Southeast Asia Infrastructure presents excerpts from a Climate Policy Initiative (CPI) published report titled “Global Landscape of Climate Finance” which tracks trends in climate finance between 2011 – 2020 and concludes with key actions to rapidly scale climate finance to the trillions. The report provides a brief overview of sources, instruments, uses, and geographies in the past decade, as well as climate finance needs in the coming years by sectors and geographies. It also offers a preliminary estimate for climate finance in 2021, drawing on data published in 2022.
Key observations from data over the last 10 years have been detailed below.
Global climate finance flows almost doubled in the last decade
Global climate finance flows have been steadily increasing in the past decade. Climate finance increased at 7% (CAGR) on an annual basis reaching USD665 billion in 2020. This was driven primarily by growth in the renewable energy and transport sectors. Data on climate finance also improved over the years. Despite the increase, current investment levels are still significantly short of the estimated needs.
Figure 1: Global climate finance in 2011-2021 (USD bn, nominal)
We need at least USD 4.3 trillion in annual finance flows by 2030 (CAGR 21%) to avoid the worst impacts of climate change. There is enough liquidity in global financial markets (USD 200 trillion held by investors in 2020) but barriers impeding deployment exist. Delayed investment will only further increase the cost of action and response. Notably, investments needed to adapt to climate change will increase considerably as global warming progresses.
We need at least USD4.3 trillion in annual climate financing flows by 2030 to avoid the worst case scenario of climate change impact.
Private sector investment is increasing, but not at the scale and speed necessary for the transition
Private sector actors, particularly financial institutions with trillions of asset under management, are committing to net zero and sustainable finance practices. Nonetheless, it is not clear how fast these commitments are translating into changes and investment on the ground. The growth rate of private climate finance was slower (4.8%) than that of the public sector (9.1%) and must increase rapidly at scale. The public sector has been vital in channeling finance to hard-to-invest sectors such as agriculture and adaptation. However, there still a room for public finance to take more risks and to create enabling environments necessary for unlocking further pools of capital.
Figure 3: Climate Finance by public and private sources in 2011-2020 (USD bn)
Finance towards renewable energy made the most progress, whereas adaptation and resilience finance lags significantly.
The renewable energy sector was transformed into an established and competitive sector with a 7x higher return on investment than fossil fuels (IEA, 2021). Public sector support was particularly crucial in scaling renewable energy investment by supporting and enabling technology cost reduction, as well as providing incentives such as time bound subsidy mechanisms as markets became self-sustaining. Transport is the fastest-growing sector, built in part by sustained policy support for the industry. Other critical sectors, including agriculture, forestry, land use, industry, water and wastewater, all of which have potential to mature, are trailing behind. There is a lack of data on adaptation finance from the private sector. Nevertheless, the quantity and quality of adaptation finance fall far short of needs.
76% of climate finance was raised domestically
75% of all climate finance was concentrated in North America, Western Europe, and East Asia & Pacific (primarily led by China). Also, 76% of all climate finance flows were raised and spent domestically.
Across all regions, there is a lack of consistently collected data on domestic climate finance suggesting that countries do not systematically monitor climate expenditure against policy objectives.
Mobilization of private finance is crucial to achieving net zero goals.
In the last ten years, the world has learned valuable lessons and developed crucial capacity to move faster towards Paris alignment and net zero goals. Building on this effort, public and private actors must work closer together to drive technology costs down, lower the cost of capital, scale up investment at pace while redirecting flows away from high-carbon investments. Climate transition presents tremendous investment opportunities across a range of sectors and regions.
However, the current rate of increase of climate investment will fail to secure the low carbon and climate resilient development needed. Only through rapid acceleration—to reach seven times the current level of investment— and alignment of all finance flows with climate goals will we bridge the significant funding shortfalls. The funding landscape needs to go beyond incremental investment through traditional funding instruments, such as project-level debt, and increasingly embrace innovative financial instruments that unlock capital at scale.
Mobilization of private finance is crucial to achieving net zero goals. Historically, the public sector has facilitated this by funding initial research and development into unproven technologies and creating policy environments that encourage private investment and domestic public finance to scale up markets. To minimize disruptions related to the much-needed transition, there is a need for a holistic systems view and an organized climate space, which breaks silos, brings in stakeholders who are not yet actively involved. These efforts should translate challenges and opportunities into implementable programs at sectoral, subnational, and national levels to mobilize international and domestic finance.
The entire report can be read here.