The Bank for International Settlements has suggested reducing climate chaos through development of easy-to-understand taxonomy, standards, certifications, benefits, and assigning green outcome-linked ESG ratings. It’s not just funding. It’s about methodology supporting climate finance, starting with common definitions, technology, temperature scores of activities being financed, to allowance for loan losses, default probabilities, and capital assignment.
An option is to associate climate scores with all economic, social, and financial activities by applying technologies. Methodology will involve design of temperature scores, underlying science, methods of projection of emissions, and carbon budget distribution. Work is underway to strengthen and harmonise the disclosure and transparency environment by a task force on nature-related financial disclosures and science-based technology initiatives.
A strong appetite is emerging in support of climate-safe social bonds being floated by municipalities in some advanced economies, including Japan and the US. Demand for climate finance runs into trillions of dollars and sources of green finance must rise. Long-term, fixed-interest-rate, currency-hedged finance is the need of the hour. Funding needs to be tied to timely science-based net-zero targets. Some country-specific exceptions may be required. There exists a trust deficit. It’s no secret that only a miniscule share of green bonds has gone to emerging and developing economies.
Where necessary, central banks and international financial institutions can provide currency hedging through market mechanisms. Green rating criteria must be sufficiently clear on environmental benefits. Rating agencies could publicise their ESG rating criteria and efforts for raising green finance. All-out efforts are necessary to establish national, regional, and international green banks with adequate resources to narrow the climate-funding gap. Funding is also needed for the International Monetary Fund, the Asian Development Bank, even the private sector, to explore “debt for nature” swaps to preserve biodiversity, ecology, beaches, forests, mountains, and natural resources.
A shared governance framework, on the principle of “same activity, same definitions, same risk, same regulation” to regulate climate finance and supervise markets, issuers, disclosure, and transparency will promote a conducive environment. Science-based, clear and concise measurement methodologies aimed at avoiding double counting with an audit trail would raise public confidence.
Incentives could be structured to favour doing better by cutting own emissions, than by buying offsets. Banks must assess skill gaps and induct staff armed with climate credentials. The US has taken the lead in nominating Ajay Banga, a Wall Street veteran with climate credentials, for World Bank President. Countries are moving towards having climate-savvy staff in their economic ministries, and a national chief climate advisor.
International cooperation on issues that are related to climate finance yet controversial is required via diplomacy. India, holding the current G20 Presidency, could facilitate a consensus structured on the principle of vasudhaiva kutumbakam — a Sanskrit phrase that means the whole world is a single family. G20 can help make the world cleaner and greener by sharing globally its collective wisdom on climate finance, structured on principles of equity and natural justice.
The writer is a former senior staff of Asian Development Bank (Philippines). The views expressed are personal. This column has been edited for length
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