Climate Finance: What is it and why is it important?

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Climate Finance and Green Finance, often used as synonyms in the field of sustainable finance, have distinct meanings and applications. Climate Finance focuses on funding projects, strategies, and policies aimed at combating climate change. It includes initiatives such as renewable energy, energy efficiency, forest management, and sustainable agriculture, emphasizing climate issues and the reduction of greenhouse gas emissions. Green Finance, on the other hand, has a broader scope and involves funding projects that, in addition to benefiting the climate, also contribute to the overall health of the environment. This category includes initiatives for biodiversity conservation, air and water pollution reduction, waste management, and recycling. Both concepts are essential in the field of sustainable finance and play a fundamental role in the ecological transition.

Climate finance is crucial to supporting the transition to low-carbon economies and ensuring climate resilience. Climate finance aims to limit the increase in global average temperature to below 2°C above pre-industrial levels, going beyond mere economic aspects. In this context, governments, financial institutions, and investment funds play a crucial role, as do tools and methodologies for measuring the impact of funded projects and distinguishing between green finance and climate finance. In a complex and ever-evolving landscape, initiatives like the Polytechnic University of Milan's Climate Finance Observatory and international programs such as the United Nations' Financing Climate Action and UNEP's Climate Finance are striving to chart a clear path towards increasingly sustainable finance.

The report Global Landscape of Climate Finance 2024 states that the need to increase ambitions in climate action is more urgent than ever. The nine years from 2015 to 2023 have been the warmest on record, and extreme weather events have quintupled over the past 50 years (WMO 2021, 2022 and 2023a). Annual climate finance more than doubled between 2018 and 2022 (from $674 billion to $1.46 trillion) but proved insufficient: a further increase of five times is needed to meet the average annual requirement of $7.4 trillion through 2030 in the 1.5°C scenario. For comparison, consumer fossil fuel subsidies alone amounted to $1.4 trillion in 2022 (IISD and OECD, 2023), and investments in the production and distribution of new fossil fuels reached $1 trillion in the same year (IEA, 2024a).

The report Global Landscape of Climate Finance 2024 highlights how current climate finance represents only 1% of global GDP, while some estimates for emerging markets and developing economies (EMDE) suggest that certain countries may need to allocate about 6.5% of their GDP by 2030 (IHLEG, 2022). The projected economic losses that can be avoided by achieving a 1.5°C warming scenario by 2100 are estimated to be five times greater than the climate finance needed by 2050 to achieve it (CPI, 2024a). While climate finance requirements are expected to reduce beyond 2050, economic damages in a BAU (Business-As-Usual) scenario will continue to increase exponentially in the future.

The financial sector can play a crucial role in safeguarding biodiversity through sustainable investment practices. The report “Biodiversity Opportunities and Risks for the Financial Sector” highlights how financial institutions should integrate environmental, social, and governance (ESG) criteria in their investment decisions, directing capital toward projects that favor nature conservation. By adopting risk assessment models that consider ESG metrics, banks can identify and avoid investments with negative impacts on biodiversity. Additionally, by improving transparency and reporting, institutions can provide clear information on the environmental impacts of their activities, enabling investors and stakeholders to make informed choices and promote responsible investments.

Climate Finance utilizes a series of specific tools and methodologies to maximize the positive impact of its initiatives. Among these tools are Green Bonds, Carbon Credits, financial guarantees for ecological projects, and funding for scientific research in the environmental sector. Additionally, advanced methodologies are adopted to evaluate projects and measure their climate impact. Governments, through appropriate policies, can encourage private investment in sustainable projects, promote environmental scientific research and contribute to defining standards for measuring climate impact. Finally, they can act directly as financiers of climate-related initiatives.

Climate Finance is a fundamental pillar for sustainable development, addressing global environmental and climate challenges and supporting ESG principles. This discipline focuses on investments and funding directed at projects that reduce the impact of climate change, and is essential for achieving the Sustainable Development Goals (SDGs) set by the United Nations. In particular, climate finance can help reduce greenhouse gas emissions by promoting the use of renewable energy, improving energy efficiency, and encouraging sustainable agricultural practices. These interventions directly support SDGs related to clean energy, climate action, and life on land. Additionally, Climate Finance can stimulate innovation and sustainable economic growth by investing in green technologies and responsible business practices.

Climate finance and risk management are closely interconnected concepts. While climate finance focuses on the allocation of financial resources for projects that mitigate climate change, risk management involves identifying, evaluating, and managing risks, including climate-related ones. In the context of climate change, risks can be physical, such as extreme weather events or long-term changes in climate conditions, or they may arise from the transition to a low-carbon economy, like regulatory changes or technological innovations. Both types of risk can significantly affect investment value and financial returns. Risk management in climate finance involves using tools and techniques to evaluate and manage these risks.

The environmental platform XNatura by 3Bee Ecosystem offers companies, municipalities, and natural parks an integrated tool to monitor and manage their impacts and dependencies on nature, biodiversity, and climate, allowing them to define tailor-made climate strategies in compliance with regulations. In natural risk assessment, the platform particularly focuses on hydrogeological risk, considering flood event severity and frequency, and providing an estimate of the likelihood of similar episodes occurring in the next two years. In climate risk assessment, the platform monitors the evolution of temperature and precipitation over time and includes parameters like MSA Climate Change that assesses the impact of climate change on urban biodiversity. This allows for targeted interventions to strengthen local ecosystem resilience.