Summary
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In a stark wake-up call to global leaders, the State of Climate Action 2023 report reveals that countries are lagging on crucial policies to combat climate change. The urgency is underscored by the need to phase out coal seven times faster, reduce deforestation four times faster, and expand public transport six times faster to avert the worst impacts of climate breakdown.
The State of Climate Action 2023 report has cast a spotlight on the critical role of the finance industry in driving the transition to a zero-carbon world. As the report emphasises, the decisions made by both public and private actors regarding investments will play a pivotal role in determining the pace and success of this global shift.
The Finance-Climate Nexus
Finance serves as a linchpin in the ambitious endeavour to combat climate change. However, the current trajectory of investments poses a significant challenge to achieving the goals set by the Paris Agreement. The report underscores that a fundamental transformation of the financial system is imperative to catalyse the necessary changes across power, buildings, industry, transport, forestry, agriculture, and carbon removal technologies.
Key Findings and Targets
The report outlines crucial indicators and targets to gauge progress in aligning financial practices with climate objectives. Notable benchmarks include a sevenfold increase in the ratio of investment in low-carbon to fossil fuel energy supply by 2040, a complete halt to public financing for fossil fuels, and achieving a 10:1 investment ratio in the zero-carbon economy compared to high-emission activities.
The report emphasizes the need for a substantial increase in climate investment, estimating a requirement of $4 trillion to $5 trillion per year globally between 2030 and 2050. Both public and private finance must play a role in this endeavour. Public finance is vital for catalysing the transition in areas where the private sector may falter, such as funding public services, infrastructure, and research and development.
Challenges and Progress
Quantifying climate finance remains a formidable challenge due to data constraints and definitional intricacies. The Climate Policy Initiative (CPI) estimates an encouraging trend, with climate finance increasing by an average of $61.6 billion per year in the five years leading up to 2021.
However, this positive trajectory is juxtaposed against the stark reality that, in 2021, total global flows of climate finance, including both in public and private, domestic and international, reached an all-time high of $850 billion to $940 billion – still a considerable gap from the $5.2 trillion target for 2030 as set by the global community.
Equity and Justice in Finance
The report underscores the importance of addressing issues of equity and justice in climate finance. It stresses that poorer countries, which have contributed the least to the crisis, require international support to transition to net-zero economies. Within countries, the effort of raising public finance should be distributed equitably, with progressive taxation ensuring that the burden falls on the wealthiest individuals and companies.
The urgency for increased climate investment is particularly pronounced in developing countries. In 2020, total climate finance in non-OECD countries was a mere $392 billion, with China absorbing half of this amount. This figure pales in comparison to the estimated $2 trillion per year required in developing countries (excluding China) by 2030.
Private Climate Finance and Corporate Contributions
The report also discusses private climate finance, acknowledging positive growth trends but stressing the imperative for accelerated efforts. Global private climate finance, totalling $333 billion in 2020, exhibits an average annual growth of $26.5 billion between 2016 and 2020. However, to meet the 2030 target of $3.3 trillion, an exponential increase—more than tenfold—is essential. Post-review data reveals positive strides, reaching $685 billion in 2022, but substantial efforts remain necessary for 2030.
Corporate entities emerged as significant contributors, with $124 billion invested in 2019–20. Commercial financial institutions also played a pivotal role, increasing their financing from $48 billion in 2017–18 to $122 billion in 2019–20. However, regional imbalances persist, with North America and Oceania dominating private sources, while sub-Saharan Africa lags behind, receiving just 12 percent of the region's total climate finance from private sources.
Overall, the State of the Climate Action 2023 report signals a call to action for the finance industry. The transformative changes required to meet climate goals demand not only increased investment in the zero-carbon economy but also fundamental reshaping of financial practices. Finance professionals stand at the forefront of this global shift, with their decisions holding the key to unlocking the necessary resources for a sustainable future.
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