COVID-19 and the Future of Climate Finance? exploring the emergent with the Global Innovation Lab

By the UNDP Asia Pacific Regional Innovation Centre and Global Innovation Lab for Climate Finance

There is no question that the COVID-19 crisis has fundamentally altered daily life — and the global economy. But what does this mean for the green economy and climate development agenda? Last week, the UNDP Regional Innovation Team held a live session with the Climate Policy Initiative (CPI) Global Innovation Lab for Climate Finance, to explore this very question.

Like the pandemic, climate change will affect everyone globally, albeit on a much larger time and impact scale. Without urgent and coordinated action, trillions of dollars of economic activity and millions of lives will continue to be put at risk. Similar to COVID-19, climate change does not distinguish between national boundaries and can disproportionately affect the most vulnerable.

In this stocktaking session, CPI’s Ben Broché and Leigh Madeira, shared the latest trajectories of markets and economic development dynamics, and provoke us to reconsider whether we are on the right trajectory (or not) for building a sustainable future? For example, will COVID-19 derail climate finance? Or will a redesign of venture capital markets catalyze the change required? Can we expand demand for interesting instruments in the pipeline — like the Breathe Better Bond developed to fund green infrastructure initiatives? Or will national policy and private investment focuses on short-term recovery plans?

As CPI’s Ben Broché shared: “a lot of the work is about addressing this de-risking- whether perceived or real.” At the same time, to meet climate change mitigation and adaptation targets, USD 1.6–3.8 trillion in climate-related investment is needed annually and this scale of change requires us to “move from billions to trillions rapidly.”

Below we share the live session recording, a few top highlights, and extended Q+A from the participants

https://vimeo.com/410891019
You can see the session here: https://vimeo.com/410891019

What We Covered

  • Climate Policy Initiative’s Climate Finance practice and the theory of change behind the Lab, lessons learned
  • The importance of public and private climate finance in sustainable development, especially in relationship to the COVID crisis
  • Potential trends, challenges, and key impact areas for climate-related development in a post-COVID world
  • The role of blended finance in unlocking investment in challenging sectors, and the role it can play in supporting the transition to a low-carbon, resilient economy
  • How the Lab has worked with entrepreneurs, innovators, and investors from the pubic, development finance, and private sectors to develop and launch new financial solutions that have channeled billions of dollars into climate development in emerging economies over the past five years
  • Case studies from several Lab-backed financial instruments, as well as lessons-learned for the global development sector

Crowdsourced Q+A

About working through COVID and Anticipating Post-Pandemic Space

Question from Live Session Participant:“As you mentioned, there is demand for ‘new approaches’ to climate investing. How do we get ready for any opportunity or challenge we face during / post the COVID-19 outbreak? How do you make a business case for climate action amidst the pandemic?”

Leigh Madeira- CPI: The strongest point here is emphasizing that, as governments and investors, we do not have to choose between restoring economic activity, protecting public health and addressing climate change. The three are interconnected, not at odds, so we must direct investments towards projects that advance all three. As we mentioned in the session, we think that our global response to COVID19 can also help move the climate response forward if our policies and investments focus on five key areas, starting with the stimulus plans that so many countries are enacting.There are plenty of “shovel-ready” projects that could generate short-term growth in a wide range of sectors, from increasing access to renewable energy, to improving sustainable agriculture and making our cities more energy efficient.

We believe that the other four areas to focus response should be:

1- Economic diversification. The pandemic highlights that fossil fuel markets are unstable. Renewable energy investments, to the surprise of many, are proving to be much more stable. Renewables are now attracting interest from investors who are hungry for low-risk, stable-yield opportunities in this time of extraordinary market instability (eg, “Sustainable ETFs attract $3.8 billion amid the crash in oil prices”). Climate finance instruments like the ones we incubate in the Lab are often not very correlated to the market — local sustainable agriculture, forest restoration, green infrastructure. I’m not claiming that our instruments are completely immune to market shocks but the diversification potential from these climate sectors is very real and COVID is proving that as we speak.

2- Realignment of incentives. There are two factors here. The first relates to time. The focus on short term gains often comes at the expense of long term value. Companies are too often overly focused on the next quarter at the expense of their long-term financial viability. If investors assess companies over a longer time horizon, markets will be more resilient to short-term shocks like the COVID crisis and better prepared for longer term risks like climate change. The renewable energy example I just mentioned emphasizes that point. The second factor is about the incentives themselves. We traditionally evaluate investments, whether public or private, based on their short-term financial return. But those incentives hide many other costs. Governments predictably use their budgets to incentivize different behaviors, but the current situation and rapid deployment of impact-linked government support could be a useful framework for also fighting climate change and linking financial incentives to environmental progress.

3- Embracing the public sector as a leader. Governments around the world are the leaders in the public health and economic responses to COVID-19. We’re seeing governments stepping in as an ‘investor of last-resort’ in the case of bailouts, but governments are also taking the lead with these new financial incentives. We discussed the role of blended finance in achieving our climate goals and for that to work we rely on governments as co-investors to de-risk new ideas that may not have the track record yet to attract commercial investors (eg, “Government of Indonesia takes lead on leveraging blended finance”).

4- Investing in the health, poverty, climate nexus. Those at the base of the pyramid suffer from a disproportionate share of disease and have more limited access to quality health care (eg, “Impact of COVID-19 in Low- and Middle-Income Countries”). We also know that these people are more heavily impacted by the effects of climate change. The people going to work right now and riding public transportation and putting themselves at risk are mostly doing it because they don’t have the economic choice to stay home. We talked about the link between COVID and air pollution earlier, and that just stresses the importance of investing in solutions at the nexus of health, poverty, and climate.

About Finance and Technical Implementation

Question from Live Session Participant: Do we have a forecast of investor interest in these initiatives given that many companies have suffered losses due to COVID?

Ben Broché-CPI: It is far too early to tell how COVID-19 will impact public and private climate finance. But the Lab’s focus has always been developing innovative solutions that drive economic growth while addressing climate change, so we will continue to aid investors in understanding that sustainable investing does yield solid returns. And, as Leigh mentioned earlier, we are seeing early evidence that sustainable investments are outperforming traditional private market benchmarks, so this may create a wider audience interested in climate finance. CPI publishes an annual assessment of climate finance flows, from public debt to private equity. If you are interested in exploring this question through our research, you can sign up on our website: Global Landscape of Climate Finance.

Question from Live Session Participant: Commercial banks are facing crucial challenges from the non-performed traditional financial products (loan-based). This gap can be an opportunity. What should be the innovative financial products to convince commercial banks to provide such working capital to start with. Then, the crowd can follow. Any real cases anywhere?

Ben Broché-CPI: this is why public-private collaboration is crucial, which is at the heart of the Lab’s success in mobilizing over USD $2 billion in climate finance investment. Our members — which include governments, philanthropies, DFIs and private sector investors — have expressed that through the Lab, they have the opportunity to collaborate with experts from different sectors in ways that launch new opportunities in blended finance: levearing early-stage concessional finance to build up instruments that are market-ready for private investment. Some successful examples include:

  • Breathe Better Bond: municipal bonds in developing nations that raise financing for projects that reduce both air pollution and greenhouse gas emissions.
  • Climate Investor One: combining three innovative investment facilities into one to finance projects in the wind, solar and hydro sectors.
  • Cooling-as-a-Service (CaaS): a pay-per-service model for clean cooling systems, which eliminates upfront investment in clean cooling technology for customers who instead pay per unit of cooling they consume, strengthening incentives for efficient consumption.
  • CRAFT: A fund that combines a standard growth equity investment structure with technical assistance to enable the deployment of climate resilience services and technologies in developing countries.

Question from Live Session Participant: Investment in developing nations is often politically related. For example, Indonesia’s recent green bonds, as well as recent or planned bond offerings in places like Malaysia, North Africa and Maldives are all heavily Middle East supported. With oil prices in the ground, then I would imagine this could have an impact on investment in green bonds. Commercial banks in the East also tend to be very conservative. So how do you see these innovative instruments working under the current scenario?

Ben Broché-CPI: it’s a great question. While there’s a lot of opportunity, it’s true that there is a lot of market education that needs to occur. We’ve also learned through the Lab that, even though we are all driven by a sense of urgency, it takes a long time to move from early stage idea, to a financial product that is investment ready, and from there to funding projects on the ground. Successful lab instruments often take 3–5 years to reach scale and measurable impact. But we are seeing an increasing number of private and institutional investors, regardless of location, exploring a wider range of investment options as they develop a deeper understanding of climate risk, the nexus between climate risk and the other factors that Leigh mentioned, and seek to diversify their portfolios to better hedge against some of these risks while maintaining reasonable returns. We are still in early stages. But the aim of our work is to build awareness to the next stage beyond the “early adopters” in order to reach those trillions of dollars of annual investment mentioned earlier that are needed to adequately address climate change.

Curious to explore more? You can view the slides here, learn more about the Climate Finance Lab, and follow Climate Finance Lab, Ben Broché , Leigh Madeira, and the Regional Innovation Centre. Have ideas or questions for the UNDP? Reach out to RIC Session moderator, Courtney Savie Lawrence to continue the conversation.

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Doing development differently through designing, developing, curating, collating and championing innovation and digital across the Asia Pacific Region.

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Regional Innovation Centre UNDP Asia-Pacific

Regional Innovation Centre UNDP Asia-Pacific

Doing development differently through designing, developing, curating, collating and championing innovation and digital across the Asia Pacific Region.

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