Dubai to Davos, the 'just' climate finance conundrum

As our hot air meets the cold air in the Swiss Alps this week, I have been reflecting on why climate finance seems so stuck. Whilst the case for green finance seems increasingly clear, financial markets still seem to struggle with the reality that the money is not flowing at anywhere near the rate required and, also, not to where it is needed most: i.e. those most vulnerable to the effects of climate change and the effects of the climate action the world must take.

Last month, at COP28 in Dubai, the final version of the “first global stocktake ” document agreed wording on “transitioning away from fossil fuels in energy systems, in a just, orderly, and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science”. This ‘critical decade’, basically the next six years, requires a "tripling of renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements” by 2030. Finance is critical and the state parties to the Paris Climate Agreement witness the “growing gap between the needs of developing countries and the support provided to date”. ?There is frustration that a promise made in 2009 by richer countries to mobilise $100 billion a year by 2020 has only just been met (possibly) and that overall investment needs to rise radically to $5.8-5.9 trillion a year until 2030. Adaptation finance has been long overlooked and this needs to increase to between $215-387 billion annually up until 2030, whilst ￡4.3 trillion per year needs to be invested in clean energy up until 2030, and then $5 trillion per year thereafter until 2050.

There is not a green energy investment problem in many rich countries. Financial challenges within the OECD tend to be as much about planning processes, supply chain procurement or grid infrastructure. In poorer countries the lack of investment is stark. Green finance, even when fully mobilized, is not going to many of the places it is most needed. As the Climate Action Network (a global alliance of environmental NGOs) puts it: “the transition is not funded or fair” when it comes to the Global South.

There has been a tendency in the Global North to factor out social issues from green finance, there is (for example) no reference to social risk in the Taskforce on Climate-related Financial Disclosures . Perhaps including social factors within (scientifically based) green measurement is seen as a delay, adding un-needed complexity and political factors into what otherwise is more scientific, measurable and, increasingly, market-based criteria. The fight to get financial markets to internalise their environmental externalities is still ongoing, why pollute it with messy, poorly defined, social requirements?

But as I trudge up to #Davos I reflect on whether we are now at an inflection point. That rather than delaying things, our avoidance of social content within green finance is, itself, the problem. Externalising the true social cost of finance risks undermining the wider green finance agenda particularly in reaching the most vulnerable workers and communities where it is needed most.

So the (perhaps na?ve) questions I am asking this week are:

·????? To what extent is green finance truly externalising social factors or are they implicitly part of commercial and political considerations. The livelihoods and energy and other needs of poor and marginalised people are inherently less attractive to private capital than those in richer countries, particularly when government subsidies are also available in Europe and North America?

·????? Most of the Just Transition frameworks that have currently been developed either make the long-term ‘ESG’ case that development goals cannot be disaggregated from environmental targets but do not usually deliver this within specific financial instruments.

·????? When Just Transition is integrated into specific financial arrangements, it is usually framed as an issue of risk management and aligning with necessary social safeguards. This is unlikely to meet the expectations of workers and communities within specific place-based transitions, those who are most concerned with the outcomes and transformational potential of transition rather than just the risks to be avoided or managed.

·????? Just Energy Transition Partnerships (JETPs) are one interesting attempt to buck these prevalent trends and it remains very early days. But one initial conclusion to draw from the way JETPs are structured is that just transition finance is essentially blended finance, and the higher the ‘justice quotient’ of specific investments the more reliance it is likely to be on sovereign sources at concessional rates? Perhaps this is self-evident but if it is, it is rarely stated.

·????? What then is the right mix of public, private and philanthropic sources most conducive not just to just transition safeguards but also outcomes? How does this translate into specific financial instruments?

·????? What kind of mechanisms are needed to deliver these instruments? In particular- how can just transition finance be delivered locally where it is needed most through place-based mechanisms that are trusted by workers and communities?

Part of the Just Transition financing conundrum is the fact that justice is in eye of the beholder and transitions will only be “just” if workers, indigenous peoples and affected communities feel this to be the case regardless of how many principles, checklists and due diligence that is in place. Therefore, financing arrangements have to be place-based and delivered in ways that are felt to be fair and accountable.

These are some of the questions in my head as I prepare to moderate the Government of Switzerland ’s session on this issue in #Davos this Thursday. ?I will reflect what I have learned on the way back home.

#JustTransition #Davos #ClimateFinance

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