Climate Finance

Climate Finance

    climate action

    The Asia-Pacific region is the most prone to climate-related disasters, which impact the most vulnerable people, including women, youth, the elderly, and people with disabilities. Additionally, the region contributes to half of the world’s total greenhouse gas emissions.

    To tackle these challenges, the Asia-Pacific countries are now taking action through their National Determined Contributions (NDCs), an integral part of the landmark Paris Agreement on climate action. To support implementation of the NDCs, national governments need to mobilize adequate climate finance resources. This requires identifying innovative and alternative sources of funding, including leveraging private-sector financing.

    According to the United Nations Framework Convention on Climate Change (UNFCCC), “Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change.” This can include finance for climate-adaptive infrastructure, renewable energy projects, net-zero technology upgrades, and projects advancing nature-based solutions for example. At the same time, the co-benefits of climate action offset many of the costs of emissions reduction and emerging advanced technologies offer future prospects of lower abatement costs. Between 2016 and 2030 alone, it is estimated that the Paris Agreement will open USD 23 trillion in opportunities for climate-oriented investments.

    However, the NDC Partnership notes that navigating the complex, diverse “menu” of multilateral, bilateral, and private sources of climate finance presents a challenge. Limited resources and technical capacities of countries to bolster the financial readiness of their institutions and create enabling environments for climate-oriented investment compound this challenge, as well as a lack of harmonization across climate finance processes offered through various sources. The capacities of smaller entities such as small and medium-sized enterprises to navigate the climate finance environment and set emission reduction targets may also be problematic. At the same time, inadequate access to finance remains one of the chief constraints to achieving the Paris Agreement.  

    ESCAP, for example, has worked to deliver targeted advisory and technical assistance to central and national development banks in the Asia-Pacific region in order to enhance the capacity of these institutions to put in place policies and guidelines that encourage investment towards climate mitigation and adaptation projects.

    What are some different types of climate finance?

    Climate finance is a diverse field, with many different avenues and each with their own applications. Some are listed below.

    Carbon Pricing: Carbon pricing instruments (CPIs) create financial incentives for companies and countries to reduce their greenhouse gas emissions. CPIs provide an effective and efficient approach to stimulate national private sectors to reduce their carbon footprint. Putting a price on carbon can be implemented through carbon taxes or emissions trading schemes involving carbon credits, or a mix of both. Prominent examples in the Asia-Pacific region on carbon pricing include, for example, Singapore’s carbon pricing scheme and emissions trading schemes in China, Kazakhstan, and the Republic of Korea.

    Underpinning carbon pricing is a robust monitoring, reporting, and verification (MRV) system gathering quality data on emission levels. Another significant challenge is ensuring the quality of carbon credits, which may be considered low quality for any or some combination of (but not limited to) the following reasons: measurability, verifiability, and transparency; leakage; additionality; double counting; or double issuance.

    Loans/Investment: Banks wield enormous influence over development trajectories through the activities that they finance. Redirecting financial capital towards low-carbon investments is therefore important. This can be done, for example, via the introduction of a green banking regulation set by national central banks. This can be as strict as prescribing financial institutions a certain limit for carbon-intensive investments. New Zealand has introduced legislation that will make climate-related disclosures mandatory for publicly listed companies and large insurers, banks, non-bank deposit takers, and investment managers. Meanwhile, total climate finance and co-finance committed by major multilateral development banks (MDBs) in 2020 exceeded USD 151 billion. The Asian Development Bank, for example, is committing that at least 75% of its operations will support climate change mitigation and adaptation by 2030, in addition to delivering USD 80 billion in cumulative climate finance from 2019 to 2030 from its own resources.

    Climate bonds (a type of loan) provide another avenue that is gaining traction, particularly in Europe and China. According to Climate Bonds Initiative, they “are used to finance—or re-finance—projects needed to address climate. They range from wind farms and solar and hydropower plants, to rail transport and building sea walls in cities threatened by rising sea levels.” However, green and climate bonds have yet to take off across the Asia-Pacific. On a larger scale, climate-oriented investments can also take the form of impact or environmentally/socially responsible investments made by institutional asset owners (including pension funds), insurance companies, sovereign wealth funds, foundations, and private wealth advisors/family offices. On a smaller scale, such investments can be made by individuals and small to medium-sized firms alike.    

    Climate Funds: There are a variety of different climate funds within the international climate finance landscape. The Green Climate Fund (GCF), for example, is a critical element of the Paris Agreement. It is the world’s largest climate fund, mandated to support developing countries realize their NDCs. The Global Environment Facility (GEF), on the other hand, is the largest multilateral trust fund focused on enabling developing countries to invest in nature, supporting the implementation of major international environmental conventions, including on biodiversity and climate change. The GEF has provided more than USD 21.5 billion in grants and mobilized an additional USD 117 billion in co-financing for more than 5,000 projects and programs.

    In addition to providing guidance to the GEF, Parties to UNFCCC have established four special funds: the Special Climate Change Fund (SCCF) and  the Least Developed Countries Fund (LDCF)—both managed by the GEF,  the GCF under UNFCCC, and the Adaptation Fund under the Kyoto Protocol, which has provided over USD 700 million for climate change adaptation projects in developing countries. Another institution is the Climate Investment Funds (CIF) that accelerates climate action by empowering transformations in clean technology, energy access, climate resilience, and sustainable forests in developing and middle income countries through USD 8 billion donated by 14 countries. Building on synergies, climate funds can be used to scale up or replicate successful pilot projects, providing a continuity of climate action, and be combined with complementary resources.


    climate action background

    The Asia-Pacific region is at the forefront of the impacts of climate change and is uniquely positioned in global efforts to manage climate change. Higher temperatures, sea level rise, and extreme weather events linked to climate change are having a major impact on the region, harming its economies, natural and physical assets, and compounding developmental challenges that include poverty, food and energy security, and health. Without climate-oriented development, climate change could force more than 100 million people from the region into extreme poverty by 2030, wiping out the gains in poverty reduction achieved over the last decades. At the same time, the region accounts for over 50 per cent of global emissions and the high-growth path on which many of the region’s economies are on, means this contribution will grow without fundamental policy interventions.

    Newest estimates for the Asia-Pacific region show that growth will be significantly impacted by climate change. Without climate action, GDP in the region could decrease by as much as 3.3 per cent by 2050 and 10 per cent by 2100, relative to the base case. The economic costs associated with disasters across the region are also increasing. Damage to property, crops,  and livestock from disasters increased from USD 52 billion annually to over USD 675 billion between 1970 and 2019 when slow onset disasters are added to the region’s riskscape.

    The Asia-Pacific has the capacity to respond with progressive policies, incentives, and regulations to rewire economies for low-carbon growth. Regional cooperation is a key tool to link global, national and sub-national climate actions. ESCAP has the capabilities to support its member States to develop these policy frameworks through a range of regional cooperation efforts. Its intergovernmental platform, norm setting, and multi-sectoral approach can help provide support for its member States as they build low carbon and resilient economies, ensuring continued success in a carbon-constrained world.

    The ESCAP resolution on climate change response in the Asia-Pacific for the 72nd Commission Session (E/ESCAP/RES/72/8) requested the Executive Secretary to encourage and collaborate with relevant United Nations bodies and specialized agencies, regional, and subregional organizations as well as non-governmental organizations in line with the existing mandates and resources of the Commission to promote capacity-building of member States, in particular least developed countries and small island developing States, regarding climate change and climate resilience in the areas in which the Commission has existing capacity and expertise, including climate-related disaster risk reduction, through policy dialogues, and the sharing of experiences and information where appropriate.

    Fortunately, the amount of climate financing utilized in the Asia-Pacific region is increasing year-on-year with countries in North-East Asia, South-East Asia, and the Pacific receiving the largest climate finance flows. 

    Climate Finance in the Paris Agreement

    Article 9 of the Paris Agreement stipulates that developed country Parties shall provide financial resources to assist developing country Parties for both mitigation and adaptation in continuation of their existing obligations under the Convention. Other Parties are also encouraged to provide or continue to provide such support voluntarily.

    Meanwhile, the global stocktake referred to in Article 14 of the Agreement takes into account the relevant information provided by developed country Parties and/or Agreement bodies on efforts related to climate finance. Article 6, on the other hand, covers the use of international carbon markets.

    According to the UNFCCC, the “Financial Mechanism of the Convention, including its operating entities, and the Standing Committee on Finance, shall serve as the financial mechanism of this Agreement. In addition, Article 9 stipulates that the institutions serving this Agreement, including the operating entities, shall aim to ensure efficient access to financial resources through simplified approval procedures and enhanced readiness support for developing country Parties, in particular for the least developed countries and small island.


    COVID-19 and climate change have both been described as “grey rhinos,” where the costs of inaction are likely higher than the combined costs of action. At the same time, addressing the COVID-19 pandemic has shifted many countries’ priority away from climate action. However, there is a great opportunity to align the COVID-19 recovery with climate action, as there are synergies and countries can then avoid paying twice: once for COVID and again for climate action. As such, financing the COVID-19 response and recovery can, practically, double as climate finance for a better, greener recovery.  

    Innovative Instruments for Financial Institutions

    innovative instruments

    Meeting the financial requirements of a transformative 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs) converges with delivering on the Paris Agreement on Climate Change and the related Nationally Determined Contributions (NDCs). Many countries are undertaking analyses on how to align, renew, and modify their financing frameworks to meet the implementation requirements of their climate targets accordingly. Meanwhile, innovative approaches can be leveraged in this process, with innovation being one of the primary drivers of sustainable development.

    The Paris Agreement emphasizes the importance of making available financial resources to support the implementation of policies, strategies, regulation and actions for climate change mitigation and adaptation. A good deal of climate finance is already flowing in the Asia-Pacific region. However, investments will need to be further scaled up, including the mobilization of domestic finance and private sector investments in particular, to support the implementation of the climate change mitigation targets of the countries in the region.

    Through a three-year regional project, ESCAP provided technical and advisory services to national financial institutions in five countries—Fiji, Indonesia, Pakistan, Sri Lanka, and the Philippines—to identify and support the development of financial instruments that will leverage domestic investments to meet implementation needs and bridge financing gaps for low carbon climate resilient development. The project aim was to provide targeted advisory and technical assistance to empower central banks, as the regulator of the national financial markets, in framing national fiscal policies for “lean” investments in low carbon, climate resilient, and environmentally sustainable development. Such polices would be further implemented by national development banks, as well as commercial banks and will generate low carbon investment projects engaging private investors down the road. The aim was to identify innovative financial instruments that are both climate-responsive (with a focus on mitigation) as well as in line with the 2030 Agenda. The project fosters peer-learning and stimulates the creation of new partnerships that bridge the public-private divide with the aim of forging low-carbon climate resilient development in the region.

    To this end, scoping studies in four countries have been conducted to map out the landscape of national climate finance architecture and financial institutions, to identify ongoing climate finance initiatives and existing incentives for low-carbon investments and priority areas for interventions. In addition, two rounds of national consultation workshops have been held in Pakistanthe Philippinesand Sri Lanka and one in Indonesia, identifying national climate finance champions, stimulating discussion on innovative climate finance instruments for financial institutions and creating shared platforms for dialogue and learning among key stakeholders. This has been strengthened by the establishment of a regional network which seeks to promote peer learning and best practices through online forums and e-learning.

    Climate Change Adaptation

    According to NASA, climate adaptation refers to the process of “adapting to life in a changing climate – [which] involves adjusting to actual or expected future climate. The goal is to reduce our vulnerability to the harmful effects of climate change (like sea-level encroachment, more intense extreme weather events or food insecurity). It also encompasses making the most of any potential beneficial opportunities associated with climate change (for example, longer growing seasons or increased yields in some regions)." This stands in contrast to mitigation that focuses on reducing the flow of greenhouse gases into the atmosphere through a combination of reduction at the source and enhancing/restoring natural “carbon sinks” such as oceans, wetlands, and forests.

    The UNEP Adaptation Gap Report 2020 estimates that the annual costs of adaptation could range from $140 billion to $300 billion by 2030 and from $280 billion to $500 billion by 2050. According to the Organisation for Economic Cooperation and Development (OECD), tracked adaptation finance amounted to only approximately USD 16.8 billion in 2018, falling well short of the estimated needs, despite a rise in adaptation finance.

    Similar to many climate actions, adaptation is highly local in nature and, thus, local authorities in least developed countries “are in a unique position to identify climate change adaptation responses that best meet local needs, and typically have the mandate to undertake the small- to mediumsized adaptation investments required for building climate resilience, according to the United Nations Capital Development Fund (UNCDF). However, these authorities often lack the resources to do this, particularly in a way that is aligned with established local decision-making processes and planning/budgetary cycles. Another issue is that many adaption projects may be considered “unbankable.” According to weADAPT, mitigation projects are “typically more likely to be revenue-generating and therefore likely to be aligned with financial indicators, while adaptation projects are more likely to be associated with non-financial indicators of bankability, such as social impact and potential for emissions reduction.”

    Climate Finance