Countries in the Asia-Pacific region face a shortfall of at least $800
billion in climate financing. With public finances depleted by the
pandemic, policymakers must unlock the vast potential of private capital to
join the fight more effectively against global warming.
Doing so will demand a coordinated and multi-faceted approach by actors on
all sides, from governments and central banks to financial supervisors and
multilateral institutions. Important strategies include phasing out
fossil-fuel subsidies, which have reached a record
$1.3 trillion. It will also be key to expand carbon pricing, bridge critical
data gaps, and promote innovative financing along with public-private partnerships.
Here's an explainer based on
our latest research, which draws on recent chapters of the Global Financial Stability Report
on
scaling up climate finance and other IMF
studies on climate issues:
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Why is climate finance urgent? Progress is too slow.
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 fall alarmingly short, targeting only an 11 percent
reduction. Without stronger action, our warming planet imperils homes,
health, and food security. Mobilizing more climate finance is vital not
only for mitigating emissions but to build adaptive capacity through
investments in climate resilient infrastructure. This is especially
important for Asia, which is home to several of the largest emitters and
a region acutely vulnerable to climate change due to high
population density and geography.
- What makes Asia’s role pivotal? The region’s transition to greater sustainability has global implications.
Asia contributed about two-thirds of global growth last year, and will again in 2024, but its heavy reliance
on burning coal for energy means that it contributes more than half of
harmful global greenhouse gas emissions. Asia’s economies recognize how
climate hazards directly impact lives and livelihoods, and have made deeper
commitments, as their revised Nationally Determined Contributions under the
2015 Paris Agreement show. Asia can aid the climate fight by demonstrating
how to balance economic growth and environmental sustainability.

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How significant is the funding gap? Asia’s emerging
market and developing economies need investment of at least $1.1
trillion annually to meet mitigation and adaptation needs. But
they’re only getting $333 billion, mostly from sustainable debt
instruments like green bonds, and public sources contribute more
than half. Such a shortfall leaves these economies with a funding
gap of at least $815 billion. China leads in attracting climate
finance, making major strides in renewable energy adoption, and its
collaborations with the EU have yielded crucial frameworks for
sustainable finance, such as the Common Ground Taxonomy and
stricter China Green Bond Principles.
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What are the biggest challenges? Pacific island
countries and other small economies often have trouble accessing
international capital markets or obtaining financing via global
climate funds. In particular, they find it hard to meet stringent
accreditation requirements of global climate funds as their
capacity is already stretched thin and public investment management is
challenging. For larger countries, green bonds may be as costly as
conventional securities because investors appear to be less trusting of
green characteristics in Asia’s sustainable debt instruments. These
issues underscore the broader challenges for the region’s funding
aspirations.
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What do countries say? A survey of 19 countries in Asia
revealed important gaps in data, disclosures, and taxonomies, and
that these are exacerbated by inconsistent national climate
policies that can promote fossil fuel subsidies. These
deficiencies undermine investor confidence in forward-looking
targets and transition. Greenwashing also is a risk, respondents
say, because it can call into question the legitimacy of
environmental claims made by bond issuers. In addition, increasing
geoeconomic fragmentation, including friend-shoring and fraying global
supply chains, could threaten cooperative and collective action to
contain climate change.

Action to unlock much more climate finance requires coordination among
agencies overseeing climate initiatives, plus collaboration between local
and global entities:
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How can Asia’s governments help? One way will be to
comprehensively enhance the framework on data, taxonomies, and
disclosures. They should phase out fossil fuel subsidies and
expand carbon pricing, which would generate revenue for
sustainable public investment. This would help boost investment in green
technology, jobs, and growth, while supporting vulnerable households.
Measures that strengthen macroeconomic and public investment management
will help reduce risk premiums and funding costs, drive economic growth,
and attract private capital.
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Where do central banks and financial supervisors fit in?
They should promote global standards for transparent and
consistent disclosures, while strengthening climate risk analyses
and incorporating climate-related financial risks into prudential
frameworks to enhance financial stability. Lastly, collaborating
with multilateral standard setters to develop internal capacity is
crucial for improving the clarity and reliability of ESG score
ratings, fostering greater trust and understanding in these
evaluations.
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What is the IMF’s role?The Fund is working with member
countries to better detail climate-related economic risks and
policies in surveillance and lending activities. The IMF also is
strengthening data and statistics, including through capacity
building and peer learning, to develop common standards for
measuring and analyzing climate risk. Finally, our
Resilience and Sustainability Trust can help vulnerable low- and middle-income countries catalyze financing
from other sources by restoring sound macroeconomic management and
building the institutional capacity of the public sector. Other
multilateral organizations can provide more grant financing and
concessional lending, and risk-mitigating mechanisms can help expand
their lending capacity. Cooperation among multilateral
institutions is essential to align efforts and resources to
achieve a balanced allocation between mitigation and adaptation
lending.
—This blog reflects research by Cheng Hoon Lim, Ritu Basu, Yan
Carriere-Swallow, Ken Kashiwase, Mahmut Kutlukaya, Mike Li, Ehraz
Refayet, Dulani Seneviratne, Mouhamadou Sy, and Ruihua Yang.