How can financial services recognise and help with societal financial trade-offs?

Finance day at COP27 uncovered many interesting themes and discussions. A common talking point was around the global climate finance landscape still not being where it needs to be, for us to reach our collective net zero target.  

Societies in Africa, and the Asia Pacific for example are being put in impractical situations. Facing trade-offs between imminent funding required to develop climate enabling projects, while also trying to improve their own livelihoods, stay out of debt (as a result of borrowing) and remain resilient in the wake of catastrophic climate disasters. There continues to be a significant investment funding opportunity gap, which in effect is slowing down progress for these nations. Risk sensitivity of private & institutional investors and access to affordable finance options remain barriers to enabling change. 

Take the floods in Pakistan as an example affecting over 33million Pakistani people. While the country was making every effort to stand up on its feet again in the aftermath, they were simultaneously trying to keep adaptation projects alive. Funding both while facing debt challenges is no easy feat and a scenario, we are seeing played out more frequently as the real affects of climate change become more apparent. 

Here are three considerations that we think financial services could embed into their ESG decisions to help empower emerging countries/developing nations to be climate financially resilient: 

• Innovation in risk decisioning Data & AI solutions alongside stronger advancements in actuarial sciences need to be embedded more into investment risk decisions. Understanding project pipeline, longevity, local partnerships etc could make a real difference and instil more trust & confidence in emerging markets 
• Collaboration between the public and private sectors is necessary. Banks, MDBs, and regulators have a huge role to play to grow green markets but they can only do this through informed dialogue with one another. 
• Equitable market solutions will be key to building resilience in developing economies. Debt buybacks and restructuring freeing up sovereign funds while capital guarantees and green secondary markets mobilize capital from the private sector. 

When it comes to financial services, the fairness, effectiveness and disbursement of capital flows to emerging markets needs to be scaled in order to help build resilience and reach balanced environmental and social impacts. It is important nobody is left behind. Our joint success in fighting climate change, relies in ensuring participation and combined development objectives with these counties. 

To learn more, read our article Permission to transition: ESG considerations to achieve net zero.