Editing IPCC:AR6/WGIII/Chapter-15 (section)

== Executive Summary ==

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'''Finance to reduce net greenhouse gas (GHG) emissions and enhance resilience to climate impacts represents a critical enabling factor for the low carbon transition. Fundamental inequities in access to finance as well as its terms and conditions, and countries’ exposure to physical impacts of climate change overall result in a worsening outlook for a global just transition (''' '''''high confidence''''' ''')''' '''''.''''' Decarbonising the economy requires global action to address fundamental economic inequities and overcome the climate investment trap that exists for many developing countries. For these countries the costs and risks of financing often represent a significant challenge for stakeholders at all levels. This challenge is exacerbated by these countries’ general economic vulnerability and indebtedness. The rising public fiscal costs of mitigation, and of adapting to climate shocks, are affecting many countries and worsening public indebtedness and country credit ratings at a time when there were already significant stresses on public finances. The COVID-19 pandemic has made these stresses worse and tightened public finances still further. Other major challenges for commercial climate finance include: the mismatch between capital and investment needs, [[#footnote-016|1]] home bias [[#footnote-015|2]] considerations, differences in risk perceptions for regions, as well as limited institutional capacity to ensure safeguards represent. {15.2, 15.6.3}

'''Investors, central banks, and financial regulators are driving increased awareness of climate risk. This increased awareness can support climate policy development and implementation (''' '''''high confidence''''' ''')''' '''''.''''' Climate-related financial risks arise from physical impacts of climate change (already relevant in the short term), and from a disorderly transition to a low-carbon economy. Awareness of these risks is increasing leading also to concerns about financial stability. Financial regulators and institutions have responded with multiple regulatory and voluntary initiatives by to assess and address these risks. Yet despite these initiatives, climate-related financial risks remain greatly underestimated by financial institutions and markets limiting the capital reallocation needed for the low-carbon transition. Moreover, risks relating to national and international inequity – which act as a barrier to the transformation – are not yet reflected in decisions by the financial community. Stronger steering by regulators and policy makers has the potential to close this gap. Despite the increasing attention of investors to climate change, there is limited evidence that this attention has directly impacted emission reductions. This leaves high uncertainty, both near-term (2021–30) and longer-term (2021–50), on the feasibility of an alignment of financial flows with the Paris Agreement ( ''high confidence'' ). {15.2, 15.6}

'''Progress on the alignment of financial flows with low GHG emissions pathways remains slow. There is a climate financing gap which reflects a persistent misallocation of global capital (''' '''''high confidence''''' ''')''' '''''.''''' Persistently high levels of both public and private fossil-fuel related financing continue to be of major concern despite recent commitments. This reflects policy misalignment, the current perceived risk-return profile of fossil fuel-related investments, and political economy constraints ( ''high conf'' ''idence'' ). {15.3}

Estimates of climate finance flows – which refers to local, national, or transnational financing from public, private,multilateral, bilateral and alternative sources, to support mitigation and adaptation actions addressing climate change – exhibit highly divergent patterns across regions and sectors and a slowing growth. {15.3}

When the perceived risks are too high the misallocation of abundant savings persists. Investors refrain from investing in infrastructure and industry in search of safer financial assets, even earning low or negative real returns. {15.2, 15.3}

Global climate finance is heavily focused on mitigation (more than 90% on average between 2017–2020). This is despite the significant economic effects of climate change’s expected physical impacts, and the increasing awareness of these effects on financial stability. To meet the needs for rapid deployment of mitigation options, global mitigation investments are expected to need to increase by the factor of 3 to 6 ( ''medium confidence'' ). The gaps are wide for all sectors and represent a major challenge for developing countries, [[#footnote-014|3]] especially Least-Developed Countries (LDCs), where flows have to increase by factor 4 to 7, for specific sectors like agriculture, forestry and other land use (AFOLU) in relative terms, and for specific groups with limited access to, and high costs of, climate finance ( ''high confidence'' ). {15.4, 15.5}

The actual size of sectoral and regional climate financing gaps is only one component driving the magnitude of the challenge, with financial and economic viability, access to capital markets, investment requirements for adaptation, reduction of losses and damages, climate-responsive social protection, appropriate regulatory frameworks and institutional capacity to attract and facilitate investments and ensure safeguards being decisive to scale-up financing. Financing needs for the creation and strengthening of regulatory environment and institutional capacity, upstream financing needs as well as R&amp;D and venture capital for development of new technologies and business models are often overlooked despite their critical role to facilitate the deployment of scaled-up climate finance ( ''high confidence'' ). {15.4.1, 15.5.2}

'''The relatively slow implementation of commitments by countries and stakeholders in the financial system to scale up climate finance reflects neither the urgent need for ambitious climate action, nor the economic rationale for ambitious climate action (''' '''''high confidence''''' ''')''' '''''.''''' Delayed climate investments and financing – and limited alignment of investment activity with the Paris Agreement – will result in significant carbon lock-ins, stranded assets, and other additional costs. This will particularly impact urban infrastructure and the energy and transport sectors ( ''high confidence'' ). A common understanding of debt sustainability and debt transparency, including negative implications of deferred climate investments on future GDP, and how stranded assets and resources may be compensated, has not yet been developed ( ''medium conf'' ''idence'' ). {15.6}

The greater the urgency of action to remain on a 1.5°C pathway the greater need for parallel investment decisions in upstream and downstream parts of the value chain. Greater urgency also reduces the lead times to build trust in regulatory frameworks. Consequently, many investment decisions will need to be made based on the long-term global goals. This highlights the importance of trust in political leadership which, in turn, affects risk perception and ultimately financing costs ( ''high confidence'' ) ''.'' {15.6.1, 15.6.2}

There is a mismatch between capital availability in the developed world and the future emissions expected in developing countries. This emphasises the need to recognise the explicit and positive social value of global cross-border mitigation financing. A significant push for international climate finance access for vulnerable and poor countries is particularly important given these countries’ high costs of financing, debt stress and the impacts of ongoing climate change ( ''high confidence'' ) ''.'' {15.2, 15.3.2.3, 15.5.2, 15.6.1, 15.6.7}

'''Ambitious global climate policy coordination and stepped-up (public) climate financing over the next decade (2021–2030) can help address macroeconomic uncertainty and alleviate developing countries’ debt burden post-COVID-19. It can also help redirect capital markets and overcome challenges relating to the need for parallel investments in mitigation and the up-front risks that deter economically sound low carbon projects. (''' '''''high confidence''''' ''').''' Providing strong climate policy signals helps guide investment decisions. Credible and clear signalling by governments and the international community reduce uncertainty for financial decision-makers and help reduce transition risk. In addition to indirect and direct subsidies, the public sector’s role in addressing market failures, barriers, provision of information, and risk sharing (equity, various forms of public guarantees) can encourage the efficient mobilisation of private sector finance ( ''high confidence'' ) ''.'' {15.2, 15.6.1, 15.6.2}

The mutual benefits of coordinated support for climate mitigation and adaptation in the next decade for both developed and developing regions could potentially be very high in the post-COVID-19 era. Climate compatible stimulus packages could significantly reduce the macro-financial uncertainty generated by the pandemic and increase the sustainability of the world economic recovery. {15.2, 15.3.2.3, 15.5.2, 15.6.1, 15.6.7}

Political leadership and intervention remain central to addressing uncertainty as a fundamental barrier for a redirection of financial flows. Existing policy misalignments – for example in fossil fuel subsidies – undermine the credibility of public commitments, reduce perceived transition risks and limit financial sector action ( ''high confidence'' ) ''.'' {15.2, 15.3.3, 15.6.1, 15.6.2, 15.6.3}

'''Innovative financing approaches could help reduce the systemic underpricing of climate risk in markets and foster demand for Paris-aligned investment opportunities. Approaches include de-risking investments, robust ‘green’ labelling and disclosure schemes, in addition to a regulatory focus on transparency and reforming international monetary system financial sector regulations''' '''(''' '''''medium confidence''''' ''')''' '''''.''''' Markets for green bonds, ESG (environmental, social, and governance), and sustainable finance products have grown significantly since the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC AR5) and the landscape continues to evolve. Underpinning this evolution is investors’ preference for scalable and identifiable low-carbon investment opportunities. These relatively new labelled financial products will help by allowing a smooth integration into existing asset allocation models ( ''high confidence'' ). Markets for green bonds, ESG (environmental, social, and governance), and sustainable finance products have also increased significantly since AR5, but challenges nevertheless remain, in particular there are concerns about ‘greenwashing’ and the limited application of these markets to developing countries. New business models (e.g., pay-as-you-go) can facilitate the aggregation of small-scale financing needs and provide scalable investment opportunities with more attractive risk-return profiles. Support and guidance for enhancing transparency can promote capital markets’ climate financing by providing quality information to price climate risks and opportunities. Examples include Sustainable Development Goals (SDG) and environmental, social and governance (ESG) disclosure, scenario analysis and climate risk assessments, including the Task Force on Climate-Related Financial Disclosures (TCFD). The outcome of these market-correcting approaches on capital flows cannot be taken for granted, however, without appropriate fiscal, monetary and financial policies. Mitigation policies will be required to enhance the risk-weighted return of low-emission and climate-resilient options, and – supported by progress in transparent and scientifically based projects’ assessment methods – to accelerate the emergence and support for financial products based on real projects, such as green bonds, and phase out fossil fuel subsidies. Greater public-private cooperation can also encourage the private sector to increase and broaden investments, within a context of safeguards and standards, and this can be integrated into national climate change policies and plans. {15.1, 15.2.4, 15.3.1, 15.3.2, 15.3.3, 15.5.2, 15.6.1, 15.6.2, 15.6.6, 15.6.7, 15.6.8} .

'''The following policy options can have important long-term catalytic benefits''' '''(''' '''''high confidence''''' ''')''' '''''.''''' (i) Stepped-up both the quantum and composition of financial, technical support and partnership in low-income and vulnerable countries alongside low-carbon energy access in low-income countries, such as in sub-Saharan Africa, which currently receives less than 5% of global climate financing flows; (ii) continued strong role of international and national financial institutions, including multilateral, especially location-based regional, and national development banks; (iii) de-risking cross-border investments in low-carbon infrastructure, development of local green bond markets, and the alignment of climate and non-climate policies, including direct and indirect supports on fossil fuels, consistent with the climate goals; (iv) lowering financing costs including transaction costs and addressing risks through funds and risk-sharing mechanisms for under-served groups; (v) accelerated finance for nature-based solutions, including mitigation in the forest sector (REDD+), and climate-responsive social protection; (vi) improved financing instruments for loss and damage events, including risk-pooling-transfer-sharing for climate risk insurance; (vii) economic instruments, such as phasing in carbon pricing and phasing out fossil fuel subsidies in a way that addresses equity and access; and (viii) gender-responsive and women-empowered programmes. {15.2.3, 15.2.4, 15.3.1, 15.3.2.2, 15.3.3, 15.4.1, 15.4.2, 15.4.3, 15.5.2, 15.6, 15.6.2, 15.6.4, 15.6.5, 15.6.6, 15.6.7, 15.6.8.2}

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