Mind the gap: what it takes to finance a greener future

Complacency in fighting climate change and preserving biodiversity is endangering our economic survival. The longer we wait, the higher the costs will be.

We’ve all heard it time and again: either we tackle climate change and safeguard nature, or we face the steep price of our inaction. And that price is rising by the day. Just consider the recent flooding in Spain, the droughts in the Amazon basin or the storms in North America. These events are horrific in and of themselves, but they are also ruining the foundations of our economies and, ultimately, the basis of our economic survival.

Tackling the climate and nature crises demands urgent investment in three areas: climate change mitigation, adaptation and disaster relief. In other words: we must curb climate change to the greatest extent possible, prepare ourselves for what we cannot avoid and help those who are hardest hit. All of this is vital — and all of it is costly. But so far, we have mobilised only a fraction of the funding we need.

To stay on track to meet Paris Agreement goals, global annual investment in climate change mitigation designed to help transition our economies have to reach up to USD 11.7 trillion annually by 2035, according to estimates by the United Nations Environment Programme (UNEP). That equals about 10 percent of global economic output. The energy transition alone requires investment in clean energy to triple by 2030. We urgently need to unlock all possible sources of capital, at speed and at scale, and to put in place the regulatory conditions to finance our green future and preserve nature.

Climate change and nature degradation will transform our societies irrespective of the actions we take. That means we must adapt and become more resilient – and we must do so in a manner that is fair and equitable.

Even in the most optimistic scenarios, governments will need to help, particularly those in the most vulnerable groups. Yet, looking at the investment for climate adaptation, the difference between what is needed and what is planned – what we call the “financing gap” – is widening. UNEP also estimates that those financing needs are growing. They are 50% higher than previously estimated and up to 18 times greater than current commitments.

Falling behind on climate change mitigation and adaptation increases the risk of natural disasters and, in turn, the need for disaster relief. It is especially a duty for the strongest countries to help the most vulnerable ones, for both humanitarian and economic reasons. But here again, our efforts are far from sufficient, and funding for climate disaster relief is a long way from where it needs to be.

This is in part due to the widening gap between insured and uninsured losses. According to Swiss Re, only 38% of the total USD 280 billion in global economic losses in 2023 was insured, and most of it was concentrated in the industrialised world. The agreement on the Loss and Damage Fund reached two years ago at COP 27 in Sharm el-Sheikh was a welcome step, and COP 29, which begins this week in Baku, is an opportunity for countries to equip it with the capital it needs. Given the unequal impacts of climate change, however, more developed countries should increase their contributions to it.

Climate change and nature degradation are threats to our economies. This is why the European Central Bank and other central banks take them into consideration when working to keep prices stable, banks sound and the financial system safe. It is our task to gather and analyse data on how climate change and the loss of nature have an impact on banks and the economy. This can help to guide already committed and future funding efficiently, so that the economy will align with the Paris goals.

But it is governments that are at the forefront of the fight against climate change. They are the ones with the means and the tools to tackle it. However, they cannot do so alone. Companies, capital markets and venture investors will also have a vital role to play in financing green innovation. And within the EU, structural policies, fiscal incentives (such as carbon pricing and abolishing fossil fuel subsidies), transition plans and progress on the capital markets union are all critical to removing investment barriers and accelerating the green transition.

Tackling climate change and safeguarding biodiversity fairly and equitably is not a task we can afford to leave to future generations – it is our duty to act now. To ensure our economic survival, we need to invest in our green and resilient future. This year’s COP marks the time to close the global climate finance gap.

This article originally appeared as a post on The ECB Blog and as an opinion piece in The Financial Times.