Why talk about climate finance and not just climate finance? – 03/04/2024 – Why? Economês in good Portuguese

Last week the first Brazilian Climate Finance Forum took place, an official G20 event that brought together representatives from civil society, the public and private sectors and multilateral financing bodies. The need to mobilize resources to support climate action is immense and urgent. It was no surprise, then, that this was the predominant topic on the forum.

However, “funding” and “finance” are not synonymous. In a simplified way, the first concerns who pays the bill and the second deals with how to put a price today on events that will only occur in the future, or price future events, in the jargon of finance theory.

It turns out that the future is uncertain. So, to price it, we need to consider what each person expects to happen in the future. Different people have different expectations about the likelihood of each possible future scenario occurring. This is why so many transactions take place on stock exchanges around the world. Financial markets provide instruments for these expectations to be negotiated.

Given that there is also enormous uncertainty associated with the climate crisis, each economic agent has different expectations about its effects. This may seem chaotic, but it is familiar ground for finance theory. For her, climate risk is just another source of systemic risk, that is, something that cannot be diversified by creating investment portfolios. The good news is that we don’t need to start from scratch, because the techniques for dealing with this new systemic risk are basically the same as those that have been used for decades.

This has caught the attention of finance scholars around the world and fueled important advances in understanding climate finance in recent years. The discussion has a crucial implication. If we want to channel resources – especially private ones – for investments in climate action projects, it is essential that project risks are manageable. This will only happen with the use of finance theory that prices future events today and financial market instruments to negotiate that future now.

The amount to boost the effective confrontation of the climate crisis is astronomical. UN estimates indicate that developing economies will need US$7 trillion annually to reach their greenhouse gas emission reduction targets by 2030. And this is just the mitigation bill, but we already know that we also need to invest in mitigation actions. adaptation.

It is unrealistic to think that there will be resource mobilization of this magnitude without significant participation from private sources. However, private investments will only occur with adequate risk management, which requires, in turn, the systematic use of finance theory and innovations in the financial market.

For this to become a reality, we must discuss climate finance with the same vigor and urgency that we dedicate to climate finance today.

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