By: Oyena Mtuzula, Head of Credit & ESG, Terebinth Capital
It is almost eight years since 197 countries committed to the Paris Climate Agreement (or COP21), an ambitious global action plan to fight climate change. The accord provides a pathway for developed nations to assist developing nations in their climate mitigation and adaptation efforts. The aim is to be carbon neutral by 2050. Countries have agreed to lower their emissions by 2030, but the gaps are still substantial. As a result, there remains a significant probability that many countries will not meet the agreement. This is a critical issue as failure to do so will have dire effects on the environment and, ultimately, economies.
According to the World Economic Forum Global Risk Report 2023, extreme weather events and natural disasters alongside the failure to mitigate climate change dominate the severe risks we face over the next decade. Developing countries will be the hardest hit as they lack the resources to adapt to temperature and precipitation changes. This makes Africa particularly vulnerable, as the pace of warming is expected to accelerate from around 0.3 degrees Celsius over the past decade, to as much as 2.0 degrees. Food security will be a far-reaching challenge, given the outlook for lower crop yields and resultant need to ramp up production amid already scarce resources.
The Intergovernmental Panel on Climate Change (IPCC) states that any rise in global temperatures of more than 1.5 degrees Celsius would be an unacceptably high risk, potentially resulting in major extinctions, more severe droughts and hurricanes, a watery Arctic, and an increased toll on human health and wellbeing. Eventually, these will have financial implications for economies and fiscal policy.
The costs extend beyond natural disasters
While the costs seem exorbitant, we cannot afford not to abide by the climate change agreements as the cost of failure will run into trillions of dollars. It is estimated that the fall-out could decrease global gross domestic product (GDP) by more than 20% by the end of the century. In contrast, reaching the Paris goals through infrastructure investment will have considerable global rewards, estimated to be in the order of $19tn.
Climate-related change entails two fundamental risks: the widely known direct impact of climate changes, and the less-spoken-about risks associated with the transition to a lower-carbon economy. The impact of the former is already evident in large-scale environmental incidents. The transition includes extensive policy, legal, technological and market changes that organisations will have to endure. For example, development of clean technologies will affect competitiveness (carbon capture and storage costs) and winners and losers will evolve from this disruption. In addition, governments will have to consider the socio-economic consequences of the transition, and whether and how to provide a safety-net during the move to a lower-carbon economy.
An impartial way of funding
Data from the Centre for Global Development shows that historically (1850 – 2011) developed economies were responsible for 79% of carbon emissions. However, the pattern has shifted with emerging economies now accounting for two-thirds, and China alone around 30%. Developed countries have policies and budgets to deal with climate action and its consequences. The United States (US) and European Union have undergone large-scale budget adjustments to shift towards clean energy, with the US committing $350bn towards these initiatives.
Developing economies, on the other hand, do not have big balance sheets to finance the required emission reductions. The International Monetary Fund’s (IMF’s) new Resilience and Sustainability Facility (RSF) has extended concessional financing for climate transition to developing economies, but current climate finance has not yet reached the goal of $100bn per year. Given that advanced economies are responsible for a large percentage of the accumulated emission damages, it would only be equitable for them to ramp up assistance to developing countries.
Our stance
Climate change is no longer a distant threat; it demands our immediate attention and analytical skills. We see this as an opportunity for us to drive change, shape policies, educate, engage, and craft a brighter, sustainable future. Hence, we ensure that our investments encompass financing projects focused on emission reductions.
