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Financing Climate -Resilient Development

Author: Chantal Naidoo- Environmental Finance- Development Bank of Southern Africa

( Article Type: Sustainable Development )

A new role is emerging for development finance institutions such as the Development Bank of Southern Africa (DBSA), to strategically realign their development objectives to effectively respond to heightened evidence of the impacts of global climate change and deepening economic and social challenges. As the world grapples with unprecedented natural disasters, shifting agricultural planes, water scarcity, heat waves, prolonged droughts and unseasonal floods against a sunset of protracted climate negotiations and the proliferation of global and sectoral agreements, development finance institutions are challenged to balance their development interventions between supporting volatile and growing economies and tackling the fundamental causes and symptoms of climate change. The developing country story-line still speaks of improving the livelihoods of the poor and vulnerable and creating a sound economic base for future growth. Pursuing growth as usual is, however, no longer possible as evidence mounts that the natural environment is rapidly changing, and so must we. Setting aside the heated climate science debates, climate change could be regarded as a potential failure of the sustainable development aspirations established under various global agreements and compacts. For development finance institutions, navigating the social and environmental, political and economic dimensions of climate change is complex, especially in light of their specific national mandates. A clinical assessment brings forth a maze of interdependencies revealing that:
• Protracted climate negotiations will influence the growth path of developing countries as discussions on funding, technology and technical capacity transfers for transition to low carbon growth and development continues.
• Climate change and low carbon investments will dominate discussions on policy and resource programmes of bilateral, multilateral and private sector organisations.
• Development tensions will arise between national development priorities and international climate pressures.
• Technology transfer and climate finance will become part of the development assistance packages to developing countries.
• Significant innovation is required to support developing countries to embed climate risk into their development paths. Responding to climate change has distinct regional implications in that natural resources (e.g. water, pastoral land, air, oceans) do not adhere to the neatly mapped political boundaries. Sub-Saharan Africa is widely acknowledged as being one of the most vulnerable regions to climate change. Tentative development progress may be undermined by rampant climate change, creating a humanitarian crisis. Thus, development finance institutions such as the DBSA operating within the region also holds a duty of care to reduce the vulnerability of its neighbouring countries through investing in climate resilient infrastructure and fostering greener regional development and integration.

Translating climate gloom into a development opportunity
Against this background, development-driven and country-owned interventions that embed climate risk within the national development growth path translate the potential climate gloom into a development opportunity. Climate change creates an opportunity for an alternative development path upon which job creation, new economic activities, innovation, environmental planning, capacity and greater social cohesion can be built.
President Zuma, in his closing remarks at the United Nations Framework Convention on Climate Change (UNFCCC) COP 16 Summit, offered the South African position on climate change. He stated that “through our actions, we also need to respond to the notion that there is a trade-off to be made between faster economic growth and the preservation of our environment. We must prove that faster economic growth can be achieved alongside the sustainable management of our natural resources” (SA President Jacob Zuma, 9th December 2010). Against this backdrop, the green economy emerges as response strategy to transition South Africa into a low-carbon and greener growth trajectory through a combination of mitigation and adaptation response strategies. These will translate technology into development opportunities through greener local industrialisation and climate-resilient infrastructure. South Africa was first among developing countries to voluntarily propose targets for emission reductions by 2020 and 2025 – imagine our future as a nation: the adaptive capacity of the environment to extreme climate variability is improved, a diversified economy with labour intensive industries operating at low emission levels and sustainable and quality livelihoods for all South Africans, particularly the growing youthful populace.

Planning from this vantage point requires substantial policy reform, knowledge of key priority actions within the short to medium term, to trigger innovation, entrepreneurism and investment and sustainable resources to support the transition. The degree of change required is potentially overwhelming and can only be achieved through a series of separate although interdependent and mutually reinforcing interventions. Yet commencing the transition is exceptionally challenging for the following reasons:
• Decision-makers are often conservative in their approach to policy reforms and fiscal spending while green interventions require a level of innovation and risk-taking;
• Externalised costs of disease, storm damage or water scarcity resulting from damaged ecosystems are seldom factored into decision-making on spending.
• Full life-cycle costs of developments and their cumulative impact on ecosystems are not considered.
• Green interventions are perceived to be more expensive, although international precedent shows that the additional investment is small (0-10%) and recoverable from the significant benefits.
• Resourcing green interventions requires access to innovative financing and technical support

Within the economic and social transformations, new green sectors are emerging while other primary sectors are migrating to lower carbon intensive operational methods. As the new sectors develop, there are direct linkages with the core strategy of South Africa’s New Growth Path, to generate employment and localise technology. Key enablers are required for a sustainable transition that provides for new industries to be created such that they are independent and operate competitively after the initiation stage.

Sustainable finance as a key enabler
A staggering 1.5 – 2% of global GDP per year is estimated as the incremental investment required to transition to a green economy (UNEP-Finance Initiative, 2010). Beyond any reasonable doubt, no single player within the international and national finance system (either public, private or philanthropic) is capable of absorbing such costs. The sands are passing through the hour glass rapidly and urgent action is required within the next 10 to 15 years. More than ever before in the history of the global finance system, connective and interdependent partnerships among different finance providers are essential to trigger the magnitude and depth of change required. Pathways to new sector development Translating climate change into a green growth strategy

The Copenhagen Accord of 2009 called upon developed countries to provide to developing nations new and incremental sources of funding for climate interventions of $30 billion in the short term (2010 to 2012) and a longer term target of $100 billion per year by 2020. These amounts are to be aggregated in a proposed global climate fund. A comprehensive climate finance package is required, which combines public and private mechanisms as well as resources for technical support and capacity development. Climate finance measures may include market mechanisms blended with different funding sources (such as multilateral finance, bilateral finance, private wealth and pension funds, carbon credits or Reducing Emissions from Deforestation and Forest Degradation (REDD) credits) and different enabling instruments (such as government guarantees, risk sharing, insurance, taxes and fiscal incentives). Since the UNFCCC’s COP16 Cancun meeting in 2010, significant work is underway to create the institutional mechanism for a Global Green Climate Fund.
The international climate finance architecture is a complex landscape and a key issue for the planners will be to ensure that the mechanism enables access to grass-root organisations, and based on country-driven interventions. It is anticipated that the Global Green Climate Fund may be operational by 2014 while the initial principles of such a fund will be announced at COP17 in Durban, 2011. Framing international climate finance as a contributor to the domestic finance system means that there should be a symbiotic relationship between state and private sector funding for the optimal allocation of risk. This frame is however incomplete without recognising the key developmental role played by non-governmental organisations that respond swiftly to needs at a grass-root level. These organisations often provide the initial base upon which to scale up developmental interventions.
Allocations from the Global Green Climate Fund would not wholly address the economic and social costs associated with climate change; therefore South Africa has to seek to build a sustainable climate finance framework that is not primarily dependent thereon.
The country has the benefit of a well regulated financial sector, mature and sophisticated capital markets, astute institutional investors and entrepreneurial capital. These sources should be unlocked and mobilised to support the transition.
Within South Africa, the domestic financial system has been cautiously optimistic about green and climate-related interventions focusing attention primarily on renewable energy and energy efficiency. On a smaller scale, alternative technology interventions in waste management, water, sanitation, transport and biodiversity are growing.

In addition, NGOs are focused on mitigation and adaptation programmes within communities, demonstrating alternative technologies through donor and CSI funds. The positive proliferation of activity bodes well for South Africa’s future. Access to early stage project and technical support remains a key challenge for the majority of green projects although there is significant international donor interest and commitment to South Africa. Yet these individual efforts lack a grand unifying vision and the fragmented approach creates immense inefficiencies and fails to achieve scalable impacts. One of the key issues cited by seekers of finance is that there is poor knowledge and access to the available climate related resources. While providers of finance often comment on the need for greater clarity and integration of the national climate and green priorities. By entrenching climate change within the national priorities as a development intervention and ensuring that there is better coordination between programmes and funding sources, a pathway may be cleared towards a sustainable climate finance framework. Alignment provides for a deeper developmental impact and raises the potential to attract additional investment to supplement fiscal allocations.
Facilitating the matching of national priority programmes with funding sources is one of the key functions of a proposed South African climate finance coordination mechanism, which builds on prior work by the DBSA on behalf of the Department of Environmental Affairs in December 2010. The facilitation function of such a mechanism may be expanded to include technical support and tracking the response strategy through sound monitoring, reporting and verification standards. If implemented, South Africa would be established as a country that has a development-driven and country-owned climate finance strategy and thus, attracting the depth and breadth of resources within the context of its national development priorities. From this position, South Africa should build a strong platform for regional priority programmes and linkages to increase the adaptive capacity of the SADC region to climate change.
The complementary mandates of the DBSA and its sister development finance institution, the Industrial Development Corporation are one example of how national priority programmes may be integrated to achiever deeper impact to create the new industrial and infrastructure sectors such as renewable energy, energy efficiency and shifts in transport modalities. Coordinated green interventions between these institutions will instil investor confidence in the new ‘green economy’: IDC investing in green industries while the DBSA utilises such industries to build greener (climate resilient) infrastructure. Through coordinated efforts within government, private and international capital are effectively mobilised and disbursed to achieve economic, social and environmental benefits.

Greening infrastructure as a catalyst for economic growth and social cohesion
South Africa’s rich natural infrastructure is a proud heritage we all share and represents the sound economic base upon which the growing youthful populace should be entitled to build their futures. Putting this into context, two thirds of all unemployed persons in South Africa are presently below the age of 35 (National Planning Commission, 2011) while one in every third person in Africa is expected to be under the age of 35 by the year 2050 (UN World Ageing Report, 2009). The National Planning Commission’s 2011 Diagnostic Overview paints a crisp picture of the fragile elements of South Africa as a development state, citing among other factors that ‘poorly located and inadequate infrastructure limits social inclusion and faster economic growth’. The DBSA derives its development investment mandate from the national infrastructure target of R800bn over the 2011/12 to 2013/14 Medium Term Expenditure Framework (MTEF) cycle announced in the Minister of Finance’s February 2011 budget speech. The DBSA is developing national implementation programmes to finance major infrastructure programmes in key sectors being health, education, human settlements, energy and transport. Herein lies the opportunity to build climate-resilient infrastructure for South Africa and within the region to increase the capacity of the infrastructure assets over its operational life time to respond to extreme weather variability. Quoting Minister Gordhan, “now is the time to do extraordinary things, in dealing with our particular development circumstances. It requires new ideas and bold efforts from all: government, business, labour, communities and every family” (National Budget Speech, 2011). Rhetoric and protracted climate negotiations are distracting attention away from the vulnerable faces of climate change, particularly the youth, rural communities, children and women. While we tarry about who is to blame for the injustice and current status quo, it is equally important to confront the reality that we need bold, swift and immediate action.
In the context of its role within the climate finance architecture and the financial ‘ecosystem’, the DBSA is committed to serve as a development catalyst implementing government’s policies by bridging the gap between state and its stakeholders including business and civil society. Since being institutionalized in 1983, the DBSA has invested in the rich biodiversity and conservation of the country working with local government, national agencies and civil society to empower communities and preserve natural landscapes. The technical capacity within the organisation spans over 80 years of collective experience and its interventions have a distinct focus on creating sustainable livelihoods in response to changing environmental states.
Against this backdrop, the DBSA emerges as a potential change agent to catalyse the mainstreaming of green technologies into the nation’s infrastructure delivery programmes to secure a future for our youth, our people, our neighbours and all living things.

The crisis doesn’t only make us free to imagine other models, another future, another world. It obliges us to do so. - President Nicolas Sarkozy