Reducing global CO2 emissions to limit global temperature rise to 1.5°C above pre-industrial levels is a daunting but achievable goal that requires a worldwide mega-scale dynamic flow of financial resources.
The magnitude of the financial flow needed to activate and run global climate actions to achieve the Paris goal is estimated at USD 32 trillion from 2021 through 2030, according to the Net Zero Financing Roadmaps report released in November 2021 at the UN Climate Change Conference UK2020. Meanwhile, McKinsey’s Six Characteristics of the Net-Zero Transition report suggests that a total of approximately USD 9.2 trillion is needed every year for the next 30 years.
However, several problems are encountered by investors during the investment process which inhibits the flow of financial resources, as summarised below.
- Complexity of investment reasoning: Investment in projects for climate change mitigation or adaptation requires a clear rationale on why the investment is needed and how the intended projects or incentives can produce outcomes that result in an effective response to climate change. The new framework, known as ‘Climate Rationale’, requires significant climate intelligence from investors more used to traditional financial investment judgement.
- Uncertainty of trustworthiness of information: Investors often find it difficult to be convinced of the data and information provided on the projects proposed. Internationally accepted methodologies such as Science-Based Target Initiative(SBTI), GHG Protocols, CDM Methodologies, Social Cost of Carbon and various Integrated Assessment Methodologies still leave room for uncertainty due to the lack of actual physical real data from the fundamental industrial, environmental or behavioural activities.
- Country and entity risks: Projects often hide risks of malpractice, fraud, potential abuse of project funding, undisclosed risks of incapacity, opaque operational processes, deceitful financial management and bogus project activity expenses and spending, as well as risks of international sanctions and potential environmental, social, gender, inequality or cultural issues.
- Lack of information on investment opportunities: Currently, there is no effective global registry of climate projects and no efficient mechanism that can integrate global climate projects toward the grand landscape of green sustainable investment at the global level.
- Long-term period of returns: Return on investment in climate projects is long-term by nature and may not be realised for several years or even decades. Unless there are schemes that can turn expected long-term returns into immediate or short-term financial returns, investors focused on the short-term will not be attracted to climate projects.
To overcome such problems, the global climate finance community needs a global integrated climate finance mechanism and a digital globally integrated climate investment platform with the following features:
A. Openness: The platform should be open to any climate investment opportunity and simultaneously provide investors with access to those opportunities.
B. Trust: The platform should be trusted by participants. Trust can be obtained when:
a. The ethics and operational discipline of participants on the platform are verified to ensure reputable management frameworks, compliance with global regulations and standards, and behaviours and practices that are free from fraud;
b. The initiatives or projects should carry strong Climate Rationale, bankable financial valuation, provable impacts, and a clear and reliable roadmap of implementation; and
c. There is a strong function of MRV (monitoring, reporting and verification) that can underpin the whole process through the entire project life-cycle.
C. Efficiency: The platform should ensure speedy and efficient operation, minimising the cost of action while significantly reducing the time required. This can be achieved using the following tools and processes:
a. Integrated information repository: all data should be integrated based on the principles of data integrity and data normalisation.
b. Workflow management: Procedural steps should be designed and componentised allowing dynamic flows of action.
c. Business rule management and execution: Business rules governing every process on the platform should be automatically executed in all processes on the platform, minimising the intervention of manual action.
d. Integration with related platforms and systems: Data exchange or procedural integration with external marketplaces, climate information networks, stakeholder systems and other platforms should be provided.
D. Insight: The platform should provide basic climate finance intelligence to validate climate projects by assessing the value of the projects and measuring investment risks to assist investment decisions.
E. Compliance: The platform should force compliance with global, regional, and national green regulations and principles of environmental integrity, carbon trading regulations, and principles of cross-border carbon adjustment mechanisms.
The desired global climate finance platform can be a single point of action to dynamically help the global climate finance community to scale up and accelerate climate investment toward achieving the global Paris Agreement goals.