- Green and Climate Finance Options to Support the Post-Covid-19 Pandemic Recovery and Climate Action
Most of the policy measures introduced in 2020 and 2021 as a response to the socioeconomic crises induced by the COVID-19 pandemic focused on addressing health concerns and a speedy economic recovery. Considerably less attention has been paid to combatting climate change and preventing environmental degradation, for which many governments in the Asia Pacific region lack the needed financial resources. There are, however, various options to mobilize green and climate finance to address climate change, recover from the COVID-19 pandemic, and achieve a wider range of environmental and sustainable development objectives. Enhancing the availability of green and climate financing and developing clear, coherent and supportive policies are crucial for all economies in the region to recover swiftly and grow in a resilient and sustainable manner. This report examines critical policy gaps and barriers to climate finance, such as constrained fiscal space, weak institutional capacities to implement NDCs, policy and regulatory gaps, and lack of investment-ready projects. To enable green growth and sustainable development in the region, these barriers need to be overcome keeping in view each country’s long-term strategic development vision and broad legal framework, and international commitments such as their Nationally Determined Contributions (NDCs). The report also discusses a range of financial instruments and mechanisms, including project finance, funds and facilities, thematic bonds, carbon pricing, and debt for climate swaps, and highlights their usefulness, scalability, governance and related monitoring issues. Implementing these instruments and mechanisms can help overcome the existing barriers and unlock the growing private sector demand for green and climate investment opportunities. The report also explains how assessment tools can be developed and used as part of the planning processes to address policy gaps and assess the readiness of investment projects. It also underscores the critical role that blended and concessional finance plays in enhancing the effectiveness of climate finance instruments in the region, particularly in the SIDS and LDCs. The report includes several case studies that illustrate how different options and instruments are being used in structuring actual investments, including a municipal solid waste to energy project in Viet Nam and a sovereign green bond issuance in Fiji. The market for green bonds is expanding rapidly, with considerable interest from global institutional investors. Although this market still represents a small percentage of the total bond market, its fast growth offers a noteworthy financing option to many countries in the region. The report also highlights emerging post COVID-19 green and climate finance trends, including regulatory frameworks like the European Union’s Carbon Border Adjustment Mechanism (CBAM), and carbon financing structures such as securitized Internationally Transferred Mitigation Outcomes (ITMO). The report also briefly examines the impact of new and emerging technologies, including the pivot to green fuels such as green hydrogen and Carbon Capture and Storage (CCS). However, given the lack of a clear policy framework in many countries and competition among investors for new technologies, uncertainty remains as to their impact on climate finance post COVID-19. In this context, the report discusses the status of climate risk disclosure and reporting and the growing number of reporting frameworks that can help investors internalize climate risks when taking investment decisions. Effective climate risk disclosure enables all stakeholders to better understand the opportunities and risks of climate change, allowing investments to be better allocated to fund climate solutions and avoid growing threats to the stability of the global financial system. Finally, the report draws attention to the need to balance competing policy choices and financing options and how successful outcomes are determined by a complex mix of regulatory and financing arrangements in different sectors that support low carbon and sustainable development. Although the flow of green and climate finance in Asia and the Pacific is growing, many governments in the region still lack the resources and policies needed to undertake the necessary actions to address climate change and recover from the COVID-19 pandemic. The report argues that the two key enabling factors that need to be addressed are, first, a coherent climate policy framework and, two, support for blended finance.