“Excellencies, Distinguished delegates, Business Leaders, Colleagues and Friends,
I am honoured to have been asked to open this event today on what is a critical subject not just for financing for climate action but for the whole of the sustainable development agenda.
Nationally Determined Contributions are, as we know, the crux of the Paris Agreement and form the foundation for the pathway towards low-carbon, climate-resilient development. However, while the NDCs submitted by nearly 200 Parties are a significant step in the right direction, they are, in their current form, insufficiently ambitious. As detailed in the UNEP Emissions Gap Report, even if all conditional components of the NDCs are implemented, global warming will only be limited to below 3–3.5°C, well above the 1.5-2° C target.
While such temperature rises will impact all countries and all peoples, we know that the smallest islands and the poorest, most exposed regions, are those that will suffer first and hardest. Clearly, our ambitions must be higher so that the temperature doesn’t get warmer, and our implementation faster so that climate change doesn’t turn more dangerous.
The scale of the challenge is daunting. Not only are we faced with dire scientific warnings and daily images from the Caribbean and elsewhere highlighting the threat we face, but we know as well that the sheer scale of financing needs is massive. Achieving the positive but short-fetched NDCs amounts to more than $4.4 trillion; approximately $349 billion per year. These numbers, estimates though they are, provide a frightening order of magnitude, even more so when we consider that we need yet more resources and political will to reach our goals, which in turn contribute to the Climate SDGs.
Where then, do we even begin?
The answer, to be frank, likes firmly in the private sector. Perhaps for the first time in history, a global challenge can’t be won by the governments of the world without businesses getting behind it. Current estimates peg the global renewables market at about $300 billion a year in new businesses, which is only a small part of the $1 trillion annual market in “climate business solutions,” according to the International Finance Corporation (IFC). The other markets for innovation include green buildings at $388 billion annually, climate-smart urban transport ($288 billion), water recycling ($23 billion), municipal waste management ($160 billion) and the huge upside in energy storage ($2.5 billion). All of these are set to grow. And much of this is going to be spent in developing countries.
As public funds are limited and have to be spread out over an increasing range of climate, security and socioeconomic challenges, most of the capital for climate-smart infrastructure will therefore have to be provided by the private sector. NDCs, if implemented correctly, can present an incentive and a guide for companies and fund managers looking for sound investment opportunities in climate-resilient infrastructure and assets.
Improving and developing financial mechanisms and instruments is therefore critical as a stimulus. Ideally, countries would reach their NDC targets and investors would obtain great returns for their shareholders.
We at UNDP in partnership with you, business leaders and partners, can also, support governments to promote renewable energy auctions, land title reform and policies around energy storage—all of which could boost renewable energy investments to a cumulative $11 trillion by 2040, according to the IFC. Off-grid solar energy and storage alone can reach $25 billion a year by 2025 with the right tariff structures, technical standards and financing structures, such as pay-as-you-go financing and securitization. And policy changes can also make billions of dollars of “climate-smart” agriculture, sustainable land use and transportation investments, getting closer to achieving the NDC goals.
Let me outline three key areas of innovation we at UNDP think are important.
First, major investments in low-carbon development technologies will be needed from the private sector. While challenging, we can accomplish the needed shift by looking to public funds for de-risking where required, addressing bottlenecks whether regulatory or otherwise, supporting project development to mobilize private capital through feasibility and pre-feasibility, and finally providing concessional financing. This can be done through a variety of products and structures such as risk-sharing facilities and lower interest rates. Not only does this help achieve NDCs and combat climate change, but it also creates jobs, spurs innovation and helps raise people out of poverty – goals we must always have in mind.
Second, low carbon development projects could become bankable by shifting the risk-reward profile of renewable energy investment, as we have done at UNDP. In countries with under-capitalized financial sectors, local banks may be concerned about lending their limited capital to borrowers in an unproven sector such as renewable energy. Partial loan guarantees from a development bank can provide these local banks with the security they need to issue loans, whereby a portion of the risk of default is transferred to a public actor.
Finally, we have to reverse the discussion flow. For these innovations to be successful, they must be country-led and private capital-friendly. There is still a disconnect between financing and need, and a lack of awareness within the private sector of what must be done, just like there is a lack of awareness in the public sector on how to mobilise private finance. And we as investors, donors and implementers want to avoid prescribing this top-down. We must have a decentralised strategy of opportunity-offer by some and risk investment appetite by the others, starting by dialoguing with countries to understand what they are asking for.
At UNDP, we are working intensively to connect global financing and technology to country priorities developed through their NDCs. Through our work with the investment working group of the Insurance Development Forum that we co-chair with BlackRock, we are helping to define the criteria needed for resilient infrastructure investments—potentially opening up a sub-asset class to offer a differentiated, diversified, and uncorrelated opportunity set for institutional investors that channel money to NDCs. We are looking to be innovative by marrying public funding and de-risking with private investment. For example, feed-in tariffs, pay-for-performance contracting and a variety of credit enhancements would unlock trillions in investments in water and waste management. And we are increasingly focusing on helping our partner countries develop investment plans for critical sectors identified in those NDCs. Today’s Innovation in Finance panel in the context of the World Climate Summit will raise awareness of the role that private sector financing can and must play if we are to address the needs of countries for resilience, adaptation and mitigation.
Allow me to close by emphasizing two points. First, NDCs are not merely about climate action, they are fundamentally about sustainable development. Development aid and domestic resources will be, in the long-term, ineffective, if we ignore the growing threat of global warming. But the opposite is true, and that’s my last point: if we get it right, we will preserve the planet and poverty will become history. Not a small order, but the only right thing to do.
Magdy Martínez-Solimán is UNDP’s Assistant Administrator and Director of the Bureau for Policy and Programme Support. Keynote Address by Magdy Martínez-Solimán originally appeared on UNDP at http://www.undp.org/content/undp/en/home/news-centre/speeches/2017/climate-investment-platform.html
Photo by Casa de América CC BY-NC-ND 2.0.