Including Financial Entities in the Implementation of NDCs for Increased Climate Ambition in Latin America
The Latin America and the Caribbean (LAC) region faces a host of challenges in responding to climate change. On one hand, it faces a panoply of impacts, from the melting of fragile Andean glaciers to the strengthening storms that batter the Caribbean. On the other, its countries need to finance a rapid shift to greener development while addressing poverty and other priorities. While official development assistance (ODA) is critical to accessing green finance, grants cannot fill all financing gaps and are often inaccessible to middle-income countries. As such, Latin American governments are increasingly looking to establish new incentives and facilitate investment opportunities than align with private investor needs.
To address this issue, LEDS LAC Platform and the NDC Partnership co-organized a finance webinar where invited speakers shared their first-hand experiences working at the intersection of the private sector, civil society, and government and provided information on how climate actors may approach the process of integrating financial institutions into climate action. Speakers were Lauro Marins, Executive Director of CDP Latin America, Laura Marcela Ruiz from the Ministry of Finance and Public Credit of Colombia, and Clara Sofía Gómez Botero, coordinator of the Area of Collective Action and Innovation at the World Wildlife Fund.
Activating Green Investment Through Data Disclosure
An essential way to engage investors in climate finance is by valuing and internalizing the costs of climate risk. Disclosing risk information can incentivize better environmental management, traditionally seen as a cost generator, to reveal opportunities in operational efficiency, entrepreneurship, and market competition.
The key to attracting fresh finance is the collection of data on the transitional and physical risks imposed on businesses or assets due to volatile climate conditions. Lauro Marins highlights climate risk as one of the main factors private investors consider when selecting projects with high returns. Networks like the CDP serve to inform how climate risk can affect investments, so companies may orient investment decision-making accordingly. By analyzing company reports of their climate risks, CDP can identify trends in the data that point to a strong correlation between financial performance and reduced climate risks.
Moreover, transparency of public data on climate risks, opportunities, and environmental performance send clear signals to investors who have similar concerns to account for when looking at their bottom line. Disclosure of country- or city-level environmental performance indices, which measure climate data transparency, strong governance and management of climate risks, and investments in low-carbon best practices, all increase investor confidence, further enabling collaboration between the public and private sectors. Best practices include setting science-based targets, shifting to renewable energy, investing in low-carbon product innovation, using internal carbon pricing, or incentivizing suppliers to reduce their emissions. For instance, the Zero Carbon Fair facilitated by CDP became a platform for city governments and the private sector to negotiate and propose solutions to a new climate economy in 25 LAC cities.
Using Market Mechanisms to Unlock Private Financing
In addition to prioritizing transparency, governments hold a responsibility to attract climate financiers by creating enabling environments for low-risk investments. This is accomplished by orchestrating a cohesive climate finance strategy—a combination of investment planning, market mechanisms, and public-private partnerships.
Laura Marcela Ruiz and Clara Gómez both emphasized the power that country-led initiatives have to open doors for outside investors and ultimately close funding gaps, as seen in the case of Colombia. Colombia’s efforts to address its Nationally Determined Contribution (NDC) commitments through innovative financial models, like its Permanent Financing Program (PFP), have strengthened the government’s ability to attract diverse climate financiers by establishing government ownership and de-risking private sector investment. Through the PFP, Herencia Colombia, public and private resources are leveraged towards national conservation strategies under a set of negotiated conditions intended to protect private investors. In parallel, the Colombian government gradually assumes conservation costs over a twenty-year period financed by its National Carbon Tax.
Such models ensure the long-term financial sustainability of the targeted project and increase the capacity of governments to implement their NDCs. Market based instruments help put both public and private investment on sustainable footing, so countries may eventually finance sustainable, climate resilient activities independently. With countries expected to submit revised NDCs within this year, alignment of fiscal policies with private investor priorities will play an integral role in enhancing national ambition post-2020.
For further details on these initiatives and access to the webinar and presentations, visit the LEDS LAC webinar site. We invite you to follow the NDC Partnership and LEDS LAC Twitter accounts to join the conversation and learn more about efforts to update and increase NDC ambition.
This blog was written by Sam Morton of the NDC Partnership Support Unit.