The important role of financial institutions in climate action

Mandera Secondary School students plant trees on October 9, 2024. [ Ibrahim Adan Ali, Standard]

As the UN Climate Change Conference (COP 29) in Baku, Azerbaijan, gets underway today, the spotlight is on the pivotal role financial institutions will play in addressing the escalating climate crisis. Delegates will be seeking global collaboration on tackling the climate crisis with urgency and ambition, as a follow up to the commitments made in the previous years.

This year’s 10-day conference is poised to build on the momentum established at COP 28, where countries and stakeholders came together to reaffirm their commitment to climate action amidst the urgent need for robust financial mechanisms.

The discussions in Dubai last year emphasised the need for scaled-up funding for climate adaptation and mitigation, with a particular focus on the role of public and private financial flows in achieving net zero transitions. One of the key outcomes was the reaffirmation of the pledge to mobilise $100 billion annually from developed countries to support developing nations in their climate efforts.

This commitment has laid a foundation for COP 29 discussions on innovative financing solutions and the need for inclusive financing models that ensure equitable access to climate finance.

Additionally, the establishment of Loss and Damage Fund highlighted the urgency for financial entities to address the disproportionate impacts of climate change on vulnerable population, further underscoring the necessity of a robust financial response in the face of global warming.

With the climate change intensifying and global temperatures rising, the need for substantial investments in sustainable practices and technologies is paramount. Financial institutions hold the keys to unlocking funding necessary for transformative change, and their engagement is essential to meeting the ambitious targets that will be set during the COP conventions.

The United Nations Environment Programme estimates that about $4 trillion annually must be mobilised by 2030 to limit global warming to 1.5 degrees Celsius. This figure is staggering, underscoring the magnitude of the challenge we face and the urgent need for financial institutions to step up.

Financial institutions are uniquely positioned to facilitate this transition. They can provide the necessary capital for renewable energy projects, sustainable infrastructure and green technologies which are integral to reducing greenhouse gas emissions and fostering the green transition.

A report from the International Finance Corporation indicates that investments in renewable energy could create over 24 million jobs globally by 2030, a statistic that could resonate with both policymakers and investors.

The Central Bank of Kenya has introduced initiatives aimed at promoting sustainable banking practices, including the Kenya Green Finance Taxonomy, aimed at classifying economic activities that are environmentally sustainable.

The taxonomy is aligned with international green finance standards, such as those set by Climate Bonds Initiative and the European Union Taxonomy for Sustainable Activities. This helps position Kenya’s green finance sector within the global market, making it easier for investors to participate in Kenya’s green economy.

Financial institutions in Kenya are increasingly adopting Environmental, Social, and Governance (ESG) criteria in their business strategies. A recent report from the Nairobi Securities Exchange  indicated that companies with robust ESG frameworks experience better financial performance and lower risk levels.

It is therefore imperious for financial institutions to recognise their pivotal role in the fight against climate change. They must embrace the challenge of mobilising the necessary funds while seamlessly integrating sustainability into their operations. The stakes are high, and the time for action is now.

There is a pressing need for the development of innovative green financial products that cater to a wide range of investors and sectors. To address this challenge, financial institutions must collaborate with various stakeholders to create comprehensive strategies that align financial resources with the urgent needs of climate adaptation and mitigation. Moreover, these institutions bear the responsibility of integrating climate risk assessments into their decision-making processes, ensuring their portfolios are resilient against the impacts of climate change.

Considering the COP 29 theme, “In Solidarity for a Greener World,” it is crucial for financial institutions to unify their commitment to sustainable practices and collaborative efforts for a healthier planet. Together, we can create a resilient future that prioritises both environmental integrity and economic prosperity.