Eric Boachie Yiadom, Climate Finance Expert/Lecturer, University of Professional Studies, Accra Ghana
Scientists have long established that human activities are the primary cause of climate change. Human activities in the form of economic activities at different stages of economic development emit greenhouse gasses leading to climate change. There is also a strong relationship between economic development and capital availability; thus, countries with more capital resources grow faster. So, it appears that the richer a country, the greater the economic activities and the higher the level of greenhouse gas emissions (GHG). This perception is supported by the fact that developed nations emit more GHGs than developing countries. Capital resources are almost becoming bad for the climate, especially in the post-industrial era. But there is hope depending on how capital resources are directed.
The financial system is a key player in sourcing and disbursing funds for economic activities. The financial sector is the mediator between capital resources and the investment sectors of an economy. So, whether capital will be invested in environmentally destructive sectors or not depends on the eco-friendliness of the financial sector. The Financial sector development as represented by financial markets and institutions are the channels that distribute capital resources to the various sectors of the economy. As a distribution channel, financial markets and institutions indirectly determine the economic activities that eventually repair or retards environmental quality. If the financial sector is engineered to be pro-climate mitigation, funds will be allocated at the least cost into projects and sectors that ultimately reduce climate change. A novel work by Schumpeter reveals that a well-developed financial sector facilitates capital accumulation and advanced technology to spur economic activities. Thus, the financial sector plays an intermediary (mediator) role between capital and the environment. In the natural sense, a weak mediator is easily influenced. Therefore, a weak financial sector will mimic the type of capital received, hence, if the capital is toxic intended, it will adversely affect the environment. On the contrary, if the level of financial sector development is robust, it corrects market failure and capital impact on the environment may no longer be damaging.
Financial sector development can be a catalyst to climate change mitigation through its three components: financial deepening, efficiency, and access. Financial deepening measures the depth of credit availability and investment options. As a result, the financial sector can be restructured to offer more credit to environmentally friendly sectors. This will encourage investment into the development of low carbon technologies and subsequently offer environmentally friendly goods at competitive prices. The level of financial efficiency, on the other hand, influences the cost of funds and the return on investment. To promote investment in low carbon technologies or encourage the uptake of clean energy, the cost of funding those investments should be relatively cheaper. This can be done through a deliberate central government policy to influence the determinants of borrowing and lending rates. Largely, macroeconomic indicators such as inflation, policy rate, exchange rate, among others which are at the heart of political decisions influence the financial sector efficiency. It behooves governments to believe in climate actions and take strong decisions to improve financial sector efficiency. Another aspect of financial sector development is access. Access measures the expansion in the financial sector. As the financial sector expands, households that hitherto were neglected get access to finance and this may exacerbate or recede climate change depending on the goods and services they purchase. Financial access increases purchasing power, hence demand goods and services. Low carbon products such as clean energies for cooking, lighting, and refrigeration can be modeled along with financial access by offering special credit/funds to purchase such items. In this case, the financial sector is not just expanding but climate adaptation has been incorporated into the expansion.
Financial sector development cannot mitigate climate change without the direct involvement of central governments. If the private sector is left to dictate financial sector development, it will surely be influenced by profit. Currently, low carbon technologies and products are relatively expensive than carbon-intensive ones and this can be attributed to the under-investment in the sector. It will take some time for early investors in the low carbon products to recoup or make gains on their investment. Due to this, central governments are in the best position to commit financial resources to develop the low carbon sectors and also regulate the financial sector to make cheap funds available to attract investors. Apart from the government taking the lead to make available prolonged and sustained funds to the low carbon sectors; specific regulations that outlaw investment in environmentally destructive sectors can be fashioned to redirect investment into low carbon sectors.
To a large extent, financial sector development requires a political will to enable it to mitigate climate change. The United Nation’s Secretary-General summarizes this beautifully:
“We are currently way off track to meeting either the 1.5° C or 2° C targets that the Paris Agreement calls for. We need to reduce greenhouse gas emissions by 45% from 2010 levels by 2030 and reach net zero emissions by 2050. And for that, we need political will and urgent action to set a different path.” (Guterres, 2020)
ACU Commonwealth Futures Climate Research Cohort Program
Being part of the ACU Commonwealth Futures Climate Research Cohort has been helpful to me in several ways. The workshops organized by the ACU in research leadership, knowledge exchange, stakeholder engagements, research to action, etc. have sharpened my research skills and improved my understanding of how to translate academic research into implementable projects.
One unique thing about the cohort is its diversity. The cohort comprises 26 members with diverse backgrounds from different countries across the commonwealth. This has offered me international collaborations and friendships. Recently, I teamed up with four other colleagues to deliver a virtual international climate change conference.
As part of the program, the cohort was grouped into sub-teams to undertake implementable projects. My team researched “Technology and Policy Mapping for Sustainable Energy Access in the Global South”. We were five in a team from different countries and different time zones. It was fun participating in virtual international collaboration. The project also gave a practical experience of the modules learned at the workshops.
I cannot forget the unmatched publicity the ACU has given to me. It is offering several opportunities both locally and abroad. I can only be thankful to the ACU for creating this cohort and offering me the opportunity to be a part.
