Chapter 15: Investments and Finance
Executive Summary
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 lowcarbon 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 crossborder investments in low-carbon infrastructure, development of local green bond markets, and the alignment of climate and nonclimate 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}
15.6 Approaches to Accelerate Alignment of Financial Flows with Long-term Global Goals
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15.6.7 Development of Local Capital Markets
Harnessing existing bond markets and securities exchanges in nascent markets. The G20 has an action plan to support strengthening local currency bond markets and development of local capital markets is also part of the option for financing UN SDGs in developing countries (UN 2015a, 2019, 2020; IATFD 2016, 2021). Primers are available on bond market development to support policy choices (World Bank and IMF 2001; Silva et al. 2020; World Bank 2020; Adrian et al 2021; IMF and World Bank 2021). Developing government bond yield curves with different maturities can be an important policy objective (high confidence). This can support pricing discovery, liquidity (Wooldridge 2001) and can be achieved through step by step tranches from shorter to longer maturities to boost confidence and encourage municipals and other quasi-sovereigns. Money market instruments (such as, green commercial paper) anchor the short end of the yield curve with bonds of varying maturity issued by sovereign/quasi-sovereign entities (national treasuries, SOEs, municipalities) to mobilise investors (Goodfriend 2011; LSEG 2018; Tolliver et al. 2019). A variety of bonds are being used for developing countries including green (Ketterer et al. 2019), blue-water (Roth et al. 2019), transition, SDG/social, biodiversity bonds (Aglionby 2019), green/resilience bonds (AAC 2021); gender bonds (Andrade and Prado 2020) diaspora (LSEG 2017) and infrastructure project bonds (CBK 2021). Local policymakers would gain from technical and financial assistance in building green yield curves, for example with support from multilaterals (EIB 2012; IATFD 2016; Shi 2017; EIB 2018; Impact Investing Institute 2021). Green bonds are one of the most readily accessible to help fund Paris goals (Tolliver et al. 2019; Tuhkanen and Vulturius 2020). Section 15.3.2 refers to the growth in labelled bond markets (CBI 2021a), low borrowing costs and yield curve building in Europe (Bahceli 2020; Serenelli 2021; Stubbington 2021; UK DMO 2021). For developing countries, labelled bonds have mostly been in hard currency (e.g. Smith 2021) despite local currency markets making up more than 80% total debt stock (IMF and World Bank 2016; Silva et al. 2020; Adrian et al 2021; Inderst 2021). The labelled bonds issuance by multilaterals do not currently mobilise the trillion levels needed. Research studies show that participating in green bond markets in part depends on a country having credible NDCs (Tolliver et al. 2020a; Tolliver et al. 2020b) and highlights diverse approaches working together to support local bond market development (Amacker and Donovan 2021; ICMA 2021; IMF and World Bank 2021).
15.6.8 Facilitating the Development of New Business Models and Financing Approaches
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15.6.8.3 Exploring Gender-responsive Climate Finance
Global and national recognition of the lack of finance for women has led to increasing emphasis on financial inclusion for women (high confidence). Currently, it is estimated that 980 million women are excluded from formal financial system (Miles and Wiedmaier-Pfister 2018); and there is a 9% gender gap in financial access across developing countries (Demirguc-Kunt et al. 2018). This gender gap is the percentage difference between men and women with bank accounts as measured and reported in the Global Financial Inclusion (Global Findex) database. Policies and frameworks to expand and enhance financial inclusion also extend to the area of climate finance (high confidence). Since AR5, there remain many questions and not enough evidence on the gender, distribution and allocative effectiveness of climate finance in the context of gender equality and women’s empowerment (Williams M., 2015; Chan et al. 2018; Wong et al. 2019). Nonetheless, the existing global policy framework (entry points, policy priorities, etc.) of climate funds is gradually improving in order to support women’s financial inclusion in both the public and the private dimensions of climate finance/investment (Schalatek 2015; Chan et al. 2018; Schalatek 2020). At the level of public multilateral climate funds, there have been significant improvements in integrating gender equality and women’s empowerment issues in the governance structures, policies, project approval and implementation processes of existing multilateral climate funds such as the UNFCCC’s funds managed by the Global Environment Facility, the Green Climate Fund and the World Bank’s CIFs (high confidence) (Schalatek 2015; Williams M., 2015; Sellers 2016; GCF 2017). But according to a recent evaluation report, the integration of gender into operational policies and programmes is fragmented and there is lack of an ‘adequate, systematic and comprehensive gender equality approach for the allocation and distribution of funds for projects and programmes on the ground’ (GEF Independent Evaluation Office 2017; Schalatek 2018). The review found that ‘almost half of the analysed sample of 70 climate projects were judged to be largely gender-blind, and only 5% considered to have successfully mainstreamed gender, including in two Least Developed Countries Fund adaptation projects’ (GEF Independent Evaluation Office 2017; Schalatek 2018). While the GCF requires funding proposals to consider gender impact as part of their investment framework,16 the fund does not have its own funding stream targeted to women’s project on the ground, nor is there as yet an evaluation as to how entities are actually implementing gender action plan in the projects. In the case of the CIFs, as noted by Schalatek (2018), ‘gender is not included in the operational principles of the Pilot Program on Climate Resilience (PPCR), which funds programmatic adaptation portfolios in a few developing countries, although most pilot countries have included some gender dimensions’. And, ‘gender is not integrated into the operations of the Clean Technology Fund (CTF), which finances large-scale mitigation in large economies and accounts for 70% of the CIFs’ pledged funding portfolio of 8.2 billion USD’ (Schalatek 2018). However, both the Forest Investment Program (FIP) and the Scaling-Up Renewable Energy in Low-Income Countries Program (SREP) have integrated gender equality as either a co-benefit or core criteria of these programmes (Schalatek 2018).
Overall, efforts to promote gender responsive/sensitive climate finance, at national and local levels, both in the public and private dimensions and more specifically in mitigation-oriented sectors such as clean and renewable energy, remain deficient (high confidence). Recent developments in the capital markets in the areas of social bond are focused around gender bonds – debt instruments targeted to activities and behaviours that are relevant to gender equality and women’s empowerment. These bonds are aligned with Sustainabilitylinked Bonds as well as Social Bonds Principles of the International Capital Market Association. Issuances of gender-labelled bonds are increasing in the Asia Pacific region (the most comprehensive initiative is the Impact Investment Exchange’s (IIX) multi-country USD150 million Women’s Livelihood Bond17) and in Latin America, Colombia, Mexico and Panama each have gender bond issuances). Additionally, a few developing countries, such as Pakistan (May 2021) and Morocco (March 2021) have issued gender bond guidelines for financial market participants.
Linkage to sectoral climate change issues and gender and climate finance. Subsets of actions designed to enhance women’s more formal integration into climate policies, programmes and actions by the global private sector include: investment in clean energy, redirecting funds to support women and vulnerable regions as a component of social and green bonds as well as insurance for climate risk management. In the latter context, insurance providers are arguing that ‘given the fact that women are disproportionately affected by climate change, there could be new finance innovations to address this gap’.(Miles and Wiedmaier-Pfister 2018). AXA and IFC estimate that the global women’s insurance market has the opportunity to grow to three times its current size, to UDS1.7 trillion by 2030 (AXA Group et al. 2015; GIZ et al. 2017). However, across the board, and in particular with regard to public funds, despite improvements in the substantive gender sensitisation and operational gender responsiveness of multilateral and bilateral climate finance funds operations, current flows of public and climate finance do not seem to be going to women and local communities in significant amounts (Chan et al. 2018; Schalatek 2020). At the same time, evaluations of the effectiveness of climate finance show that equitable flow of climate finance can play an important role in levelling the playing field and in enabling women and men to successfully respond to climate change and to enable the success and sustainability of local response in ensuring effective and sustainable climate strategies that can contribute to the global goals of the Paris Agreement (Minniti and Naudé 2010; Bird et al. 2013; Barrett 2014; Eastin 2018). This is particularly, so in the case of female-owned MSMEs, who, the literature increasingly shows, are key to promoting resilience at micro and macro scale in many developing countries (Omolo et al. 2017; Atela et al. 2018; Crick, F. et al. 2018).
