In a few days’ time, on 6 November 2022, the UN climate change conference will open in Sharm El Sheikh, Egypt, and climate finance will be on the agenda. For obvious reasons, there will be nothing to brag about: not only are green financial markets in decline, but the developed countries’ pledges of grant aid to developing countries are still far from being honoured.
The issue of climate finance has been creeping up the agendas of international conferences at all levels ever since experts began sounding the alarm about the significant human footprint and the need to mitigate it. Understandably so: the damaging impact of human activity on the climate, and the damaging impact of climate change on people’s lives and health is getting worse and new solutions are required to defuse this conflict — technologies, business processes, responsible production and consumption patterns, and so on. In other words, a new low-carbon and responsible economy is needed, which cannot be built without oriented finance. However, due to well-known geopolitical processes, climate finance is not at its best right now.
At the UN Climate Change Conference in Glasgow in 2021 there were 120 world leaders and over 40,000 registered participants. The final Glasgow Climate Pact is replete with apologies and regrets: the global community and developed countries were already falling short of their targets for both reducing greenhouse gas emissions and financing their commitments to developing countries. It is clear that this year the promises and reality will diverge even further from each other.
The Paris Agreement: reconciling objectives
To begin with, I suggest looking carefully at the “terms of reference”, which in our case is the Paris Agreement, adopted at the UN conference in 2015 and signed by almost 200 countries, including Russia. It makes clear the document’s aim of enhancing implementation of the UN Framework Convention on Climate Change, adopted in New York on 9 May 1992, as well as strengthening the global response to the threat of climate change in the context of sustainable development and efforts to eradicate poverty.
This last addition is, in my view, critical to the raison d’être of climate finance, because the solution to the global problem of poverty eradication tends to get lost in the popular mantra that the top priority of the climate agenda is to keep the global temperature increase well below 2 °C, preferably to 1.5 °C.
In my view, the Paris Agreement contains a reasonable priority — addressing the urgent need to eradicate poverty in Africa, small island states and developing countries, because — as it happens — they suffer most from rising temperatures because of their “southern” location. If it gets hotter where it is already hot, food problems will increase.
I am sure it was on social grounds that the text of the Paris Agreement, after the objective of holding the increase in global temperature, included the objective of adapting to the adverse impacts of climate change and low greenhouse gas emissions development in a way that does not jeopardise food production.
Again, the focus is on social priorities, with which funding commitments were further linked: developed countries committed to providing $100 billion a year to developing countries to mitigate the climate problem and adapt their economies and populations to rising temperatures.
There are thus two critical dimensions to climate finance: the provision of funding by developed countries in the form of grants, and the leveraging of financial markets for sustainable development.
Green and climate: counting the joint cheque for now
For obvious reasons, not all green finance instruments focus on climate goals — preventing greenhouse gas emissions, capturing/reprocessing them or adapting to warming. The palette of accumulated environmental problems for which green money is attracted is certainly much broader: lack of drinking water, land desertification, declining biodiversity, untreated production and consumption waste, unsustainable use of energy and resources... And even if there are climate dimensions to these problems, it is currently almost impossible to identify the share of climate finance in total green debt.
Historically, although the climate theme has been the most prominent among the growing environmental problems, it has not yet been methodologically singled out as a separate segment of green finance. This is why the statistics do not show exactly how much money has been raised over a given period of time to address temperature rise or adaptation.
That being said, a further development of the climate theme in the financial market would seem to justify the separation of the green and climate segments. If you can’t count something, you can’t manage it. And currently, not only abroad but also in Russia, the conditions for the release of new climate instruments are being worked out with the appropriate label.
However, as long as the climate segment of the financial market has not gained its autonomy, we can judge the volume of funds raised to meet the Paris Agreement targets from the green labelling of financial instruments with a certain degree of conventionality. Moreover, climate finance continues to “hide” not only in green, but also in other financial instruments in the format of sustainable development.
How much money is going into the green transformation of the economy
Green finance is dominated by green bond issuance, accounting for 93.1% of all green finance globally between 2012 and 2021, according to estimates by TytCityUK, a UK-based industry finance organisation. Global green bond issuance increased from $2.3 billion in 2012 to $511.5 billion in 2021. "Green lending has grown rapidly since 2017, yet green lending activity remains limited and focused on the syndicated loan market, according to TytCityUK analysts. Over the past decade, global green IPO (initial public offering) activity has been volatile in both volume and value terms.
When looking at global green finance markets, the world’s largest economies (the US and China), with their huge capital markets, tend to be the most active in green finance in absolute terms. Although some European countries, notably Sweden and Germany, stand out as having significant green finance activity given their relatively smaller size.
The latest update of bond market statistics (as the main segment in green) from the CBI shows that in the first half of 2022, total debt designated as “green”, “social”, “sustainable”, “sustainability-related” and “transitional” reached $417.8 billion, down 27% from the first half of 2021.
Overall, global issuance of green, social, sustainable and sustainability bonds is forecast to fall by 16% to $865 billion by the end of 2022, according to a new report from S&P Global Ratings.
If S&P’s forecast comes to fruition, which is likely, it would mark the first annual drop in environmental, climate and social fundraising after several years of strong growth. Back in February, S&P’s estimate was $1.5 trillion in funds raised for 2022.
In Russia, the dynamics of fundraising through green, social and other targeted sustainability bonds are in similar trends. According to the INFRAGREEN Information and Analysis Platform Registry, there were 33 issues of green, social and other targeted bonds by Russian issuers in 2018-2021 with a total volume of about 418 billion roubles. Funds were raised for development projects through bond offerings on the Moscow Exchange, on foreign exchanges and over-the-counter. The bulk of the funds raised came in 2021, a year rife with innovation — in particular, last year Moscow Exchange listed the first Russian issue of sub-federal green bonds of the city of Moscow.
During the nine months of this year Russia placed one issue of green bonds of VEB.RF corporation worth 50 billion roubles and two issues of social bonds — DOM.RF Mortgage Agent LLC worth 6.7 billion roubles and SOPF Infrastructure Bonds LLC worth 15 billion roubles, which together are significantly lower than forecasts made by experts at the beginning of the year. In other words, development institutions are holding the agenda in this segment of the financial market, but it is clearly not enough for its growth and development. These are generally bad times for investment — not only in the green finance segment.
What is meant by an innovative climate finance system?
The roundtable on Innovative Finance for Climate and Development in Sharm El Sheikh will discuss this issue with representatives of all stakeholders: donor countries (developed countries), recipient countries (developing countries), and international financial institutions, international development banks and the private sector. Developed countries are likely to speak about the barriers to accelerating climate change investment — most notably, the lack of a large pool of ready-to-invest projects that recipient countries are expected to submit. Developing countries, for their part, will mirror this problem and talk about the difficulty of preparing projects in the absence of guarantees for financing. The content of this envisaged dialogue is not new.
So what is the stated innovation? The conference appears to be proposing a shift from grant aid to greater use of debt and other market-based climate financing mechanisms. This will include clearer guidance on how to use green market instruments, guidance for developing countries on how to prepare projects, and how to develop a global system of climate platforms where all parties can find each other.
Against this backdrop, China is calling for more concrete action by developed countries to meet the climate finance commitments already made to Africa. In mid-October, during the UN Security Council debate on climate and security, the Chinese representative said that helping Africa fight climate change is not about how loudly someone chants slogans, but about delivering on commitments and meeting Africa’s needs. A new collective quantitative target must be set so that African countries can get the real funds needed to do the work of adaptation that is yielding tangible results.
It is hard to disagree with such calls, because climate finance is primarily about money, not just advice. However, in a geopolitical crisis, the fulfilment of developed countries’ commitments to developing countries for an annual $100 billion in aid is unlikely to grow. It has been lagging behind even in relatively calm times. That is why the shift from outright non-repayable financial support to full repayable debt instruments with interest will be the main vector for innovative climate finance in the coming decade. This means that global green finance centres will be developing strongly, not only in Asia, but also in Africa.
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