Climate finance has become an increasingly discussed topic and is set to become one of the largest sources of funding in the coming decades. A broad range of entities will be offering climate finance from private companies to public institutions and financial organisations, it is only a matter of time. Given the challenges that lie ahead, Individuals and the private sector will benefit from it. However, this is still a niche topic: the #climatefinance hashtag only has 5,000 followers on a professional network like #LinkedIn. So, what is climate finance? What is its purpose? How does it work? Where is it coming from? Where does it go to?

Climate finance is generally presented as an expert topic with fancy concepts, but it is in fact very simple. Let’s begin with a simple definition. Climate finance is the use of financing instruments specifically aimed at reaching climate change mitigation and adaptation goals. In other words, climate finance consists in any financial efforts to support the reduction and avoidance of further greenhouse gas emissions getting into the atmosphere but also helping people and countries to prepare and adapt to different climate. This concept has been around mostly since 1997 with the adoption of the Kyoto Protocol.

Where is climate finance coming from?

While there is no historian to tell us when the term climate finance was first coined, it is generally accepted that the use of the term ‘climate finance’ began during the Earth Summit of 1992 which ended with the creation of the United Nations Framework Convention on Climate Change (UNFCCC) and later led to the drafting and adoption of the Kyoto Protocol in 1997. The word finance is only mentioned once in the UNFCCC and once in the Kyoto Protocol[1] and the then financial mechanisms that could be considered early forms of climate financing were not call so at the time. It is only with the Marrakesh Accords of 2001 that the word finance, mostly used in relation to adaptation, was finally mentioned[2].

Surprisingly, it is only as late as 2014 that the UNFCCC adopted an official definition for climate finance: “climate finance aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”. In 2015, 4 mentions of climate finance fought their way through into the Paris Agreement[3].

Where does climate finance fit?

For the general public, climate finance can be considered as a fairly vague or broad concept. In order to further investigate what climate finance refers to, it is useful to first describe where it fits in the broader financing landscape. In order to do so I have sought to draw its family tree below. If it was a living thing, the climate Finance family’s genealogy could look like this.

As a caveat, this diagram does not represent all the extended family but the most notable members. It probably also does not fully capture the linkages between all its members. As you can see there is no space for green finance, since this can be perceived very generic, undefined, overused and tainted that it does not make too much sense to use it anywhere. All economic activities have an environmental impact, since there always is an ecological footprint behind the transformation of materials for the purpose of producing a good or a service.

Over the past 2 years, the European Union’s Technical Expert Group (TEG) on Sustainable Finance has gone through a complex and long process of defining what sustainable finance is, in order to facilitate the channelling of funding to it. The outcome was a sustainable finance taxonomy.

In short, financing climate mitigation in the EU context would correspond to fund activities that:

• Are low carbon (even though this is usually poorly defined)

• Contribute to a transition to a net-zero emissions economy but are not currently close to a net-zero carbon emissions level

• Enable low-carbon performance by others or enable substantial emissions reductions through avoided emissions

The TEG has defined activities contributing to climate change adaptation as activities that:

• Include or provide adaptation solutions that contribute substantially to preventing or reducing the risk of adverse impact or substantially reduce the adverse impact of the current and expected future climate on other people, nature or assets

The TEG even came up with a technical annex[4] listing all the activities contributing to mitigation or adaptation as well as a list of activities by sector.

Mitigation and adaption do not belong to a specific set of activities or sectors. It applies to all sectors and reaching the objectives of the Paris Agreement will require a substantial shift of our economy and of our lifestyles, and this partly explains the need for visionary politicians and leaders who are committed to implementing these objectives.

Why do we need climate finance?

In 2017, the OECD estimated that, globally, a shiny EUR 6.3 trillion a year would be required to meet the Paris Agreement goals by 2030[5]. To give an idea, this is slightly less than the monetary value of all of Germany’s global economic activities in 2019 and more than France’s or the UK’s for the same year.

It is obvious that the already overstretched public resources will not be sufficient to address this challenge. Whether you consider capitalism as an obstacle to achieve the Paris Agreement’s objectives or not, institutional and private capital will be necessary to get there.

Money has always been the sinews of war. The war the world finally seems ready to start fighting, is the one against a changing climate, in other words, against the unpredictable consequences of elevated concentrations of greenhouse gas in the atmosphere. It also a war that is meant to enable humanity to adapt to a new environment. An environment that may change to an extent that is still difficult to imagine.

Except maybe for conservationists, in our human-centred conception of the world, climate change has never been so much about the environment than about the human impacts these changes may trigger in that environment.

Even a 2°C hotter climate would trigger changes such as more intense extreme weather events (droughts, flooding, storms, heatwaves), a number of diseases migrating into temperate zones, global agricultural yields decreasing, lands becoming unfit to grow anything, water scarcity, generalized loss of biodiversity, ocean acidification and coral bleaching. All these having consequences on their own, on each other and combined, to an extent that would comparatively exceed those caused by the COVID-19 global pandemic.

The figure below shows that our current development pathway leads us to 3°C to 4°C of global average temperature increase. This could translate into +10°C in certain places and -10°C in others.

Until mainstream finance is not forced to integrate the safeguarding of our environment as a compulsory criterion in its decision to allocate funds, we cannot realistically hope to keep temperature increases below a reasonable level.

Whether it is to avoid dramatic climate change or to build resilience and cope with the effects of climate change, financing mechanisms will be increasingly in need. It is currently being distributed under very small and modest channels.

What does climate finance look like?

If you are still wondering what all this is about, wait no more. According to the Climate Policy Initiative, as summarised in the figure below climate funds are being expended through regular-rate (commercial) and lower-rate loans (concessional). Climate funds are also distributed as capital for companies to operate and project to enable them to start off and obtain further assistance if required. Finally climate finance also takes the form of grants to help fund technical and financial assistance for projects with no other access to financing.

One of the interesting resources in the area of climate solutions is the Drawdown Review[6]. While it only covers mitigation and some aspects of its methodology could be questioned, it is a very credible piece of work that contains a lot of insightful content.

According to the review, the following actions would have the greatest potential for reducing emissions:

• Energy: cleaner electricity generation (e.g. wind power, solar, geothermal, biomass, waste-to-energy, etc.), energy efficiency (e.g. in lighting, building heating, insulation)

• Agriculture: reducing food waste, meat and dairy consumption by developing plant-based food, protecting and restoring ecosystems (e.g. rewetting peatland, protecting primary forests and grassland, securing indigenous people land tenure rights, etc.), reducing the use of nitrogen fertilizers and improving rice production techniques

• Industry: phasing out some refrigerant gases (e.g. in storing), recovering gas from waste (liquid and solid), recycling, and producing lower-carbon cement and bioplastics

• Transportation: developing alternative to individual cars (e.g. public transit, carpooling, bicycle infrastructure, etc.), developing electric vehicles, energy efficient trucks and aviation

• Building: adopting energy efficient cooking stoves, heat pumps, biogas for cooking, solar water heater and insulating buildings

The other part of the mitigation equation is the sequestration of carbon in natural ecosystems: through forestry, improved agriculture practice and restoration of ecosystems.

Two other channels used to disseminate climate finance are:

• The carbon offset markets: where projects are provided payments for each tonne of CO2 equivalent they reduced or avoid. These payments could not really fall into the regular type of financial instruments and represented nearly 300 million USD in 2018 according to the State of the Voluntary Carbon Markets 2019.

• The international climate funds: such as the Green Climate Funds, the most significant financing mechanism of the Paris Agreement, which has committed more than 6 billion USD since its inception a few years ago. The funding was provided mostly in loans and grants.

Since it is now clear mitigation efforts have not been enough, financing climate change adaptation has become an increasingly pressing issue. However, not only has climate change adaptation financing received less attention, it is also a lot more complex to quantify and monitor. Financing efforts in the field of adaptation has mostly taken the form of water and wastewater management, climate-smart agriculture (e.g. productivity increase, drought resilient crop, mixed crop-livestock systems, etc.) and disaster risk reduction. These efforts have been mostly funded by government and international or regional development agencies (e.g. development banks, UN agencies, climate funds, etc.).

How big is climate finance?

The think tank Climate Policy Initiative has been mapping climate finance flows since 2013 and found that in 2017-2018, around 579 billion USD were spent annually on average[7]. The yearly variation is presented in the figure below. Fund sources accounted in this data are very likely not exhaustive but include a very broad range of references.

As you may have guessed, when compared to the OECD estimation of what would be required to attain the Paris Agreement climate objectives, we are more than 90% short on funding. We would need another 5,7 trillion USD each year on top of what we are currently spending. The world is incurring delays every year on the level of investment required to put us on track to achieve these objectives.

Who spends climate finance? Who benefits from it?

According to the same Climate Policy Initiative report and as can be seen in the graph below, climate finance is coming from a broad range of sources.

Since we know countries themselves don’t have pockets that are deep enough to bear the burden of the heavy investment required, public finance should ideally only be used to leverage private finance if we want to reach the target amounts. However, private finance only accounted for 56% of all sources of climate finance in 2017-2018, which is far behind where it needs to be.

Climate Policy Initiative reported that domestic, bilateral, and multilateral development finance institutions (DFIs) accounted for most of public finance. DFIs, operate mostly in developing countries and are also providing development finance which is sometimes redirected or rebranded as climate finance. It also means that industrialized countries who also need public support benefit less from it and in a different form.

The remaining funds coming from public organisations is provided by regional and municipal governments and helps subsidise or invest into lower-carbon infrastructure.

Private finance has a more diversified range of sources. Private companies account for the majority of private investors, and commercial financial institutions play an increasingly important role. Aside from these, private individuals are also contributing to climate financing. They provide10% of the total amount spent. Lagging behind these actors are actually the most important financial actors: those with vast amounts of money, who manage households’ savings and retirement pensions. These actors do not seem to believe that the risks involved in building tomorrow’s world are worth taking. Thus, institutional investors and smaller funds managers account for a surprisingly small fraction (2%) of climate finance.

When it comes to the sectors towards which private finance is being channelled, renewable energy comes first (85%) notably for electricity production, followed by low-carbon transportation systems (14%). However, collecting data for some of these sectors can be difficult. This is highlighted in the graph below which also shows, an illustration of the narrative bias related to the role of renewable energy. It is indeed commonly believed that renewable energy will play a key role in combating climate change by enabling the clean generation of electricity even though it only accounts for 7.5% of energy consumed worldwide[8].

The figure below offers a rather tortuous view of where funding tagged as climate finance comes from and where it goes. It does however provide a complete picture of the current situation.

Conclusion

While still a fairly niche practice, climate finance is increasingly used by the public and the private sector. A growing number of projects can take advantage of the opportunities this shift will create. We believe it is now the right time for projects, programmes and organisations to identify potential sources of funding or activities that could enable them to implement mitigation and adaptation activities. It is also the right time for financial organisations to build up their climate finance offering to the general public.

The Drawdown project estimates that overall, net operational savings exceed net implementation costs four to five times over when most mitigation measures are implemented. This means that with the right financing instruments, our societies could unleash a broad range of opportunities to fight and adapt to climate change.

HAMERKOP’s experts have more than 12 years of experience helping companies, NGOs, and governments navigate the complexity of climate finance, from identifying candidate initiatives, assessing projects, liaising with the right source of funding and drafting winning project proposals. If you are looking to engage with climate finance, whether to benefit from it or provide funding, we can help, so reach out to us.

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[1] The Kyoto Protocol: https://unfccc.int/sites/default/files/resource/docs/cop3/l07a01.pdf

[2] The Marrakesh Accords: https://unfccc.int/cop7/documents/accords_draft.pdf

[3] The Paris Agreement: https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

[4] Technical annex: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf

[5] OECD. 2017, Investing in Climate, Investing in Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264273528-en

[6] The Drawdown Review 2020: https://www.drawdown.org/drawdown-framework/drawdown-review-2020

[7] The Global Landscape of Climate Finance 2019. https://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/

[8] Long-term energy transitions, Portugal, 1856 to 2008. https://ourworldindata.org/grapher/long-term-energy-transitions

Hydropower has been a reliable and a critical tool in the fight against climate change, and in achieving national and international objectives towards reducing greenhouse gas (GHG) emissions. This is particularly true in the developing world where untapped sources of hydropower remain important[1]. Yet, the use of this energy is not without controversy, especially when it comes to GHGs. What is the current state of hydropower and what are the benefits? How does it contribute to sustainable development? Where are hydropower-related emissions coming from and how can they be calculated and monetised?

While hydropower newly installed capacities have been increasing since 2001, they are not on track for longer term sustainable targets. Hydropower can be considered a low-carbon source of energy but hydroelectrical plants with large reservoirs relative to their generating capacity can emit at least as much GHG emissions as fossil fuel plants[2]. These emissions mostly stem from reservoirs as well as construction and decommissioning. Despite the uncertainty to account for these, the use of the G-Res tool can help assess these. Under certain conditions hydropower projects are eligible for carbon finance.

Hydropower is still growing

Hydropower is the first source of renewable electricity. Its contribution to global renewable electricity production has been rising steadily since 2001. The International Hydropower Association (IHA) reported that, worldwide, more than 21.8 gigawatts (GW) of renewable hydroelectric capacity was put into operation in 2018. This is equivalent to the total electrical capacity of Chile or Belgium[3].

In 2018, China added the most capacity with 8,540 megawatts (MW), followed by Brazil (3,866 MW), Pakistan (2,487 MW), Turkey (1,085 MW), Angola (668 MW), Tajikistan (605 MW), Ecuador (556 MW), India (535 MW), Norway (419 MW) and Canada (401 MW). The allocation by country and region is presented in the figure below.

Hydropower installed capacity worldwide in 2018[4]

According to the International Energy Agency (IEA), over the next five years, hydropower capacity should increase by 9%, led by China, India and Brazil.

To illustrate the disparity of potential and implementation, the Democratic Republic of Congo which has 35% of the whole African continent potential (i.e. 100 GW) only has 2.6 GW installed, not even enough to merit a position on the above chart.

The unlimited benefits of hydro

All in all, countries, in particular those of the developing world, expect hydropower to make a significant contribution to the United Nations Sustainable Development Goals[5], in particular by enabling them to limit, or even reduce their levels of GHG emissions stemming from electricity generation activities. Hydropower is thus expected to help deliver affordable and clean energy, manage freshwater, combat climate change and improve livelihoods.

Power-related benefits include clean and flexible generation and storage, as well as reduced dependence on fossil fuels and avoidance of pollutants. In terms of livelihood, benefits also include economic and local supply chain improvements, enhanced navigation and transportation, and investment in community services. Freshwater management benefits include supply for homes, industry and agriculture, and mitigation against floods and drought[6].

Hydropower could provide for a broad range of benefits, and not only on-demand clean electricity.

Hydropower is needed for sustainable development

Needless to say, hydropower could play its part in reaching the objective of limiting climate change to 1.5°C or 2°C. In terms of adaptation, hydropower projects may offer countries protection against the impacts of climate change and extreme weather (e.g. floods or drought), even though variable climate conditions also make these projects susceptible to climate risks due to their dependency on precipitation and runoff.

According to the IEA, a continuous growth in new-build capacity is required to maintain an average generation increase of 2.5% per year through 2030 to remain on track with the Sustainable Development Scenario (SDS)[7]. As shown in the figure below, although growth prospects for new hydropower capacity remain strong, they are not sufficient to reach the SDS[8] level.

Hydropower generation in the Sustainable Development Scenario, 2000-2030

Yet, hydropower still contributes heavily to global emissions reduction efforts. As of March 2020, hydropower projects represented a staggering 24% of all carbon projects certified under the UNFCCC Clean Development Mechanism (CDM). It was as such, the most important category of project under the CDM[9].

The problem of hydropower GHG emissions

Hydropower is generally considered as a low-carbon technology and can act as a balance to the carbon- and pollutant-intensive fossil fuels. If hydropower was replaced with burning coal, up to 4 billion tonnes of additional GHG emissions would be emitted per year and global emissions from fossil fuels and industry would be at least 10% higher[10]. According to the Intergovernmental Panel on Climate Change (IPCC) and IHA, the median lifecycle carbon equivalent intensity of hydropower stands at 18.5 gCO2e per kWh, and only onshore wind would do better as can be seen in the figure below.

Carbon intensity of hydropower vs other technologies

When looking at the variation of emissions for each technology, we realise that hydropower is the technology that features the greatest range of emissions. It could either be the least, or the most, carbon-intensive technology[11].

Carbon footprint variation of energy sources

Run-of-river hydropower installations primarily use the natural flow rate of water to generate power, as opposed to the power of water falling with large dams with reservoirs. They tend to have very low levels of GHG emissions and have limited environmental and social impacts on local ecosystems and communities.

Reservoirs are the source of its problem

We have determined that the following parameters have a critical effect on the final emission level (ranked from most to least impacting):

• Average temperature (more generally local climate and variations, including precipitation and wind velocity impacting to a lesser extent)

• Size of reservoir versus the installed capacity (more generally the dam’s physical characteristics)

• Services assigned to the reservoir (which would act on the allocation of emissions to activities other than electricity generation)

• Cumulated mean horizontal solar radiance

• Reservoir volume (as a function of depth and surface)

• Land use patterns (including population levels) in catchment area/reservoir area pre- and post- impoundment as well as size of catchment area

• Other factors such as soil carbon content (in the reservoir) and other biophysical characteristics of the catchment area, including fauna and flora characteristics and canopy cover

Interactions between these parameters are often complex and involve non-linear responses. Emissions stemming from these interactions are as such difficult to predict and estimate with precision.

Depending on the decommissioning method used, there may be secondary emissions from the carbon sink that are created when the reservoir is dried up.

Emissions of carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) are part of the biogeochemical cycles of carbon and nitrogen from water bodies in natural environments. Hence, local emissions may be altered in areas affected by the development of reservoirs used for hydropower, flood control, drinking water, irrigation, navigation or other water uses[12].

GHG emissions from reservoirs generally stem from:

• The decomposition of organic matter flooded by the reservoir and the biomass that grows and enters the reservoir as inflow during the life cycle. Emissions from flooded lands can occur through the following pathways after flooding: (1) molecular diffusion across the air-water interface (diffusive emissions); (2) CH4 bubbles from sediment (bubble emissions); (3) emissions resulting from the passage of water through a turbine and/or through the weir and downstream turbulence (degassing emissions); and (4) emissions from the decomposition of above-ground biomass

• Construction, operation and dismantling activities.

Human activities in the catchment area or reservoir can also influence water quality and thus the eutrophication of water bodies and therefore create conditions for increased methane formation.

In tropical and subtropical areas, CH4 emissions are minimised in winter and maximised in summer and the decomposition of above-ground biomass (i.e. the biomass of trees not submerged during flooding) can be an important source of emissions.

The emissivity level is generally considered to be relatively high during the first few years after flooding, up to the first 10 to 20 years as can be seen in the figure below representing emissions from an Andean dam. Recent studies suggest that CO2 emissions during the first 10 years after flooding are the result of the decomposition of organic matter in the field prior to this event, while subsequent CO2 emissions come from material transferred to the flooded area[13].

Typical emissions pattern from reservoirs[14]

Finally, the issue of climate change must also be considered, as a feedback loop. An average increase in mean annual temperature in tropical and subtropical regions, as is predicted under both the 1.5°C and 2°C warming pathway for sub-Saharan Africa[15], could lead to increased emissions from reservoirs.

Calculation of GHG emissions

The IHA, along with the United Nations Educational, Scientific and Cultural Organization (UNESCO) developed a freely accessible GHG emissions calculation tool to quantify the portion of GHG emissions that can be attributed to the creation and operation of a hydroelectrical reservoir: the G-Res tool[16]. The use of this tool is recommended by the IEA, IAH, UNESCO and the World Bank to perform such a calculation.

However, since the G-Res tool is only as precise as the data entered into it, it is worth considering the IPCC-recommended three-tier approach in selecting data used to calculate emissions. Tier 1 is based on general estimation drawn from secondary data. Tier 2 is based on regional data, drawn from secondary bibliographical sources, while Tier 3 is drawn directly from primary data, collected in the field.

Using the G-Res tool is a relatively complex process. All the parameters described above are accounted for by the tool as inputs. Most need to be entered manually by the user. Some can be calculated using the tool’s database (the earth engine). For others, standardised values taken from the same database, can also be used.

As can be seen in the figure below, the tool offers a complete solution to calculate emissions from a dam/reservoir over a period of 100 years. Natural and man-made emissions from the catchment area, from the reservoir, as well as those produced in the construction phase are processed to give a full picture of a project’s GHG emissions, with a 95% confidence level.

Users are also given the possibility of comparing their results with those of equivalent dams/reservoirs. Values for emission factors are standardised but can be modified if necessary.

In order to get an accurate estimate, it is necessary to know with precision how to enter each parameter in the tool and field data.

Finally, the tool remains imprecise when it comes to calculating emissions for complex hydroelectrical installations, such as cascade dams.

G-res Tool web interface

Certifying emission reductions from hydropower

The cost of hydropower can be high but remains overall in the fossil fuel cost range or below as can be seen in the figure below. In many developing countries, the investment and institutional environment can make infrastructure projects unattractive to investors.

One way of facilitating and encouraging contributions from hydropower to global emission reductions objectives is by certifying and monetising the emission reductions to increase their investment profile, notably through a better return on investment and risk reduction.

Global levelised cost of electricity from utility-scale renewable power generation technologies

Certifying emission reductions stemming from hydroelectricity entails starting with finding the appropriate standard and emissions reduction methodology.

Because of uncertainties surrounding the emissions levels of hydropower, the CDM’s Executive Board excluded projects with a power density below 4 watts per m2 of reservoir surface (e.g. a very large reservoir in relation to the capacity installed) from being eligible to existing calculation methodologies. For similar reasons, projects with installed capacity that are over 15 MW (for the Verified Carbon Standard - VCS) and 20 MW (for the GS4GG) are not eligible to certification. The graph below shows the lower the power density, the higher the emission per unit of electricity produced, especially in tropical and sub-tropical areas.

Power density vs emission intensity[17]

Only those projects avoiding further emissions and requiring the financial revenues to be financially viable could benefit from international carbon finance.

How HAMERKOP can support

HAMERKOP Climate Impacts has worked with the European Union and other institutional clients in assessing emission levels and estimating emission reduction potential for several hydroelectrical installations in West Africa.

We hold the necessary expertise to help prospective developers assess, estimate and determine emissions from their future and present hydroelectric projects.

We can also evaluate the feasibility of certifying your project to carbon certification standards to allow them to benefit from their full economic value, by enabling selling of carbon credits on the voluntary or compliance carbon markets.

Under the Paris Agreement, the international cooperation mechanisms under article 6 could help you benefit from international climate finance and we can help you assess and set-up a strategy to achieve this.

SOURCES

[1] IHA (2019) Hydropower Status Report: https://www.hydropower.org/statusreport

[2] International Rivers (2019) Reservoir Emissions: https://www.internationalrivers.org/campaigns/reservoir-emissions

[3] CIA (2017) The World Factbook. Electricity, installed generating capacity is the total capacity of currently installed generators: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2236rank.html

[4] IHA (2019) Hydropower Status Report: https://www.hydropower.org/statusreport

[5] IHA (2015). Sustainable Development Goals: how does hydropower fit in? https://www.hydropower.org/blog/sustainable-development-goals-how-does-hydropower-fit-in

[6] IHA (2019). Hydropower Status Report: Sector Trends and Insights: https://www.hydropower.org/sites/default/files/publications-docs/2019_hydropower_status_report_0.pdf

[7] IEA (2019) Tracking Power : https://www.iea.org/fuels-and-technologies/hydropower

[8] The IEA’s Sustainable Development Scenario (SDS) outlines a major transformation of the global energy system, showing how the world can change course to deliver on the three main energy-related SDGs simultaneously, by 2050 (SDG 7, SDG 3 & SDG 13). The SDS holds the temperature rise to below 1.8°C with a 66% probability without reliance on global net-negative CO2 emissions; this is equivalent to limiting the temperature rise to 1.65°C with a 50% probability. IEA (2019) SDS: https://www.iea.org/reports/world-energy-model/sustainable-development-scenario

[9] IGES (2020) IGES CDM Project Database: https://www.iges.or.jp/en/pub/iges-cdm-project-database/en

[10] IHA (2019) Hydropower Status Report: Sector Trends and Insights: https://www.hydropower.org/sites/default/files/publications-docs/2019_hydropower_status_report_0.pdf

[11] Sherer, L., Pfister, S., (2016). Hydropower's Biogenic Carbon Footprint. PLOS ONE., 11(9). P. 11: https://doi.org/10.1371/journal.pone.0161947.

[12] IEA (2018) Hydropower Annex XII: Guidelines for Quantitative Analysis of Net GHG Emissions from reservoirs – Volume 3: Management, Mitigation and Allocation.

[13] IPCC (2019). IPCC Good Practice Guidance for LULUCF 3.285; Chapter 3: LUCF Sector Good Practice Guidance

[14] Forsberg BR, Melack JM, Dunne T, Barthem RB, Goulding M, Paiva RCD, et al. (2017) The potential impact of new Andean dams on Amazon fluvial ecosystems. PLoS ONE 12(8): e0182254. https://doi.org/10.1371/journal.pone.0182254

[15] IPCC (2019). IPCC Good Practice Guidance for LULUCF 3.285; Chapter 3: LUCF Sector Good Practice Guidance

[16] UNESCO/IHA research project on the GHG status of freshwater reservoirs (2017). The GHG Reservoir Tool (G-res) Technical Documentation.

[17] IHA (2018). Study shows hydropower’s greenhouse gas footprint: https://www.hydropower.org/news/study-shows-hydropower’s-carbon-footprint

I am in this post exploring the first report of France’s High Council on Climate Change published on June 17th, 2019.

The High Council is an independent body created by the decree of 14 May 2019 to issue opinions and recommendations on the implementation of public policies and measures to reduce France's greenhouse gas emissions, in line with its international commitments, in particular the Paris Agreement and the achievement of carbon neutrality in 2050. It is chaired by French-Canadian climate scientist Corinne Le Quéré and composed of ten members chosen for their expertise in the fields of climate science, economics, agronomy and energy transition.

Point #1 – Not all carbon neutrality claims are equal

Facing political resistance from some parties, governments are committing their countries to carbon neutrality at different horizons (Norway in 2030; Sweden in 2045; France, UK, New Zealand in 2050), but these may mean extremely different things for each of them.

Everyone should keep them in check and make sure the gap between “what it sounds like” and “what it actually is” is not too large.

Factors influencing this:

✔️ Inclusion of Greenhouse gas emissions (CO2 vs CO2+CH4+N2O)

✔️ Scope of emissions (e.g. inclusion of international transportation - flights and maritime) and imports (e.g. embedded carbon of products consumed in a country)

✔️ Use of international credits (i.e. possibility to outsource emission reductions)

The recently published report of the French committee on climate change in charge of keeping check of the government progress in terms of climate change makes a useful read in this regard.

Point #2 - Carbon border tax regulation can be used to avoid environmental dumping!

According to the first report of the French committee on climate change, French’s people carbon footprint has increased by 20% since 1995.

Even though domestic emissions have decreased by 20%, what happened is that emission related to imported have doubled Since 1995 and keep increasing. 🚛

🥐 In 2015, a French person carbon footprint was 11 tCO2e, including 6,6t CO2e domestically and 4.4% generated abroad.

Proposals for carbon border tax regulation makes sense in this context: avoid environmental dumping! Hence the environmental outcry over the free trade agreement with Mercosur.

Point #3 - In France, funding for climate-damaging activities remained higher than that of climate-friendly activities. Always consider one amount from the perspective of another.

In 2018, climate-damaging investments were almost twice as high as climate-friendly ones.

👎 While "climate investments" (public and private) increased over the period of the first carbon budget (2015-2018) to reach €41.4 billion in 2018, climate-damaging investments reached €75 billion (in 2017), stagnating over the last few years.

Positive investments: buildings (€20.7 billion), transport (€12.7 billion), energy (€6.7 billion), industry (€1 billion) and agriculture (€0.4 billion).

Negative investments: mainly from the purchase of fossil fuels powered vehicles.

According to OECD, fossil fuel subsidies in France have more than doubled in 10 years, from less than €3 billion in 2007 to €6 billion in 2017.

Point #4 – The social dimension of climate change is at least as important as the scientific one.

The challenges to overcome are the ones of resources, social equity and education:

✔️ Poor management of the transition to a lower-carbon economy will penalise lower-income households, leading to protests and unproductive actions (e.g. a carbon tax will penalise fossil fuel heating system owners). The yellow vests movement has illustrated this with colours;

✔️ The social dimension is much more challenging to track and very few indicators are being tracked;

✔️ In France, 23% of people do not believe climate change is real; 36% of 18-24 years old people;

✔️ In France, 12% of 18-24 years old people are not willing to make any effort to avoid climate change to worsen;

✔️ Since mitigation has not been ambitious enough, climate change adaptation (actions taken to manage impacts of the change by reducing vulnerability and exposure to its harmful effects) has to be integrated to policies.

Report: Agir en cohérence avec les ambitions, High Committee on Climate Change. 2019.

Link: https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/hcc_rapport_annuel_2019.pdf

A few months ago, I was looking to open a bank account in the United Kingdom. Being a part of the British Standards Institution’s sustainable and environmental finance group and having worked on various issues related to the decarbonisation and climate resilience of the financial sector, I am only too aware of the issues. I have consequently decided to only patronise the business of a bank or of a financial services provider with clear policies and activities not contributing further to climate disruption.

Banks, as well as pension and investment funds, are increasingly in the spotlight for their contribution to climate change. Money on your bank accounts or pension fund is potentially invested in arm manufacturing, mining, tobacco or other harmful industries.

The consumption of any good or services has an environmental footprint and the footprint of your money is not restricted to the materials and energy required to manufacture bank notes and coins. It is also and very much more what your money is used for. As illustrated by the recent findings of the UK Parliament’s environmental audit committee, it is not credible to claim you have decreased your emissions at home if you are sending billions of pounds of taxpayer money abroad to build fossil fuel burning power plants[1].

As of June 2019, 183 (out of 194) nations have ratified the Paris Agreement that aims to keep the increase in global average temperature to well below 2°C above pre-industrial levels and to limit the increase to 1.5°C. Governments have made ambitious pledges which require reductions of greenhouse gas emissions by at least 80% of 1990 levels by 2050.

However, while over the years pledges have piled up quicker than plastic waste in the ocean and the amount of public, private and civil society initiatives have increased almost as much as global concentration of greenhouse gas emissions into the atmosphere, we are still at least a degree off the less ambitious target.

The financial sector at the forefront of the battle

The financial sector has helped drive the carbon-intensive society we live in. It now has the chance to fuel the development of low-carbon technologies and climate-resilient activities.

While divesting existing fossil fuel assets is not enough in itself and may not always trigger the expected results (assets may simply change hands), some actors in the financial industry have already began their portfolio divestment, driven by potential reputational and financial risks. Divestment opportunities have been further enhanced as funding cleaner technology has become more aligned with investor requirements (i.e. higher returns, lower risks).

Too many are banking on the climate crisis

Recently, an alliance of NGOs, including Bank Track and the Rainforest Action Network, has published Banking on Climate Change[2]. This report found that 33 global banks have financed fossil fuels with $1.9 trillion since the Paris Agreement was adopted (2016–2018), with the biggest contributors outlined below:

• Tar sands oil: RBC, TD, and JPMorgan Chase

• Arctic oil and gas: JPMorgan Chase, Deutsche Bank and SMBC Group

• Ultra-deepwater oil and gas: JPMorgan Chase, Citi, and Bank of America

• Fracked oil and gas: Wells Fargo and JPMorgan Chase

• Coal mining: China Construction Bank and Bank of China

• Coal power: Bank of China, ICBC, Citi and MUFG

The figure below provides a visual view of this tainted ranking.

As you can see, the big European banks are not far behind the American, Chinese and Japanese ones. Paradoxically, a few of these companies have policies restricting financing for coal mining. There are 4 British banks (Barclays, HSBC, Royal Bank of Scotland and Standard Chartered) in the top 33 banks financing over 1,800 companies active across the fossil fuel life cycle.

Although things are changing, with banks like Royal Bank of Scotland and HSBC working on their policy to restrict financing to some of these assets, such a move remains too slow and poorly aligned with the required efforts.

In 2016, ChristianAid published a report[3] assessing the UK’s largest banks and their alignment with the Paris Agreement. They then graded their performance on policies to accelerate the shift to a low-carbon economy. As you can see in the table below, the large banks perform poorly, with a lack of transition plan, investments in fossil fuel and a lack of carbon footprinting for some or most of their lending, as the main drivers.

The banks on the climate blacklist

According to the Ethical Consumer[4], an independent and not-for-profit co-operative, 80% of people’s bank accounts are with the big five banks, the same that have the lowest ranking on their ethical scorecards.

If you feel responsible for your money, it may seem logical not to bank with Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and their affiliates: First Direct, M&S bank, Halifax, Bank of Scotland, NatWest and Ulster Bank.

You don’t need to be an activist to prevent the money in your bank account to be used for fuelling the climate crisis as you still have quite a few alternatives.

Ethical and climate friendly banks. Excuse me?

Choose Ltd, a credit broker, defines ethical banks as always aiming to have a positive social and environmental impact when seeking profits. In addition to these criteria, Ethical Consumer considers bank ethicality through animal rights, political and human rights credentials.

According to the criteria considered, top ethical banks varies:

• Choose Ltd, without disclosing a methodology or rankings, mentions the following as ethical banks operating within the UK: Charity Bank, Triodos Bank, the Co-operative Bank, Handelsbanken, TSB and the Ecology Building Society as well as credit unions and the building societies (BS) in general;

• The Good Shopping Guide[5], that compares ethical brands uses a 9 criteria matrix to find Ecology BS, Leeds BS, Newcastle BS, Allied Irish Banks, Coventry BS, Nationwide BS and Skipton BS to be ethical banks;

• Ethical Consumer provides the most comprehensive assessment and considers tax avoidance, fossil fuel investments, investments in Israel as particularly harmful. Charity Bank, Ecology BS, Triodos, Leeds, Coventry, Cumberland, Nationwide BS and other BS, Clydesdale, Co-op, Metro Bank are the best rated and considered climate friendly. However, the only one that currently seems to invest seriously in renewables, is Triodos.

While Ethical Consumer is digging slowly into the climate impacts of banks, no specific research is publicly available on climate-friendly banks specifically.

Defining climate friendly financial service providers implies multiple and sometimes complex considerations:

• Its climate change mitigation impact: does it invest into carbon intensive fuels or commodities driving deforestation (e.g. palm oil)? Does it contribute to financing a transition to a low-carbon economy? Does it measure the footprint of its lending activities? Or does it have a transition plan to phase out any carbon intensive investment?

• Its climate change adaptation impact: does it help individuals or companies adapt to climate change and become more resilient? Does it ensure that when funding new infrastructure or project, they take into consideration climate models?

• Its own direct impact: does it measure, report, reduce or even offset the impacts of its own operations? Does it have any specific policies to reduce its energy consumption and the impacts of its data centres?

And even though ShareAction, a charity promoting responsible investment practices, seems to be praising improvements in climate-related disclosure, information is still very patchy and not accessible to the mass. Transparency is key to fight the climate crisis.

The more climate virtuous banks and financial services

If you are in UK and looking for a bank account, you still have a few options for sustainable and ethical personal or business banking.

Building societies and credit unions

These are financial institutions owned by its members as a mutual organisation. They are often acting more ethically as regulations limit the amount of money they can invest in certain industries and because they invest their profits for the benefit of borrowers and savers rather than shareholders. In UK there are plenty of them, local for many, and the largest ones are: Nationwide, Cumberland, Yorkshire and Coventry Building Societies.

Credit unions are also considered ethical as they are financial co-operatives owned and run by their members.

Traditional banks

Banks not blacklisted for their climate-damaging activities include, but are not restricted to:

• Handelsbanken, listed as an ethical bank by some but with investments in fossil fuel on possibly around 70% of their funds[6];

• Danske Bank, a Danish bank active within the UK for which no assessment was carried out, but that has experienced a range of ethical discredits;

• Bank of Ireland, while it has experienced a range of controversies and has an environmental policy, seems ambitious on paper in reducing the environmental impacts of its activities. However, it has not made any commitment to stop funding climate damaging activities;

• Metro Bank, this new bank does not have a “bespoke environmental policy”, does not seem to have a clear and transparent investment policy and has not made any commitment to not fund climate damaging activities;

• Yorkshire and Clydesdale Banks, although usually well ranked among ethical finance reviewers, these banks do not have specific restriction on banking with sector potentially damaging climate;

• TSB, the bank that relaunched in 2013, uses money invested by their customers to fund loans and mortgages to local people and businesses and don't have an investment banking or corporate finance arm; and

• Cooperative Bank, still the only major bank committed to fighting climate change and which states that it “will not provide banking services to any business whose core activity contributes to global climate change, via the extraction or production of fossil fuels (oil, coal, gas and shale gas), with an extension to the distribution of those fuels that have a higher global warming impact (e.g. tar sands and certain biofuels)”.

Modern financial solutions

In the digital era we live in, you now have even more options for banking. It actually no longer has to be a bank. There are mobile applications that offer, to some extent, similar services to traditional banks for an often more competitive package. These include CashPlus, Revolut, Coconut, Starling Bank, Anna Bank, Tide, Counting Up and Fair Everywhere. These banking services usually use customer deposits to lend to other customers as overdrafts and loans.

While these banks and financial services providers are not as bad as the big ones, you cannot guarantee they do not finance local business with climate unfriendly practices or make little effort to help finance climate change adaptation. In addition, the cumulated impact of their practices cannot be comparable to the damages caused by large banks.

Much is still needed for business and corporations to take stronger steps towards the global climate protection cause and provide the transparency their customers need to make informed choices.

Since choosing a bank or a financial service provider implies the consideration of multiple parameters, I cannot advise on a single option. However, as a rule of thumb, you could consider:

• A building society or a credit union if you have one locally where you live and do not have fancy banking needs: Nationwide, Cumberland, Yorkshire and Coventry Building Societies seems to be all good options;

• A bank that have made a clear commitment to fight climate change and offer a wider geographical coverage: Triodos seems to offer great integrity but Co-operative Bank would also work; and

• An app-based service provider that will offer flexibility when travelling, making online purchases or having to connect with other web-based apps: Starling Bank and Monzo are both credible options.

When you can align your consumption choices with your values and take decisions that reinforce sustainable means of production and consumption while getting a better service, it is time to switch!

SOURCES:

[1] House of Commons Environmental Audit Committee, UK Export Finance, Nineteenth Report of Session 2017–19

[2] Banking on Climate, fossil fuel finance report card 2019 (Rainforest Action Network, BankTrack, Indigenous Environmental Network, Sierra Club, Oil Change International and Honor the Earth, 2019)

[3] Our future in their plans (ChristianAid, 2016)

[4] Ethical Consumer, current accounts: https://www.ethicalconsumer.org/money-finance/shopping-guide/current-accounts

[5] The Good Shopping Guide: https://thegoodshoppingguide.com/ethical-rankings-banking

[6] Handelsbanken sustainability report: https://www.banktrack.org/download/sustainability_report_2017_5/sustainability_report_2017_1.pdf

With climate change set to have numerous physical impacts upon our world, it is important to ensure resilience at national, company and individual levels. Climate resilience was identified as the main issues at the 2019 United Nations Environmental Programme Finance Initiative (UNEP FI) Regional Roundtable for Africa and the Middle East.

Resilience is defined as ‘the capacity to recover quickly from difficulty’. Climate change presents us with countless difficulties, some already present and others, more difficult to predict, that will emerge and continue to worsen as average global temperatures rise in the future.

With $90 trillion of investment in climate projects needed by 2030[1], it is now more than ever that financial resilience and investment into resilient infrastructure must be developed.

Whilst in Cairo, we have attended this event, a small overlapping world of climate change and finance professionals. This post summarises the main discussion topics and issues surrounding the tools and solutions currently available to the public and private sector to build climate resilience at various levels.

Planning for resilient infrastructure

Financial investments into infrastructure in emerging markets are set to play a crucial role in building resilience, as infrastructure is designed to last decades. It is said that if infrastructure is to keep up with economic development, $3.3 trillion[2] of investments will be required per annum. This therefore means that partnership between governments and private businesses must occur to not only spread costs but also risks. If planned and implemented correctly, new infrastructure can be built to withstand future changes to the global climate. However, it is crucial that this should be done by focusing on what these changes to the climate will be imply and be like, as opposed to modelling and analysing historic data to predict the future when planning for new infrastructures and assessing the impact on existing ones.

The Organisation for Economic Co-operation and Development (OECD) analysis of flooding in Paris found that as much as 55% of the direct flood damages would impact the infrastructure sector[3]. Had future climate and flooding been modelled, the impact of the flooding could have been anticipated and reduced. There must therefore be both retrofitting and future planning for new infrastructure put in place to minimise the impacts of climate change upon society, building resilience for communities, companies and countries.

Another example could apply to new housing developments built upon flood plains. These should include buffer zones to mitigate and adapt to the changes in future water flow. Adding in vegetation, natural ponds and small hills can absorb the energy from tidal waves, reduce the amount of water reaching the infrastructure and thus reducing impact upon the area. It is an added bonus that it also adds aesthetic value! Further, modelling future climate increases the longevity of the infrastructure. For example, when building a dam historic river flow data is used when in fact future water flow should be analysed, as climate change will impact the quantities of water that will reach the dam.

Whilst these suggestions may require extra work due to the complexities of climate modelling, data collection/interpretation, infrastructure planning and space requirements, they should not be ignored. Current infrastructure systems were built over a period of decades and were not designed for either the current/future technological developments nor the changes to the climate. Due to the potential limitations this can have upon future societies, climate scenario analysis must be undergone and fully understood prior to design implementation.

Building resilient financial markets

Considering the scale of investments required, the financial sector needs to be on board. Banks and investors pursuing a different strategy will be exposed to significant and systemic risk of failure. According to William Martindale from Principles on Responsible Investment, there is now approximately 400 climate change-related pieces of legislation and initiatives for the financial sector worldwide, 50% of which have come live over the past 3 years. Here is a small number of established and emerging initiatives that have the potential to have a significant impact over time:

• Principles on Responsible Investment (PRI): in order for investment companies to holistically report, track and consider the Environmental, Social and Governance (ESG) impacts of their investment. Backed by the United Nations (UN), the Principles ask signatories to incorporate, disclose and actively work to reduce any ESG issues faced by investments made. Through doing so, it is hoped that the market will build resilience as well as consumer knowledge of the risks faced by various sectors investments may be held in.

• Principles for Responsible Banking: under development at the time of this post, 26 leading banks representing USD 16 trillion in assets are re-defining banks’ purpose and business model to align the sector with the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement. The Banking Principles are expected to direct banks’ efforts to align with society’s goals (SDGs, Paris Agreement, national and regional frameworks) through goal setting, reporting on their contribution to national and international social, environmental and economic targets, ensuring accountability and transparency on their impacts and challenging the banking industry to play a leading role in creating a more sustainable future.

• The Sustainable Stock Exchange Initiative (SSEI): initiated in 2009 and supported by a range of UN agencies, the International Organization of Securities Commissions and others, the SSEI aims to further the availability of sustainable and climate-robust investment opportunities. It does so notably through forums that support stock exchanges’ sustainability-related activities and bring capital market players together to identify, discuss and take collective actions on common sustainability issues relevant to their region or globally.

• The Sustainable Banking Network (SBN): facilitated by the International Finance Corporation, SBN is a community of financial sector regulatory agencies and banking associations from emerging markets committed to advancing sustainable finance in line with international good practice. Launched in 2012, the SBN facilitates the collective learning of members and supports them in policy development and related initiatives to create drivers for sustainable finance in their home countries. It promotes 3 pillars: environmental and social risk management, green financial products and services and eco-efficiency.

However, most of these initiatives are voluntary mechanisms that have not always proven to provide enough incentives to be fully adopted or trigger change at scale. While creating awareness is essential to get the market to initiate a shift, policy-makers have a pivotal role to play to ensure the entire market is getting up to speed. A better case needs to be made for “sustainable investment”. The chairman of the Egyptian Financial Regulatory Authority, Dr Mohammed Omran, has for instance mentioned that the ESG index in Egypt has over the past 6 years been the best performing index of the stock exchange. If that really was the case, we should soon see a surge of investors towards sustainable investments.

Deep integration of environmental and investment specialists is required to align investments, climate change, mitigation, adaptation and climate resilience. This will allow further the development of low-carbon and climate resilient instruments at an international level.

Sustainable investments and the need of complementary expertise

Many companies offer ‘Green’ or ‘Sustainable’ trackers which you can select from. However, the lack of homogeneous definition for sustainable investments means that there is no market consensus on what is a low-carbon or a climate-resilient investment. In addition, the green or sustainable attributes are often used for low-carbon investment rather than for climate resilient ones. There is also the risk of existing investments being ‘green-washed’ – making the investment appear more sustainable than they are, diverting funding from robust activities. Collaboration and integration of financial, environmental and social experts is needed to ensure that the market become more resilient and consistent.

In order for low-carbon and climate resilience investments to grow in a high-quality manner, systemic market changes must take place. With the investments required to achieve the UN SDGs, as well as to keep up with economic development, corporate investment must run alongside public investment. This would not only spread costs but also the risks involved – neither can fund the requirements alone. Whilst this will take work, collaboration and numerous experts, there must be public-private partnerships for future projects to be resilient to climate change.

While currently serving low-carbon investment rather than climate resilient ones, Green Bonds are one of the private sector solutions that can contribute in achieving sustainable growth and climate change resilience. They are loans which fund environmentally friendly and sustainable projects only. 2018 saw the largest amount invested into Green Bonds ever seen, with a record $389bn[4] loaned. Nevertheless, green bonds have been slow to take off in developing nations due to a lack of clearly defined asset classes, market standards and secure transactions.

The Adaptation Benefit Mechanism is one of the instruments under development by the African Development Bank to foster result-based payments investment into adaptation and could play an important role in meeting the Paris Agreement adaptation objectives. For instance, a project developer may get paid $50 per farmer it makes climate-resilient. Payment would be made by the investors (e.g. a commodity trader) once it has been demonstrated it has succeeded.

Resilience for the poor - the role of FinTech

In developing countries, financial Technology (“FinTech”) has the potential to act as a corridor towards sustainable and resilient development for personal, corporate and government bodies.

FinTech can provide easy access to both finances and financial information. For example, online banking through a mobile device can free up time previously spent queuing at the bank, increasing available time for economic generating activities, social care or education. This can therefore build and promote climate resilience for individuals.

It works also for companies and governments, as innovative technologies such as blockchain can process and manage complex multi-national transactions in a secure and audited platform. This can aid financing solutions for infrastructure projects, green bonds and other financial instruments required to bridge the funding gap for climate resilience.

This development requires innovation from both the technology and finance industries as well as collaboration between the two to form new products that can solve future issues generated by climate change.

In order to sustainably develop, mitigate and adapt to climate change, financial resources and physical infrastructure are required beyond that which governments alone can provide. We must therefore see partnership between public and private sectors to balance costs and risks as well as to grow economies sustainably.

Identifying issues with business resilience through risk analysis can be one way of taking an active step towards reducing pressures of climate change on your business. There are various voluntary reporting metrics which ask for companies to disclose these risks either publicly or privately such as the Climate Disclosure Project (CDP) and the Dow Jones Sustainability Index (DJSI). One framework soon to become compulsory is the Task Force on Climate-Related Financial Disclosure (TCFD) which provides a reporting methodology. This can be used to aid understanding and calculation of the risks posed by climate change and your business’s resilience.

[1] https://www.climatebonds.net/cbi/pub/data/bonds

[2] UNEP FI 2019

[3] http://www.oecd.org/environment/cc/policy-perspectives-climate-resilient-infrastructure.pdf

[4] https://www.climatebonds.net/files/reports/cbi_sotm_2018_final_01k-web.pdf