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.