2024 Public Sector Perspectives

Figure 1: Fiscal risk for high climate risk countries 0 5 10 15 20 25 30 35 40 Low Medium High 34 20 5 Illustration of 59 low- and middle- income countries that have climate threats at or above the median, divided into three groups based on their risk of fiscal crisis in the next two years (Source: IMF Blog) In addition, low- and middle- income countries also suffer from a severe lack of financing, receiving the smallest share of global climate finance. In fact, Africa which has historically been substantially impacted by natural disasters only received 3% of global climate finance in 2020, out of which only 14% is stemmed from the private sector, the lowest in the world 5 . Developing countries have long been advocating for more concrete, better tailored and larger support from the international community, towards just transition. While wealthy nations pledged in 2015 to deliver a collective goal of $100 bn a year to developing countries by 2020, their target that year fell short by $16.7 bn and by some estimations this annual climate finance promise will not be met until 2025 at the earliest 6 . COP27 and specifically the announcement of the “Loss and Damage Fund”, was the long-awaited conceptualization of an overdue support for low-income nations. Its mandate not only aims to provide further and more concrete assistance to deal with the consequences of natural hazards, but also to supply funds towards climate adaptation. The fund aims to assist “developing countries that are particularly vulnerable to the adverse effects of climate change” 7 both by financing harm caused by climate change and mitigation to reduce future tragedies. 5 New AfricanMagazine 6 OECD 7 UNEP 8 OECD 9 Global Center for Adaptation 10 Publication Office of the EU 11 Global Center for Adaptation As of 2023, there is still a long path ahead until the fund becomes what it aspired it would be. Although COP27 laid the foundation of the Loss and Damage Fund, many hope COP28 will build on the actual delivery of the $100 bn funding target, shift larger financial impact, include supplementary support frommultilateral development banks (MDBs) for climate adaptation and overall, initiate operationalization of the fund. While the Loss and Damage Fund is a positive step forward towards financing climate resilience, for it to truly fulfill its mandate, clearer definitions, more stringent governance frameworks and greater transparency on the disbursements of such financing are needed. Climate adaptation Climate adaptation can be defined as addressing loss and damage in advance through measures to minimize future harm and by increasing resilience before the occurrence of extreme weather or slow-onset events. While financing climate adaptation is essential tominimize the impact of climate variability and to guarantee sustainable development, a gap of financing towards climate adaptation persists. Between 2018 and 2020 only 4%, or $18 bn, of all private finance mobilized by official development finance interventions was earmarked exclusively for climate mitigation and adaptation. Private finance mobilization for adaptation only, rose from$1.9 bn in 2018 to $4.4 bn in 2020 8 . These figures fall short of the financing needed to minimize the future cost of inaction. The 2022 Adaptation Gap Report indicates that international adaptation finance flows to developing countries are five to ten times below estimated needs and will need to be over $300 bn per year by 2030 9 . Another study forecasted that with an increase of 3-4⁰C, financing needed could reach €175-200 bn ($185-212 bn) per year in the EU-27 and the UK only 10 . Similarly, in Africa the figures depict an evenmore worrisome narrative, especially given the African continent is currently the smallest beneficiary of climate finance worldwide. Investments required in the continent are expected to increase tenfold by 2035 with roughly £80 bn ($97.5 bn) a year needed until 2035, without which the continent could lose up to £4.8 tn ($5.85 tn) of economic benefits within the next decade 11 . The takeaway is that a behemoth of an investment into climate adaptation is required urgently, and not choosing to invest todaywill only increase the investment needed tomorrow. The interlocked role of public and private sectors in financing climate adaptation While there is a consensus that colossal investment is needed to finance climate adaptation, there is less concurrence regarding where this financing should be coming from. When considering green investments in high-income countries, as much as 81% of green investments are estimated to be funded by the private sector, notwithstanding this figure is a mere 14% in emerging and developing countries 12 . Furthermore, cross-border flows in that field are lacking as out of global private sector investment directed to climate finance, up to 90% stays within national borders 13 . This unequal geographical distribution is compounded by broader risk aversions towards emerging and developing economies and by global economic headwinds such as inflationary pressures and debt sustainability concerns. Regarding climate adaptation, the lack of predictable returns as well as the absence of definite pricing for the cost of inaction have historically been a source of hesitation for the private sector from investing in such projects. While it is estimated that within climate adaptation specifically, the private sector was only providing 1.6% of all funding in 2021 14 , encouragingly, there is an increasing understanding that business opportunities within climate adaptation exist with expectations the market could be worth up to $2 tn per year by 2026, as the need for these solutions grow along with the prevalence of climate impact 15 . To ensure successful cooperation between public and private entities, multilateral development banks (MDBs) have a crucial role to play. MDBs should mobilize private capital directly through the provision of liquidity but also indirectly by acting as financial standards setters. MDBs can act as enablers by offering foreign currency guarantees, pooling currency risks and providing support in prioritizing those projects which could have the most significant positive impact on climate change. The complexity of climate change finance requires a rapid and far-reaching reallocation of capital by rethinking the architecture of both the public and the private sector. The potential magnitude of loss and damage similarly necessitates multilateral development banks to help by stepping up their support for climate action. 12 Financial Times 13 Climate Policy Initiatives 14 World Bank 15 Bloomberg When considering green investments in high- income countries, as much as 81% of green investments are estimated to be funded by the private sector, notwithstanding this figure is a mere 14% in emerging and developing countries. Citi Perspectives for the Public Sector 15 14 Building Resilience Against Future Loss and Damage Through Climate Adaptation