The spiritual grandchild of the Rio Earth Summit agreement of 23 years ago, the universal climate agreement (UCA), is the world's best chance to limit global temperature increase to two degrees Celsius. The universal hope is that it will be adopted at the global climate change summit in Paris, France, in December 2015. The UCA is important because it will record different countries’ commitments to reduce their carbon dioxide emissions, and, this time around, developing countries, too, will make commitments to reduce their emissions—and they are looking for how to fund the actions they will need to take.

How much money is needed by developing countries? Estimates are around US$ 450 billion per year from 2020 on: US$ 350 billion for reduced emissions and US$ 100 billion for adapting to the impacts of climate change. Some of this money will be provided by countries themselves. But to reach their emission reduction targets, a significant fraction will also need to come from developed countries in the form of official climate finance (OCF). These numbers may sound overwhelming, but context is paramount—they should be compared to net inflows of debt and equity into developing countries, which are estimated to be above US$ 1.2 trillion per year.

At the 2010 Climate Change Conference in Cancun, Mexico, the global community responded to developing countries’ financing needs by creating the Green Climate Fund (GCF). The GCF groups 196 sovereign states that are Parties to the United Nations Framework Convention on Climate Change (UNFCCC), and is the only multilateral financing institution in the world whose sole mission is to serve the UNFCCC’s climate objective. Its purpose is to promote a radical paradigm shift towards low emission and climate-resilient investments in developing countries.

How is the GCF expected to do this? By providing developing countries with direct financing for climate investments and by leveraging other financing, including private investors and financial markets. Funding will be concessional, and one of the GCF's greatest innovations is its risk-bearing capacity, allowing it to bear more risk and thus leverage other less risky financing, notably from the private sector.

A lot of work has been done since the GCF’s inauguration in Songdo, in the Republic of Korea, in December 2013, where it is headquartered. It is now open for business and has a growing network of more than 120 developing country focal points engaged with the Fund. Developing countries are central in the funding process and the GCF’s own Board is structured to ensure a balanced representation from developed and developing countries—a 50:50 ratio.

In the year since its launch, the GCF has already secured US$ 10 billion equivalent in financial pledges from 33 countries, including from developing countries. It continues to raise money on an ongoing basis. A significant portion of its pledges have already been converted into usable resources, and the Fund is ready to start investing in climate-sensitive projects and programmes.

How will the GCF operate? Through a network of accredited partners, trusted entities that will work on its behalf during the project cycle. These may include local institutions in the countries themselves, regional entities, private banks and funds, nongovernmental organizations and international organizations. The GCF’s accredited partners will deploy its resources through a variety of financial instruments (concessional loans, subordinated debt, equity, guarantees and grants) and monitor project impacts. The process to build the network of partner entities is ongoing, with applications received from all over the world, and some institutions already accredited.

To accelerate private sector investment in low-emission, climate-resilient activities, the GCF’s Private Sector Facility will work hand in hand with international businesses, capital markets and the local private sector in developing countries. Its risk-bearing capacity will enable the Fund to support private investments in, for example, energy efficiency, forest protection and reforestation, deployment of climate-related insurance products, adaptive agricultural methods in the face of desertification and other similar projects.

At the Paris Climate Change Summit later this year, the world expects member States to take some important decisions concerning climate finance. Total OCF commitments to date are a good start but only a fraction of what is needed to achieve the world’s climate change objective. In order to succeed, countries must agree to set in place predictable, long-term flows of OCF up to and beyond 2020, including quantities significantly larger than the initial pledges made to the GCF to date. The line of argument for increasing investments is simple—either we pay now or pay later and face the risk of significant development setbacks for all of humanity.

UNEP Inquiry Shows How to Align Global Finance with Sustainable Development
A new UNEP report released at the International Monetary Fund (IMF)/World Bank Annual Meetings shows how to harness the assets of the world's financial system for sustainability - the key findings are that:

  • A 'quiet revolution' is underway as financial policymakers and regulators take steps to integrate sustainable development considerations into financial systems to make them fit for the 21st century.
  • Momentum is building and is largely driven by developing and emerging nations including Bangladesh, Brazil, China, Kenya, and Peru, with developed country champions including France and the UK.
  •  Amplifying these experiences through national and international action could channel private capital to finance the transition to an inclusive, green economy and support the realization of the Sustainable Development Goals.

These are the core findings of a two-year Inquiry by the United Nations Environment Programme, summarized in a new report, The Financial System We Need. Commenting on the release:
Achim Steiner, UN Under-Secretary-General and Executive Director of UNEP said: "UNEP's Inquiry has for the first time compiled and analyzed inspiring initiatives from across the world that seek to better align the financial system with sustainable development, showing that there is much to be learnt from the developing world. We now need to raise the level of ambition and cooperation to ensure that the heartland of the global economy, the financial system, can evolve to serve its core purpose of growing and sustaining the real economy. UNEP's report opens a new chapter by setting out how such an evolution can be achieved," he added.
Also speaking at the launch, Yi Gang, Deputy Governor of the People's Bank of China, said the UNEP Inquiry report "delivers a vision of embedding sustainable development into the core of financial and capital markets. It should be a very useful guide and reference for many governments, financial institutions and international organizations in thinking about how to advance green finance." Yi praised UNEP's contribution to the joint study with China's central bank on the country's green financial system, and said that "we have benefited significantly from UNEP's vision of sustainable finance as well as its analysis on international experience," and "are looking forward to continuing this partnership with UNEP in the future."

Dr Atiur Rahman, Governor of the Bangladesh Bank, and a member of the Inquiry`s Advisory Council, speaking at the launch, said: "For the first time, the Inquiry has mapped the many innovations around the world seeking to ensure that the financial systems serves its purpose of financing inclusive, green development".
John Lipsky, former first Deputy Managing Director of the IMF and a member of the Inquiry`s Advisory Council, "Reforming the financial system remains unfinished business - we have stabilized the system, but have a long way to go in designing a financial system that meets the needs of sustainable development. "
Murilo Portugal, the President of Brazil`s banking association, FEBRABAN, and a member of the Inquiry`s Advisory Council, "The Inquiry has catalyzed awareness of the need to align financial markets to sustainable development, and highlighted practical pathways to improving such an alignment."
Naina Kidwai - Chairman, HSBC India, Director, HSBC Asia Pacific, and a member of the Inquiry's Advisory Council, "Too often the financial system and sustainable development have been tackled in separate silos. The Inquiry has shown for the first time how to systematically connect the dots, demonstrating practical ways in which we can mobilise the scale of capital needed in emerging markets, particularly for clean energy and clean water."
Sharan Burrow - General Secretary of the International Trade Union Confederation (ITUC), "The UNEP Inquiry is a valuable contribution to help reframe the financial system which is essential for a socially just transition to a low carbon economy."
Henri de Castries, Chief Executive of AXA, one of over 40 partners of the Inquiry, "I welcome the Inquiry, as only a financial system with a sustainability orientation serves the economy and society, and so provides a sound foundation for fostering the long-term orientation of finance."
Rachel Kyte, Vice President and Special Climate Envoy, World Bank Group: "The UNEP Inquiry has uncovered a new generation of policy innovations that aim to ensure the financial system serves the needs of inclusive, environmentally-sustainable, economic development. Its findings are an important input in advancing a new generation of financial system reform and support the delivery of our most important sustainability goals, and could play an important role for implementing the results of the forthcoming Paris climate talks."
Highlights from 'The Financial System We Need' report from the UNEP Inquiry
The UNEP Inquiry into the Design of a Sustainable Financial System was established in January 2014 with a mandate to advance policy options that would improve the effectiveness of the financial system in supporting sustainable development.
Supported by a high-level Advisory Council of financial leaders, the Inquiry has looked in-depth at practice in more than 15 countries as well as across key segments of the financial system, such as banking, bond and equity markets, institutional investment, insurance as well as monetary policy. To reach its findings, the Inquiry has worked with central banks, environment ministries, international financial institutions as well as major banks, stock exchanges, pension funds and insurance companies.
The Inquiry has identified five types of measures that are being introduced by financial rule-makers:

  • Enhancing market practice through better disclosure, clearer responsibilities and improved product criteria.
  • Harnessing the public balance sheet, through fiscal incentives, public financial institutions and central bank action
  • Directing finance through policy measures, such as priority sector lending, legal requirements and liability regimes
  • Transforming financial culture, through capacity building, reformed incentives and market structure
  • Upgrading system governance, through guiding principles, regulatory mandates and performance measurement.
  • In total, the Inquiry found over 100 measures that are already in place, including:
  • China, a portfolio of 14 distinct recommendations to advance China`s green financial system, covering information, legal, institutional and fiscal measures
  • France, new disclosure requirements on climate change have been introduced for institutional investors as part of the country's energy transition legislation
  • Kenya, has advanced financial inclusion through scaling of mobile based payment services, which is now also supporting green financing
  • Peru, new due diligence requirements have been introduced for banks to help reduce social and environmental externalities.
  • USA, emphasizes fiscal measures to accelerate green finance, and had made significant advances in disclosure and investor action.

The Inquiry`s report presents a Framework for Action that includes a toolbox of nearly 40 different measures, a set of five policy packages across banking, bond and equity markets, institutional investors and insurance, and a prioritized set of 10 next steps to promote international financial cooperation
NOTES TO EDITORS
Along with The Financial System We Need, the Inquiry will also be launching the 'Inquiry Live' website which will house a dedicated platform the body of knowledge and research materials encompassing the Inquiry's work over the past 20 months. The website will provide a one stop shop to all of the Inquiry's research materials, as well as a dedicated portal for partner countries to enable communication and sharing of knowledge. The country portal will initially be dedicated to the 15 countries where there has been enhanced country engagement.