Climate change poses significant risks to businesses around the world. Extreme weather events, such as floods, droughts, and hurricanes, can disrupt supply chains and cause widespread damage to infrastructure. Rising sea levels can threaten coastal properties and infrastructure, while increasing temperatures can impact worker health and productivity. Failure to address these risks by companies leads them to lose market share and profits, as consumers and investors demand more environmentally responsible practices.
On the other hand, companies that proactively address climate change risks can gain a competitive advantage in the marketplace. For example, companies that reduce their greenhouse gas (GHG) emissions may be able to lower their energy costs and increase efficiency, while at the same time curbing the risk related to emission tax.
What is climate finance
The rise of green economy has also created new business opportunities for companies. As governments around the world invest in clean energy infrastructure and technologies, businesses that specialize get benefits. This is the case of renewable energy industry, in which manufacturers of wind turbines, solar panels, and electric vehicles are experiencing rapid growth as demand for these products increases.
In this context, climate finance has emerged. Climate finance refers to the various sources of funding, available to support climate change mitigation and adaptation projects, to the mechanisms and instruments used to incentivize emission reduction. These sources may include public funding from governments, private investment from banks and other financial institutions.
In recent years, the global community has made significant commitments to climate finance. The Paris Agreement, signed in 2015, set a goal of mobilizing $100 billion per year in climate finance by 2020 to support developing countries in their efforts to address climate change. While progress towards this goal has been slow, many countries and organizations have stepped up their commitments to climate finance in recent years. The Global Landscape of Climate Finance provides a comprehensive view of the evolution of the subject. The 2021 report states that global climate finance flows reached USD 632 billion in 2019/2020 and shows steady growth during the last decade as shown in the graph below.
Climate finance for business
For businesses, accessing climate finance can be a way to finance investments in sustainability and clean energy, as well as a way to curb the economic risk of compliance with an evolving climate regulation. Climate finance is composed by many instruments:
- Green Bonds
Green bonds are a type of financial instrument that is specifically designed to fund environmentally friendly projects. These bonds are typically issued by corporations, governments, or other organizations that are committed to mitigate climate change and promote sustainability. The funds raised through green bonds are earmarked for projects such as renewable energy, clean transportation, sustainable agriculture, and energy-efficient buildings.
- Carbon pricing
Carbon pricing is a market-based approach to climate finance that puts a price on carbon emissions. To incentivize companies to reduce carbon emissions, the approach aims at making it expensive to emit carbon.
By putting a price on emissions and adopting a Carbon Tax or a Cap and Trade system, companies will have the incentive to reduce their emissions and invest in cleaner technologies. Carbon tax and Cap and Trade system are two forms of Carbon Pricing.
Under a Carbon Tax, the government sets a price that emitters must pay for each ton of greenhouse gas (GHG) emissions they emit. A Carbon Tax can take two forms: an Emission Tax, based on the quantity of GHG a company produces and a Carbon Tax on products and services.
An example of the emerging trend of carbon price is the EU Carbon Border Adjustment Mechanism which is a “landmark tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries”.
Cap and Trade is a dynamic and flexible approach that leverages market forces to mitigate emissions in a cost-effective manner. The market-based strategy puts the power in the hands of the market by setting a limit on total emissions and allowing companies to emit a specific amount of emissions in the form of emission permits. Companies that exceed their assigned emissions limit can purchase additional permits from those who have not used up their allotted amount. The system creates a price on carbon, which incentivizes companies to invest in innovative technologies and processes that reduce emissions and optimize their efficiency. An example of Cap and Trade system is the European Emission Trading System (ETS) which covers 40% of EU’s greenhouse gas (GHG)emissions and limits emission from around 10.000 installations in the power sector and manufacturing industry, as well as from the airlines operating in the EU.
- Voluntary Carbon Markets
The necessity to reduce emissions and the increased relevance of sustainability in business strategy have fostered the growth of carbon markets.
After the implementation of the Paris Agreement’s Art. 6, the VCM has grown rapidly reaching $2 bn in value in 2021 (four times its value in 2020) and, according to an Insight from BCG, it is expected to reach between $10 billion and $40 by 2030. The expansion of voluntary carbon markets and the increasing use of carbon pricing instruments around the world is leading many companies to put efforts into cutting their emissions, leading to improvement in resource use, energy, and process efficiency as well as catalyzing funds to projects that enhance climate and society.
To analyze and better understand carbon pricing initiatives, the World Bank has developed an interactive dashboard for carbon pricing.
Why climate finance can be a valuable business opportunity
To access climate finance, businesses will typically need to develop a strong business case that demonstrates the potential environmental, social, and governance benefits of their project. They will also need to identify potential sources of funding and develop a financing plan that outlines how they will use the funding to achieve their goals.
Climate finance is a critical tool in the fight against climate change, and it has the potential to impact our businesses in significant ways. While climate change poses risks to businesses, companies that proactively address these risks and invest in sustainability and clean energy can gain a competitive advantage in the marketplace. Accessing climate finance can be a way to finance these investments and access new business opportunities in the emerging green economy.
As the world continues to grapple with the challenges of climate change, climate finance will play an increasingly important role in supporting the transition to a more sustainable future.
