Explainer: How Asia Can Unlock $800 Billion of Climate Financing

IMF Blog, January 29, 2024

Source details

Canonical URL: Explainer: How Asia Can Unlock $800 Billion of Climate Financing

Global temperatures are set to surpass the critical 1.5 degrees Celsius threshold above pre-industrial levels.
Efforts to halve 2019 levels of greenhouse gas emissions by 2030 target only an 11 percent reduction.
Mobilizing more climate finance is vital for both mitigation and building adaptive capacity through investments in climate resilient infrastructure, especially in Asia given high population density and geographic vulnerability.

Asia contributed about two-thirds of global growth last year, and will again in 2024.
The region contributes more than half of harmful global greenhouse gas emissions, driven by heavy reliance on coal for energy.
Revised Nationally Determined Contributions under the 2015 Paris Agreement show deeper commitments by Asian economies to balance growth and environmental sustainability.
China leads in attracting climate finance and in renewable energy adoption; China’s collaborations with the EU produced frameworks such as the Common Ground Taxonomy and stricter China Green Bond Principles.

Asia’s emerging market and developing economies need investment of at least $1.1 trillion annually to meet mitigation and adaptation needs.
They are receiving $333 billion, mostly from sustainable debt instruments like green bonds, with public sources contributing more than half.
The resulting funding gap is at least $815 billion.
Fossil-fuel subsidies have reached a record $1.3 trillion.

Pacific island countries and other small economies have difficulty accessing international capital markets and meeting stringent accreditation requirements of global climate funds due to stretched capacity and challenging public investment management.
For larger countries, green bonds may be as costly as conventional securities because investors are less trusting of green characteristics in Asia’s sustainable debt instruments.
Broader impediments include data gaps, inconsistent national climate policies that can promote fossil fuel subsidies, and the risk of greenwashing undermining legitimacy of environmental claims.
Increasing geoeconomic fragmentation, including friend-shoring and fraying global supply chains, could threaten cooperative and collective action.

Important gaps exist in data, disclosures, and taxonomies.
Inconsistent national climate policies exacerbate these gaps and may perpetuate fossil fuel subsidies.
Respondents identified greenwashing as a risk that can undermine investor confidence.
Capacity constraints hinder small economies from meeting global climate fund accreditation requirements.

Comprehensively enhance frameworks on data, taxonomies, and disclosures.
Phase out fossil fuel subsidies.
Expand carbon pricing to generate revenue for sustainable public investment.
Use revenue to boost investment in green technology, jobs, and growth while supporting vulnerable households.
Strengthen macroeconomic and public investment management to reduce risk premiums and funding costs, drive growth, and attract private capital.
Promote innovative financing and public-private partnerships.

Promote global standards for transparent and consistent disclosures.
Strengthen climate risk analyses and incorporate climate-related financial risks into prudential frameworks to enhance financial stability.
Collaborate with multilateral standard setters to develop internal capacity and improve clarity and reliability of ESG score ratings.

The IMF is working with member countries to better detail climate-related economic risks and policies in surveillance and lending activities.
The IMF is strengthening data and statistics through capacity building and peer learning to develop common standards for measuring and analyzing climate risk.
The Resilience and Sustainability Trust can help vulnerable low- and middle-income countries catalyze financing by restoring sound macroeconomic management and building public sector institutional capacity.
Other multilateral organizations can provide more grant financing and concessional lending; risk-mitigating mechanisms can help expand lending capacity.
Cooperation among multilateral institutions is essential to align efforts and resources and achieve a balanced allocation between mitigation and adaptation lending.

Explainer: How Asia Can Unlock $800 Billion of Climate Financing — Ritu Basu, Cheng Hoon Lim; January 29, 2024.