climate Investing Track case studies:
- Other related case studies covered in other GIIN publications:
- Roadmap for the Future of Impact Investing – The GIIN Roadmap details six categories of action that the impact investing community needs to take on to exponentially enhance and scale impact investing, and to accelerate progress toward the GIIN’s vision of a future where impact is integrated into all investment decisions.