The adoption of the Paris Agreement represented a major turning point for global climate action, sending clear policy signals that future investments, particularly in energy and infrastructure, will have to shift away from carbon-intensive activities toward low emission, climate resilient pathways. At the same time, there is more awareness of the need to align national plans with the 2030 Agenda for Sustainable Development, particularly goal 13, which sets targets for implementing climate action.

Over the last two years, we can see evidence of how countries are beginning to think about long-term development plans and the need for financing of these plans to be consistent with Article 2.1c of the Paris Agreement.¹ This provision sets out an unprecedented mandate to make all financial flows consistent with low emission and climate resilient pathways. While developing countries, in particular, view the provision as primarily a signal to public finance institutions to ensure they are responsive to the nationally determined contributions (NDCs) and national adaptation action plans (NAPS), the same can be said for financing from the private sector.

Aligning financial flows with the objectives of the Paris Agreement means climate risks need to be integrated into national development plans, fundamentally transforming them into climate-smart and climate-friendly investment plans.

As countries develop their long-term low emission development strategies for 2050, this article seeks to (1) identify the main finance-related information crucial to empower decision makers, (2) outline some guidance to the new generation of national-level climate finance institutions that will help implement long-term strategies, and (3) spotlight the role of institutional investors in driving ambitious and transformational change.

1. Information is key to successful and ambitious long-term strategies

   A fundamental imperative for all is to ensure that enough credible data, tools, and frameworks are available to the financial community to ensure that it has the right set of information to consider and integrate climate risks into investment decisions. At the national level, this necessitates the generation of information that will incorporate climate risks into plans, institutions, and policies.

   Given the nature of the climate talks and their guiding principle of common but differentiated responsibilities, the kind of information required may vary between developed and developing countries. For developing countries, the priority is to adjust, update, and align national frameworks with the NDCs. A set of national processes, policies, and institutions needs to be updated to ensure that a country’s national plan has an accompanying finance roadmap. Roadmaps could include information on the following:

   • An articulation of the country’s vision for development, usually through its medium (10 year) or long-term (25–30 year) strategic framework.
   • Sectoral framework and targets, expressed, for example, through a long-term power sector development program, 100 percent renewable energy targets, or sectoral targets to reduce emissions from deforestation.
   • A set of subnational and nonstate climate initiatives that complement the national government plans, such as local climate change action plans.
   • Critical climate change–related laws and legislation, usually resulting in the creation of climate-focused institutions and the mandatory integration of climate in the development agenda.
   • Other relevant environmental laws that present climate and development cobenefits, such as a Clean Air Act or Sustainable Waste Management Act.
   • Green Finance frameworks,² consistent with the objective of mainstreaming climate in national development plans, that enable and catalyze low emission, environmentally friendly investments.

   In addition to these policies and frameworks that enable climate investments, developing countries will need to generate additional finance information such as the following:

   • Assessment of their financing needs based on the level of ambition contained in the NDCs.
   • Potential sources of funding for their NDCs that include both public and private sources, local and international climate finance, and innovative market-based sources such as a coal or petroleum tax.
   • Institutions and mechanisms to effectively and efficiently access climate finance, including a potential direct access facility.
   • A system of tracking and reporting, such as Colombia’s online platform that aggregates the data and presents a comprehensive landscape of climate finance flows.³

   For developed countries that have climate finance commitments, including on tracking and reporting, the information required is clearly articulated in the framework of the climate negotiations:⁴

   • Expected levels of climate finance mobilized from different sources⁵ (both public and private, including leverage, innovative sources).
   • Policies, programs, and priorities.
   • Actions and plans to mobilize additional climate finance.
   • Efforts to balance adaptation and mitigation.
   • Steps taken to enhance enabling environments.

   These types of qualitative and quantitative information required of developed countries are all critical inputs into the formulation of long-term decarbonization strategies. Recent reporting of countries show various initiatives that directly respond to some of the developing countries’ requests outlined above. For example, on mitigation, several developed countries are highlighting clean energy financing and guarantee mechanisms as well as an innovative project preparation facility for sustainable landscapes.⁶ There is also a marked increase in reporting initiatives focused on de-risking and early stage financing mechanisms to reduce and manage climate and disaster risk, especially for the most vulnerable countries.

2. Robust national climate finance institutions are needed to implement long-term strategies

   A strong and stable climate finance architecture is key to delivering the scale of resources required to achieve the countries’ long-term strategies.  Whether a country is creating a new institution or relying on and strengthening existing ones, both are necessary to implement urgent mitigation and adaptation activities. Nationally owned and homegrown institutions for climate finance could play a leadership role in supporting transformational initiatives consistent with long-term strategies. However, these institutions must be held accountable to the same high standards as multilateral funds.⁷ Similarly, they need to demonstrate material contributions to reducing global emissions and facilitating investments that build resilience while protecting the most vulnerable communities.

   There is no silver bullet in defining what type of national institution will best deliver at scale—countries have varied experiences; one may have created a dedicated climate fund, another an interagency group tasked to coordinate and program climate finance, and yet another a commercial entity such as a green bank. The most important task is to ensure that the institution’s goals are ambitious enough to allow for scaled-up resourcing of national priorities, facilitate blending of domestic and international climate finance, coordinate countrywide activities on climate change, and build up national implementing entities.⁸

   A well-designed national level climate finance institution could benefit from the following design considerations:⁹

   • Is it responsive to national priorities on climate change as articulated in either the NDCs or the local climate change action plan?
   • Will it support cross-sectoral and interagency needs such as the intersection of clean energy objectives and addressing air pollution and urban waste management issues?
   • Where will the sources of the fund come from? What is the level of ambition in terms of resource requirements?
   • How will the institution mobilize and engage with various stakeholders, including the citizens and communities that are the intended beneficiaries of the programs?
   • How is this going to relate to existing or new financing mechanisms and instruments to be deployed?

   Several climate finance initiatives led by international organizations¹⁰ have produced useful tools to help countries screen and prioritize their current plans to focus investments on high-impact sectors.¹¹ This process produces very helpful data that guide potential local and international investors.

3. Is there a role for institutional investors in driving ambitious long-term strategies, particularly in emerging markets of Asia?

   A review of several countries’ submissions to the United Nations Framework Convention on Climate Change (UNFCCC) on climate finance highlighted the growing importance of institutional investors in helping shift global investments toward a low carbon future. The most cited example is the Norwegian Government Pension Fund Global (GPFG),¹² which has become very active in climate finance. In addition to scaling up its investments in clean energy companies, the GPFG has also publicly announced “divestment from 73 companies based on risks mostly associated with climate change, deforestation and water.”¹³

   Similarly, a recent WWF report shows that 29 of Europe’s major asset owners, mainly pension funds from the Netherlands, Denmark, Sweden, Norway, and Finland, have already implemented changes to bring their public equity portfolios more in line with the well-under-2°C climate goal.¹⁴

   The recently concluded One Planet Summit saw several more political commitments.¹⁵ These sent important signals to institutional investors in emerging economies, particularly in Asia. Since most new energy and other infrastructure will be built in Asia, mobilizing institutional investors in the region is an absolute priority. They will be significant and long-term drivers of ambitious and transformational climate-friendly strategies. Unfortunately, while there has been significant progress in Europe and North America, institutional investors in emerging economies are lagging behind. According to Ma Jun, former chief economist of the Peoples Bank of China (PBOC), “the difference in green awareness between investors in developing and developed markets is particularly stark.”  A recent study by the Global Sustainable Investment Alliance in Asia (excluding Japan) revealed only 0.8 percent of investors there can be classified as “responsible investors,” versus 52.6 percent in Europe and 21.6 percent in the United States.¹⁶ This is largely because these Asian investors are unaware of the principles for responsible investors and lack access to the tools and methodologies for green investing.

   The Asia Investor Group on Climate Change (AIGCC) has started convening and developing Asia-focused tools and policy frameworks for investors in the region.¹⁷ The group’s central messages are that Asian investors must face up to major climate risks and that they “can protect long-term returns by taking greater measures to manage climate risk.”  The recent AIGCC guide to integrating climate risks in Asian investors’ portfolios is timely and provides a systematic framework to realize the huge opportunity from transitioning to low carbon economy.

   Building on the the efforts of the AIGCC, we need to move this broader ecosystem of investors (including asset owners, asset managers, banks, insurance companies, and funds) to become champions of paradigm-shifting investments. They need to have access to asset-level tools and approaches, innovative instruments (such as stress testing) and vehicles, and additional valuation and risk models that will have a material impact on the credit worthiness of the companies they are investing in.

   Finally, it is worth noting that the commitment, recently announced in Paris, by more than 225 investors from all over the world could be game-changing, as it represents trillions of assets and will force companies to adopt a strong corporate governance framework that articulates acceptance of oversight of climate change risks, embolden them to reduce emissions across their value chain, and align their reporting and disclosure to the standards and best practices contained in the recommendations of the Task Force on Climate Related Finance Disclosures.

Conclusion: The policy and regulatory environment remains crucial to financing long-term climate strategies

The International Finance Corporation estimates a climate-smart investment potential of $23 trillion in 21 emerging market countries between now and 2030.¹⁸ How can we unlock these investments to fund long-term strategies?

Public policy has to provide incentives for private sector investments. Long-term decarbonization strategies will have to be driven by both public and private investments. And companies will only move if corporate governance seriously integrates climate-related risks into their investment plans. Market signals also have to come to communicate the potential stranding of assets when one invests in carbon-intensive activities such as coal mining and coal thermal power plants. Eliminating counterproductive policies such as fossil fuel subsidies is an integral policy shift that needs to happen. 

In order to drive climate-related investments to scale, public finance should be deployed effectively to derisk and cover the early stage costs of low carbon activities. This is possible by

• aligning NDCs with national and sectoral plans that will attract investments;
• institutionalizing performance standards that help manage climate and other environmental and social risks; and
• initiating other market-transformation mechanisms (such as removal of fossil fuel subsidies) aimed at reducing emissions and building resilience.

The heightened awareness of the Paris Agreement’s implications for future investments in carbon-intensive sectors offers more opportunity to incorporate climate risks in investment decisions. Information related to finance from both developing and developed countries will be crucial to drive ambition in formulating long-term strategies.

The climate finance discourse has focused largely on sources, mainly public finance, to scale up. Equal attention needs to be given to ensuring the strength and longevity of climate finance institutions to maximize impact on the ground. A critical set of stakeholders to mobilize in order to catalyze a paradigm shift is the ecosystem of institutional investors, particularly from emerging economies such as those in Asia.

¹ Evidenced by country plans shared during the United Nations Framework Convention on Climate Change (UNFCCC) in-session workshop on long-term finance, May 2017, Bonn, Germany.

² People’s Bank of China, “Guidelines for Establishing the Green Financial System,” 2016, https://www.pbc.gov.cn/english/130721/3133045/index.html.

³ Indira Masullo, Hyun Jun Ra, and Gaia Larsen, “Colombia’s Climate Finance Tracking System Registers $6 Billion Worth of Action,” World Resources Institute blog, November 28, 2017, /blog/2017/11/colombias-climate-finance-tracking-system-registers-6-billion-worth-action.

⁴ See UNFCCC, “Biennial Submissions of Developed Country Parties on Their Updated Strategies and Approaches for Scaling Up Climate Finance from 2014 to 2020,” April 27, 2017, https://unfccc.int/resource/docs/2017/cop23/eng/inf01.pdf.

⁵ Decision 3/CP.19; Decision 5/CP.20.

⁶ See UNFCCC, “Biennial Submissions,” table 2.

⁷ Niranjali Amerasinghe, Joe Thwaites, Gaia Larsen, and Athena Ballesteros, The Future of the Funds: Exploring the Architecture of Multilateral Climate Finance (Washington, DC: World Resources Institute 2017), https://wriorg.s3.amazonaws.com/s3fs-public/The_Future_of_the_Funds_0.pdf; Louise Brown, Clifford Polycarp, and Margaret Spearman, “Within Reach: Strengthening Country Ownership and Accountability in Accessing Climate Finance,” World Resources Institute Working Paper, November 2013, https://wriorg.s3.amazonaws.com/s3fs-public/ownership_and_accountability_final_paper.pdf.

⁸ United Nations Development Programme (UNDP), Blending Climate Finance through National Climate Funds: A Guidebook for the Design and Establishment of National Funds to Achieve Climate Change Priorities (New York: UNDP), 2011, https://www.undp.org/content/dam/undp/library/Environment%20and%20Energy/Climate%20Change/Capacity%20Development/Blending_Climate_Finance_Through_National_Climate_Funds.pdf.

⁹ Extrapolated from country case studies; UNDP, Blending Climate Finance; and national financing pathways of Chile, Peru and Costa Rica.

¹⁰ For more examples, see UN Environment, UNDP, and WRI, “GCF Readiness Programme,” home page, https://www.gcfreadinessprogramme.org/, accessed February 7, 2018; and Climate and Development Knowledge Network, home page, https://cdkn.org/themes/theme-climate-finance/?loclang=en_gb, accessed February 7, 2018.

¹¹ Philippine Climate Change Commission, “Screening and Prioritization exercise for the Philippines,” unpublished manuscript, 2017.

¹² UNFCCC, “Biennial Submissions.”

¹³ https://www.swfinstitute.org/swf-news/2015-norway-divested-from-73-companies/

¹⁴ WWF, “Table 2: Assessment by Asset Owner of IEA 2°C Alignment for 2020 for Coal Mining, Coal Power and Renewable Power (Public Equity Portfolios,” https://awsassets.panda.org/downloads/assets_owners_and_iea_2c_alignment.png, accessed February 7, 2018; WWF, European Asset Owners: 2°C Alignment and Misalignment with Public Equity Portfolios (Brussels: WWF, 2017), https://d2ouvy59p0dg6k.cloudfront.net/downloads/22_wwf_asset_owners_report_lr.pdf, accessed February 7, 2018.

¹⁵ One Planet Summit, La Scène Musicale, Île Seguin, Boulogne-Billancourt, France, December 12, 2017, https://www.oneplanetsummit.fr/en/.

¹⁶ Eric Ng, “Why Is Asia Lukewarm to Sustainable Investing?,” South China Morning Post, October 14, 2017, https://www.scmp.com/business/companies/article/2115233/why-asia-lukewarm-sustainable-investing.

¹⁷ AIGCC, Integrating Climate Change into Investment Strategy: A Guide for Investors, 2017, https://aigcc.net/wp-content/uploads/2017/12/AIGCC-CC-Guide-Design-Final.pdf.

¹⁸ IFC, https://www.ifc.org/wps/wcm/connect/51183b2d-c82e-443e-bb9b-68d9572dd48d/3503-IFC-Climate_Investment_Opportunity-Report-Dec-FINAL.pdf?MOD=AJPERES and International Energy Agency, World Energy Outlook 2016 (Paris: IEA, 2016), https://www.iea.org/publications/freepublications/publication/WorldEnergyOutlook2016ExecutiveSummaryEnglish.pdf.