Mobilising finance against climate change
I am Tomonori Sudo, Professor of Ritsumeikan Asia Pacific University, and I’m conducting research on Climate Finance. Before joining the university, I worked for Japan International Cooperation Agency (JICA), an executing agency of Japan’s Official Development Assistance. At JICA, I was in charge of climate related issues including screening projects from climate lens, developing climate related projects, and participating in negotiations at COPs.
The key climate issues
In my view, a key climate issues is the mobilization of finance. Finance plays an important role both in mitigation and adaptation. For mitigation actions, climate finance is needed to implement low-carbon development projects in fields like renewable energy development. For private sector, investment in climate related work is also crucial.
Furthermore, finance plays an important role in combatting climate change. The majority of projects addressing climate change will not generate profit for private sector, so many commercial finance institutions are hesitant to invest in them. Having said that, without these projects, losses due to extreme weather caused by climate change will lead to the loss of assets and businesses for commercial enterprises.
Thus, attracting finance from a variety of sources is essential for effective action on climate change issues.
What we need to address this is for all investors and financial institutions (both private and public sectors) to transform their appraisal and due diligence procedures by including climate risk analysis within them. One of the reasons that climate finance does not work well is that the investors and financial institutions underestimate the risk of climate change, and the value of the environment as an asset. Unfortunately, there is no mandate to incorporate such climate risks and environmental values into their appraisal and due diligence procedure.
Therefore, I would propose a new form of environmental appraisal along the lines of an ‘Environmental Internal Rate of Returns (EIRR)’ scheme.
If all investors and financial institutions were to employ such a scheme, they could start to estimate the losses of social value by not investing in climate action. So, even though their investment and finance might seem valuable for individual project, it will show a loss in terms of societal cost. Then, they will not be able to justify the investment or finance in such short-sighted projects.
This idea could open the eyes of investors and financial institutions to the importance of investing responsibly for the planet. It will play a critical role encouraging project owners to consider the impact of their projects on climate change. However, this idea cannot be realized by single financial institution. Therefore, global leaders should lead this discussion in the global arena and change their policy on the operation of investors and financial institutions.