We need ‘green’ private sector finance for climate risk

Securing financial assets to fight climate change is not easy, especially for developing economies like Bangladesh. PHOTO: COLLECTED

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Securing financial assets to fight climate change is not easy, especially for developing economies like Bangladesh. PHOTO: COLLECTED

With the increasing frequency and impact of natural disasters around the world caused by climate change, the use of innovative climate and disaster risk financing tools has become increasingly important to improve financial preparedness and strengthen the resilience of communities in the face of future impending disasters. For Bangladesh, a country highly vulnerable to climate risks, particularly cyclones and floods, innovative climate financing must be considered to mitigate the risks associated with climate change.

According to a recent report by the Intergovernmental Panel on Climate Change (IPCC) (2022), approximately half of the world’s population – particularly in communities in Africa, small islands and coastal areas, Central and South America, South Asia and the Arctic regions – are already being affected by severe climate change, leading to food shortages and water insecurity. The limited financial capacity of these regions severely limits their ability to provide basic services and resources where they are most needed. The report further highlights that human mortality from natural disasters for the period 2010-2020 was 15 times higher in these vulnerable regions. The International Disaster Database (EM-DAT) also reported 12,386 climate-related disasters worldwide over the past century, with 20 million deaths and economic losses of $4.13 trillion, the weight borne by developing countries.

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Securing financial assets to fight climate change is not easy, especially for developing economies like Bangladesh. While governments at different levels play a key role in mobilizing public finance, they often fail to catalyze private capital flows to accelerate investments in climate-resilient infrastructure. As a credible source of finance, climate experts are increasingly interested in mobilizing private finance, calling for more effective government policies and tools to stimulate private investment, especially in quality infrastructure that stands out. proven to have a positive impact on improving disaster resilience. However, large infrastructure projects often present a variety of risks to the private sector, such as political regime change which can affect the viability of these projects through reductions in subsidies, increased regulatory barriers and removal of tax incentives. , to name a few. To unlock the potential of private sector investment, it is important to tackle the burden of risk by sharing it with the public sector.

This calls for a radical paradigm shift by designing effective financial instruments to improve and strengthen the quality of the environment and strengthen public finances that also mobilize private financing. For this to happen, systemic changes, policy reforms and institutional arrangements are crucial. Thus, various forms of private sector financing options should be considered to achieve environmentally or socially sustainable outcomes, as well as the United Nations Sustainable Development Goals (SDGs).

It is important to note that the private financial sector has significant resources and the potential to create economic wealth while meeting public interest needs for long-term sustainability and social well-being. Mobilization of economic and corporate constituents takes place within certain national and institutional boundaries and structures of the financial regulatory system and corporate law. The European Union (EU) integration program in sustainable finance, for example, aims for ambitious results, resulting from the simultaneous reorientation of investors as well as their beneficiary companies and the prioritization of sustainable objectives. Private companies can optimize stakeholder wealth, socio-environmental responsibility and achievement of the SDGs. The private sector was thus challenged to respond positively in favor of the SDGs while acting in the interest of its stakeholders. Thus, the private sector is both a potential partner and a key actor, and can contribute to development goals in multiple ways for the achievement of the SDGs, such as stimulating healthy habits and creating jobs, providing investment opportunities and the sharing of resources and knowledge. needed to shape innovative solutions to global climate challenges.

Strong and continuous public policy support is essential to successfully achieve the SDGs. By providing a policy framework conducive to innovation and removing barriers, the government can encourage the private sector to deploy capital and technical capabilities critical to growing the economy. The mobilization of private sector finance provides a good initial indication of the strength of market signals related to sustainability, as well as the adaptability and potential effectiveness of sustainability policies.

Policies that provide permanent and continuous economy-wide incentives wield greater influence, as opposed to those that provide a temporary incentive or affect a limited segment of the economy. For example, a one-time grant to a specific company favors that company but does not constitute an incentive for other players within an industry. On the other hand, a carbon tax applied to the whole economy encourages all companies to reduce their emissions.

In developing countries, private financing is only possible with an appropriate risk-adjusted return, with public support to overcome operational expenses and other barriers, including climate-related research and development. Because the initial cost of adopting a low-carbon development path tends to be high, the need for early public intervention is vital.

Today, a wide variety of barriers impede incentivizing private sector engagement. High upfront costs for investing in projects can be encouraged by incentives such as transparent financial intermediation, stable policy and regulatory bodies, and administrative simplicity. The ambiguous financial intermediation of the private sector leads to doubts about the creditworthiness of the counterparty and increased uncertainty about the valuation of assets. Due to the low income level of people in developing countries, financial intermediation is often rudimentary or non-existent.

As green and climate finance is advancing in leaps and bounds globally, the private sector in Bangladesh could benefit from accessing these global funds, especially in the renewable energy sector. These funds are often provided by the Global Energy Efficiency and Renewable Energy Fund (GEEREF), which seeks to use public finance to mobilize private investment in renewable energy, guided by the European Investment Bank (EIB). . Bangladesh is eligible to use these funds, but the private sector does not have much experience or expertise to access them, and therefore needs to develop the expertise to do so. Therefore, investment in building the capacity of the private financial sector, along with the creation of an enabling and conducive environment by the government, would enable Bangladesh to attract tens of billions of US dollars over the course of 5 to 10 coming years. This would encourage the growth of private sector investment and enable Bangladesh to graduate from least developed country status, which is expected to happen in the next few years. This, in turn, will end the country’s reliance on the grant-based overseas development funds it has been accustomed to receiving for decades.

Tapan Sarker is Professor and Head of Financial Discipline at the School of Business at the University of Southern Queensland, Australia. Salemul Huq is director of the International Center for Climate Change and Development at the Independent University of Bangladesh. Syed Saad Andaleeb is Distinguished Professor Emeritus at Pennsylvania State University, USA.

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