Global financial system needs holistic, urgent reform to address climate emergency, economists say

By Nuran Erkul Kaya

ISTANBUL (AA) – Addressing climate emergency worldwide, particularly in climate vulnerable countries, requires an urgent and holistic overhaul of global financial system amid the growing economic and social costs of inaction, economists have told Anadolu Agency.

The voices are increasing for a reform in global financial system after Barbados Prime Minister Mia Mottley has been vocal on the issue under the Bridgetown Initiative at the UN climate meeting COP27, which took place in November in Egypt.

The global financial system is not delivering the resources needed to respond to today's multiple crises and the Bridgetown Initiative proposes a transformative action plan to change it with a systemic reform.

Developing countries, which are the most vulnerable against the impacts of climate crisis, want "access to resources at the pace and scale needed to relieve financial stress, enable economic development and address climate change," according to E3G, an environmental think tank.

Global South is complainant of the approach from developed countries as they have been falling short of delivering the promised $100 billion climate fund per year since 2020, while the climate adaptation needs in the developing world are set to skyrocket to as much as $340 billion a year by 2030, according to the UN Environment Program.

"There is a huge gap in climate finance. The global climate finance need is estimated as $5 trillion a year, while the global finance provided has remained under $700 billion annually so far," Sibel Kulaksiz, a senior economist at the World Bank, told Anadolu Agency in an interview.

A coordinated approach from public and private finance sector with financial institutions is critical to increase the climate finance, according to Kulaksiz.

"Global finance system could be transformed but right investment choices should be determined for reaching net zero, supported by long term strategies and national climate plans. Without the necessary climate investments and with the current slow pace of measures, climate change could cost the world economy $8 trillion by 2050," she said.

The economist further said 100 million more people could live under poverty threshold by 2030 and 216 million more could be climate migrants by 2050.

Cautioning that social and economic costs will be much higher if necessary actions are not taken, she said a strengthened climate finance policy could help reach the global climate targets.

Kulaksiz said the World Bank aims to provide 35% of its total finance for climate in the next five years.

According to data, the World Bank's climate finance stood at $26 billion in 2021 and $31.7 billion in 2022.

- Public, private sector collaboration need

Maya Hennerkes, green financial systems director at the European Bank for Reconstruction and Development (EBRD), said transitioning to net zero and resilient economies in line with the goals of the Paris climate deal requires scaled-up and accelerated investments.

"Public resources – significantly stretched by the multiple global shocks – are falling significantly short of the required levels. In this context, private climate finance is essential in driving innovation and climate-compatible transition," she said.

Multilateral Development Banks (MDBs) work with developing countries on enabling markets, catalyzing supportive policy environments and mobilizing private sector finance, while the condition for success is a greening of the financial systems, according to Hennerkes.

The greening of financial systems needs to include robust and demonstrable alignment of financial flows and institutions with the goals of the Paris Agreement, the strengthening and full integration of climate financial risk considerations, and tailoring scalable green and sustainable finance interventions, she said.

"Thus, such a transformation (in financial system) is possible and requires a holistic approach. We need all hands on deck," Hennerkes said, including regulators, finance ministries, financial institutions, and MDBs that will provide a full circle support for a green transformation.

Some finance sector players are ready and some are getting ready as they see the need for change in the face of strong drivers, she said.

"Regulators are increasingly requiring financial institutions to disclose environmental including climate and social risks, so banks are rewiring their internal climate and environmental, social and corporate governance (ESG) to be able to comply with that, while investors are increasingly requiring banks and funds to have robust ESG strategies and management systems in place," Hennerkes said, adding that consumer demand for sustainable financial products is also on the rise.

- Finance for net zero fall short of required amounts

According to Ebru Dildar Edin, the chairperson of Business Council for Sustainable Development Türkiye, sustainable finance has emerged as one of the significant issues of the world as the impacts of climate crisis are drastically growing.

"How to create adequate finance for adaptation to climate change and to reduce emissions is still a question mark. We see that it is becoming harder for countries to reach net zero targets while the costs are increasing and adequate finance cannot be created," she said, adding that the current global economic crisis is adding to the uncertainties.

Thus, Edin said, supporting finance sector with efficient policies play key role in reducing the uncertainties and accelerating the transition to sustainable finance.

"Finance sector should add new roles to the existing ones in avoiding the uncertainties," she said, stressing that the required investment of up to $7 trillion to reach net zero is an opportunity to scale up progress.