OPINION: Enhancing private sector finance through the Paris Agreement’s transparency framework
Max Horstink, John Thorne and Jessy Appavoo discuss how the transparency framework of the Paris Agreement can be used to enhance private sector investment in climate action in Sub-Saharan Africa.
Access to finance is a critical enabler for Sub-Saharan African countries to meet their NDC commitments under the Paris Agreement. Giving climate finance a more prominent role in the United Nations Convention on Climate Change’s communication requirements, including countries reporting on their climate finance strategy and architecture and how they will attract and channels funds, will help to build investor confidence and open new markets. To ensure financing of Sub-Saharan African countries´ NDCs, current guidelines under the Paris Agreement Transparency Framework need to be updated to explicitly include these countries climate finance approaches and the role of the private sector.
Sub-Saharan Africa is currently not only significantly under-represented in global climate finance flows, but it is characterised by poor investment climates and low investor confidence. This is for a number of reasons, including high-risk profiles, capacity gaps, underdeveloped markets, policy uncertainties and high transaction costs. Through a research project funded by the Swedish Energy Agency – Private Sector Finance for NDC Implementation in Sub-Saharan Africa (PRINDCISSA) – we have been applying our minds over the past two years on how to enhance private sector participation in climate finance for both mitigation and adaptation action in Sub-Saharan Africa. As part of the project, we held stakeholder consultations in African cities, developed case studies on the ground, discussed barriers and opportunities, and captured recommendations in policy briefs and journal articles.
What role can international frameworks play?
Ample opportunities exist to enhance private sector finance flows in sub-Saharan Africa, and extensive effort is already being undertaken through domestic policies and international programmes and mechanisms. Yet, current efforts are incremental and small-scale. Since the climate finance needed to implement current NDCs is vast, and will only increase over time, a holistic approach should be taken. This would involve both domestic and international efforts at different levels.
We studied to what extent and how private sector climate finance can be enhanced through the provisions of the Paris Agreement, including the NDC development cycles, the transparency framework, the global stocktake and participatory dialogue processes, and what role the private sector and especially the financial sector must play in these processes.
The financial provisions of the Paris Agreement oblige developed countries to mobilise and provide financial resources to developing countries from a wide variety of sources, instruments and channels, and report on progress. Meanwhile developing countries are required to report on financial, technology transfer and capacity-building support needed and received. However there are currently no specific guidelines for countries to report on national or sectoral climate finance strategies, investment plans and investment portfolios. Developing country reporting on financial needs is unlikely to drive significant private sector investment.
Reporting on climate investment strategies to increase investor confidence
We believe developing country parties should be supported to report on their climate finance architecture and investment strategies, including plans to attract and receive private sector funds to support the implementation of their NDCs. If developing countries develop and communicate such plans, this could increase investor confidence, stimulate peer-learning between developing countries, enhance both public and private sector climate finance, and ultimately make finance flows compatible with Article 2c of the Paris Agreement.
We first examined how the Convention’s reporting requirements and submissions currently speak to countries´ climate finance architecture, and which elements may be mainstreamed, amplified or incorporated to further enhance private sector financing of NDC implementation. This was done by reviewing the INDCs that were submitted in 2015 and 2016 to the UNFCCC secretariat, as well as other relevant reports such as National Communications and Bienniel Update Reports.
International climate finance crucial for NDC implementation in Sub-Saharan Africa
We found that most Sub-Saharan African countries are dependent on external financial support at a scale that vastly exceeds the amount that is currently pledged by developed countries. The share of conditional finance needed for these countries amounts to 83% of total finance requirements on average, suggesting that currently Sub-Saharan African countries do not believe they are capable of raising adequate amounts of domestic finance. The funding need for the conditional portion of just 13 countries in the region is higher than the total amount pledged for all developing countries across the globe (i.e. USD 100 billion/year from 2020), thereby highlighting a significant funding shortfall.
This makes the availability of international climate finance crucial for these countries to achieve their Paris Agreement goals. We also found that current country documentation includes very little on climate finance strategies, investment plans and portfolios, and related capacity building needs and efforts in the reporting of the UNFCCC processes.
Sub-Saharan African countries will need to address the barriers to climate finance. Developed countries have an obligation to provide finance, and the international private sector will choose which projects in which countries they fund. In light of the current finance gap and the historic and current perception of the investment climate in Sub-Saharan African, countries will need to compete with each other to attract the international funds for NDC implementation. Assessments of risk and return will in large part drive these investment decisions, particularly for private sector players driven by shareholder value creation.
Taking advantage of NDC updates in 2020
We believe that there is an urgent need by Sub-Saharan African countries to develop climate finance strategies and investment plans and communicate these under the Convention. This information is currently lacking in the current reporting requirements under the Convention and there is an opportunity to address this gap in the next round of reporting in 2020 through the Biennial Transparency Reports (BTRs) and the updated NDCs. In addition, there is not much coherence between these various reporting outputs in terms of climate finance elements, nor harmony between the reporting of different countries.
To address these challenges we argue that climate finance should have a more prominent role in the Convention’s Transparency Framework communication requirements and dialogue. Communicating countries´ climate finance architecture, strategies and investment plans, related progress and barriers, and the envisioned role of the private sector through the Convention’s channels will have multiple benefits. It will keep track of countries´ efforts in terms of attracting climate finance, signal which countries may be lagging behind and need additional support, stimulate peer-learning among countries, and enhance investor confidence by sending a message to the market place.
Read the PRINDCISSA policy brief: Enhancing private sector finance through the Transparency Framework of the Paris Agreement
Image: Cyclone Idai, Mozambique, aftermath, 15-16 March 2019, courtesy Denis Onyodi, IFRC/DRK/Climate Centre
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