Global central banks to study ways to scale up adaptation finance
[DUBAI] A network of central banks that aims to mobilise capital for climate action is setting up a taskforce to look into adaptation financing. Adaptation financing is especially critical for emerging markets and developing economies as they would likely suffer the brunt of climate change impacts, said Ravi Menon, the current chair of the Network for Greening the Financial System (NGFS), on Monday (Dec 4) on the sidelines of the United Nations climate change conference (COP28).
Menon, who is also the managing director of the Monetary Authority of Singapore, said there are significant hurdles to bringing in private sector financing, such as the lack of clear metrics for assessing impact and financial return and NGFS will look at how adaptation finance can be scaled up and how central banks and supervisors can contribute to such efforts.
Often seen as the poor cousin of climate mitigation, adaptation financing generally does not attract as much funding from the private sector, as these projects generally do not generate profits.
According to the latest adaptation gap report by the United Nations Environment Programme, the current adaptation finance gap is estimated at between US$194 billion and US$366 billion per year.
Given the higher risk profiles of emerging markets, they also tend to face higher costs of capital from private sector investments.
NGFS launched a technical document on Monday, charting out various new ways blended finance can be scaled up for climate mitigation and adaption in these markets.
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“The current blended finance practices have come under increasing criticism for relatively low mobilisation and leverage ratios, with calls to bring in private capital more effectively and efficiently, and for optimising the scarce concessional capital coming from increasingly limited public sources,” read the report.
Barriers to scaling up blended finance have been identified as encompassing limited investment opportunities and a lack of viable climate projects in emerging markets, knowledge gaps across the blended finance ecosystem and a lack of climate policies and regulatory clarity.
The technical document lays out several policy recommendations to address the challenges.
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To improve the investability of emerging markets, the right climate policies, such as on carbon pricing, should be in place. The climate information architecture should be strengthened, by improving the quality, comparability and reliability of climate data, implementing disclosure standards and establishing sustainable financing taxonomies.
There is also a need to bridge the knowledge gap between public and private sectors, which can be achieved only by working collaboratively across all stakeholders in the blended finance ecosystem.
The report recommended engaging with emerging market project sponsors from early conceptualisation through to financing in order to develop and bring to market a pipeline of viable projects. Effort should be focused on the design, funding, and technical support of the project to improve its viability and success.
Policymakers should mitigate risks and support innovative blended finance solutions that encourage risk diversification through risk pooling and tranching. This will attract varied sources of private capital, with different risk profiles and investment time horizons. It also recommended that greater efforts be made towards fostering the catalytic role of multilateral development banks and development financial institutions.
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