Climate change is expected to transform the way economies operate worldwide as a result of its potential destabilising effects on both the real and financial sectors of the economy. To date, many countries have dealt with climate change as involving temporary events of limited, uncertain and marginal impact. As a result, its associated risks have not been properly accounted for or assessed at the transaction, portfolio, market or economy levels.
Hazards associated with global warming and extreme weather conditions such as flooding, sea-level rises, drought and heat stress, entail physical and transitional risks that may result in huge financial costs. These may damage corporates’ assets, disrupt their supply chains, transport and delivery systems, and hence negatively affect their operational and financial performances.
For this reason, it is important to promote systemic change in financial systems worldwide to embed climate-associated risks and opportunities into business and investment decision-making in order to better identify their financial and economic implications at the transaction, institutional and economy levels. In other words, the financing model needs to gradually shift from conventional to sustainable to smooth the transition to a low-carbon green economy.
According to the Paris Agreement of 2015, the transition to a more environmentally sustainable future entails the adoption of both mitigation and adaptation measures. Mitigation refers to the transition to a low-carbon energy economy, whereas adaptation refers to the process of adjusting to actual or expected climate conditions to limit their harmful effects and realise possible benefits. To that end, special global climate funds, such as the Green Climate Fund (GCF) and Global Environment Facility (GEF), were established to efficiently channel public resources and to catalyse private capital towards climate-related investment opportunities.
Currently there are 11 climate funds operating in the Middle East and North Africa (MENA) region, where 15 countries receive climate finance, in the form of concessional loans, mostly from the Clean Technology Fund (CTF) managed by the World Bank. Climate finance refers to financial resources mobilised to fund actions directed to mitigating and adapting to climate-change effects.
Morocco and Egypt are among the top recipients of climate funds in the region, receiving about 80 per cent of the total approved climate finance in the MENA region of 54 per cent and 27 per cent, respectively. These funds are mostly directed to climate risk-mitigation projects, specifically renewable energy and energy efficiency, whereas only a smaller fraction is directed to adaptation, such as water-management, resilience, and food and agriculture projects.
According to the Climate Fund Update (2019), the MENA region receives only about five per cent and 10 per cent of total global public climate finance dedicated to adaptation and mitigation, respectively. These shares are low relative to those received by other regions such as Latin America and Sub-Saharan Africa, especially since MENA is highly vulnerable to climate change, and there are pressing mitigation and adaptation needs relating to drought, rising sea levels, land degradation, land desertification and water conservation.
It is a fact that all the countries in the region are water-stressed, and it is expected that climate change will further worsen the situation. Most MENA countries are expected to suffer a state of water scarcity by 2025. Such concerns have important implications for the region’s agricultural production, food security and social welfare. The situation is exacerbated by the fact that the region imports more than 50 per cent of its food needs and its most vulnerable populations live in rural areas. Such issues could seriously affect the social contract in countries where the majority of the population is young and has high economic aspirations.
It is therefore important to examine the policy, regulatory and institutional frameworks in the region to assess each country’s readiness to integrate and promote climate finance in order to safeguard the stability of the financial system and to reduce the vulnerability of MENA economies to risks associated with climate change while promoting investment in climate-related opportunities. This would enable financial-sector constituents to better identify, assess, price and manage climate-related risks. Such constituents include governance bodies, such as regulators and policymakers, as well as finance providers such as banks, insurance companies, and pension funds. This is in addition to asset managers, rating agencies and institutional investors.
Smoothing the transition to more sustainable economies necessitates the development of financial policies that can promote climate-resilient investment. For this reason, it is important to incorporate climate-change considerations into the financial-sector governance system through a number of climate risk-management measures. These include, but are not limited to, building the capacity of implementing agencies through training and technical assistance, as well as enforcing robust disclosure and reporting mechanisms and incorporating climate-related risks into prudential regulation and supervision practices. This is in addition to adopting well-harmonised commonly used definitions, methodologies, and tools.
It is important to realise that the expected costs associated with the promotion of climate-resilient investment need to be shared and borne by both public and private capital. To that end, international-development organisations like the World Bank, the International Finance Corporation, the United Nations Development Programme, and the United Nations Environment Programme can play an instrumental role in assisting the MENA countries in adapting innovative financing mechanisms, such as blended finance, green and blue bonds, impact bonds and debt for nature swaps.
These would enable the state in the MENA region to forge profitable public-private partnerships and to provide incentives to crowd in private investment to climate-change related opportunities which have long been perceived as public goods where investment lacks attractive market returns.
Today is an opportune time for the MENA countries to place climate change high on their policy-reform agendas and to fully integrate climate finance into their systems. This requires raising the level of awareness of the relative merits of climate finance and the risks and opportunities associated with climate change among all stakeholders, including private investors whose increased participation in the economic sphere has been an objective over the past few decades in the region.
MENA region leaders have also shown a commitment to the achievement of the United Nations 2030 Sustainable Development Goals (SDGs) adopted in 2015. These include SDGs related to ending hunger, improving nutrition, achieving food security and promoting sustainable agriculture. This is in addition to SDGs aiming at improving access to clean water and sanitation and to clean and affordable energy as well as promoting decent work for all.
The writer is a former economic advisor at the Ministry of Investment and is currently an independent consultant.
*A version of this article appears in print in the 27 February, 2020 edition of Al-Ahram Weekly