Climate change and climate finance: Private sector financing

Rajbir Saha

(rajbirsaha1995@gmail.com)

The private sector is another important source of? financing for climate-resilient projects. International organizations, including the UNFCCC, have urged and encouraged the private sector to ? finance climate-resilient projects. The public-private partnership schemes launched by various countries and supported by international development partners could provide a strong platform for the private sector to ? finance climate resiliency. Several studies, discuss how the private sector could? finance climate change adaptation and resilience-related activities and projects. Researchers highlight the barriers to the private sector actively participating in adaptation? financing. These barriers include uncertainty regarding returns on investment, high upfront costs of technology, and a lack of technical and institutional capacities in the project hosts. UNEP illustrates various mechanisms for enhancing private sector ? financing for climate change adaptation and also highlights policies needed to incentivize the private sector. Before going deeper to analyse how the private sector could or should ?finance climate resiliency, it is important to understand the incentives and obligations that can encourage the private sector to ?finance climate change adaptation and resilience. By definition, the private sector is a profit-making economic entity. Its actions are mainly driven by ?financial incentives or regulatory mandates/obligations. To some extent, their actions are also driven by social obligations (goodwill hunting). A private sector entity ?nances a project if it expects that the project will deliver a certain rate of returns to its investors. However, most project activities that will be impacted by climate change produce public goods (e.g., roads, bridges, parks, irrigation systems, electricity supply systems). Normally, the private sector may not ?nd adequate incentives to invest in these public goods and services in a normal or business-as-usual situation. When these systems become more vulnerable due to climate change, this provides further disincentives to the private sector to invest in them. Nevertheless, the private sector might invest in climate change resilient activities if it has enough conidence the assets it owns are vulnerable to climate change. For example, a private ?rm making a large-scale investment in agriculture farming could be interested in reducing weather-related risks (drought, ?ooding). It could invest in reducing this risk. Now, if the ?rm has reasonable con?dence that climate change might aggravate risks, it may be interested in making an additional investment to reduce these risks, provided that the return from its farming is still meeting its expectations. If the private sector ?nds that the investment is too high for mitigating these risks and it fears not making a reasonable rate of return from the farming, it will move away from this business and invest somewhere else where it sees lower risks and reasonable returns. The private sector ?nances climate change adaptation and resilience through various channels. It directly contributes to the UN funding windows, such as the Adaptation Funds and LDC funds. It also co-?nances climate change adaptation and resilience activities along with the MDBs. The UNFCCC's Green Climate Fund is planning to leverage private investment in climate change adaptation. The private sector also contributes through philanthropic organizations or institutions. Bill Gate is a co-leader of the Global Commission on Adaptation created in 2018 to catalyse global climate ?financing in climate change adaptation and resilience. Thus, an appropriate methodology does not yet exist to track and report private ?financing of climate change adaptation and resilience. Moreover, no regulations that require the private sector organizations to monitor and disclose their actions related to climate change exists.

Accounting for the private sector's contribution to climate change adaptation is also complex

because some might argue that most climate change adaptation is coming from the private sector. This is because when governments ?finance these activities directly or through international development institutions, the source of funds ultimately comes from the taxation of private households or businesses. Moreover, ultimately it would be the private sector that purchases various ?financial instruments (e.g., green bonds or any other climate change-oriented bonds) or that makes equity investments in climate change adaptation project activities. Below we present two examples of the private sector's participation in climate change adaptation ? financing. It is also argued in some existing studies that small-scale private sector entities (e.g., smallholder farmers, small-and-medium-sized ?rms) and large-scale entities (multinational ?rms with complex supply chains) will ?finance climate change adaptation and resilience activities, particularly in vulnerable sectors such as agriculture. This is true; they have been doing so to reduce weather-related or disease-related risks, and they have to increase their investment to reduce the relevant risks if climate change aggravates these risks. While large-scale private ?rms might be able to afford to invest against climate risks, small-scale private ?rms may not be able to do so. They need help from the public sector (governments) or from the private ?rms who supply their products (e.g., smallholder coffee farmers who supply cocoa to large coffee manufacturing ?rms). If larger ?rms do not provide ?finances to smallholder farmers, there could be a huge risk of disruption in their supply chains, which might cause huge losses. The private sector (individual or ?rm) does not have an alternative to invest in climate change resiliency for the assets it owns if the government makes this obligatory through policies and mandates. For example, if governments have different standards for buildings in more vulnerable areas (e.g., coastal areas), a private building owner will make the extra investment to follow these standards. In the absence of incentives and regulations, it may not be reasonable to expect the private sector to invest in climate resiliency. There are many methods governments or international communities can use to provide incentives for the private sector to invest in climate resiliency.