The World Economic Forum Report (2023) presents a significant impact of climate change and environmental risks on economies, societies, and markets. Important to note are the implications for financial stability that cannot be ignored.
Increased severity and frequency of extreme weather events such as floods, landslides, increasing temperatures, heat waves, droughts, pests and diseases can affect resource availability and business operations. This results into adverse business outcomes such as business interruptions and reduced returns. However, it also presents an opportunity for innovative financing to increase the economic and social resilience to climate impacts.
The World Meteorological Organization (2021) estimated global economic losses worth US$ 2.32 trillion between 2000 and 2019 as a result of climate change. As such, there is an undeniable impact on the creditworthiness of investors and therefore a strong link with the credit risk profile of financial institutions.
There is a disproportionately higher impact of climate change on developing countries due to their limited preparedness and less resilience mechanisms. Accordingly, the International Monetary Fund (2022) reckons that emerging and developing economies will need significant climate financing in the future to reduce their emissions and adapt to the physical effects of climate change. Uganda in her recently updated NDCs will need an estimated total cost of US$ 28.1 billion by 2030 to implement the proposed climate action plan. Financing is needed to support climate smart agriculture, clean energy, low carbon industries, climate resilient infrastructure among other priorities.
The urgency to scale up investments in mitigation and adaptation to climate impacts is now a critical issue worldwide. As facilitators of the economy, financial institutions have a central role in the transformation to low carbon and climate-resilient development given their unique position in facilitating the capital flows through their lending, investment and advisory roles, financing of innovative technologies with less stringent conditions and incentives to maximize the impact of such measures.
While credit from financial institutions dominates financing in majority of the businesses in Uganda, only a small portion, is explicitly classified as green. The lack of clarity as to what constitutes green finance interventions and products, such as green loans and green assets, presents an obstacle for investors, enterprises and financial institutions seeking to identify opportunities for green investing. This makes it difficult to efficiently allocate financial resources for green projects and assets.
Whereas green finance definitions are complex, efforts to understand green finance are now converging on the financing of activities that can address climate change risks through mitigation and adaptation and other environmental challenges through natural resource conservation, biodiversity conservation, and pollution prevention and control.
Financial institutions such as the World Bank (2020) provide a guide for developing a common taxonomy. The idea is to identify eligible activities that can be financed more easily and consistently and measure financial flows toward sustainable development priorities to reduce the risk of green washing.
While many financial institutions have already taken steps to reduce the direct impact on the environment stemming from their own activities and investments, the European Banking Federation (2017) notes that their main contribution lies in providing financial solutions for climate sensitive projects for all customer segments including SMEs, large companies, and start-ups.
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