Even the strongest critics of climate change can no longer deny that climate change is real. Investing in low carbon and climate resilient development is the need of the hour. The economic impact of natural hazards has risen from $10 billion per annum in 1975 to almost $400 billion in 2011.
According to the International Environment Agency (IEA’s) World Energy Investment Outlook, $53 trillion is needed to put the world on a path that would see global temperature increase limited to 2 degree Celsius — generally accepted as a ‘safe’ increase, within which climate change would not spiral out of control. This is a phenomenal amount and meeting this scale and pace requires transformational changes in the public and private climate financial architecture.
This article explores the reasons and incentives for private sector contributions, and why investing in mitigation efforts and adaptation initiatives is not just important to meet the challenges of climate change but can also make good commercial sense for businesses.
Climate change can bring new risks or exacerbate existing ones, which may affect a company directly through its own operations, or indirectly through its value chain. In Pakistan, climate-induced disasters have seen a steep increase in the last two decades. These disasters have affected not just human lives and livelihoods, but also small and large businesses. In Karachi, for instance, 1,200 people lost their lives in 2014 to a severe heatwave, and the national exchequer suffered a loss of several thousands of dollars. Similarly, the 2010 floods severely impacted the agriculture and fisheries sector and led to damages worth almost $10 billion.
It is evident that risks such as increased commodity or input prices, disruption of supply chain, changing market demand or reputational issues can have a negative impact on a company’s profits. Therefore, avoiding, ameliorating and combating the risks associated with climate change is the first and foremost incentive for climate investment by the private sector.
The negative impacts of climate change are expected to increase in the coming years. Particularly susceptible are sensitive economic sectors, those with high value fixed assets, and those having extensive supply chains. The agriculture industry, which forms the backbone of Pakistan’s economy, is likely to be severely impacted by changing weather patterns and unpredictable availability of water. Similarly, several industries that have their infrastructure near the coast will suffer damage from rising sea levels and sea water intrusion. Therefore, it is important to climate proof investments, assets and infrastructure now, so as to provide an insurance against higher losses in the future. Contributions from the private sector can play a pivotal role in this.
While many private sector companies are familiar with the risks brought by climate-induced disasters, there is less familiarity regarding the opportunities that climate change brings. Early movers can maximise on the benefits brought by increasing demand for new products and services and capitalise on these opportunities. Business ventures that develop products to reduce greenhouse gas emissions or build climate resilience are more than likely to become increasingly popular in the future. Take the case of the Rahimafrooz Group in Bangladesh. The company was established in 1954 and entered the green energy market with solar battery products. When the climate change agenda gained momentum in the 1990s, a significant amount of development funds was channelled to encourage alternative sources of energy.
Over the decades, Rahimafrooz grew in size, scale, and diversity and now has over 3,000 people employed directly and a further 20,000 indirectly, as suppliers, contractors, dealers and retailers. Similarly, Allianz Insurance Company, previously providing flood insurance only in India, has expanded its operations to six other countries in view of increasing demand. In Pakistan, NESPAK (National Engineering Services Pakistan) prepared national guidelines for disaster resilient housing, following the 2005 earthquake. Their reputation of having the required skills and technical capacity to build disaster resilient infrastructure has created a major business opportunity for the company.
The agriculture sector, though one of the most vulnerable, also has the most incentives to invest in climate resilience. According to research carried out by Pricewater House Coopers, globally, world seed markets were worth $45 billion in 2012. If a low estimate of 20 percent of those markets was at risk from climate change, there could be a market of $9 billion for climate resilient seed types. In Pakistan, investing in research and development of climate resilient seed varieties, such as drought resistant and saline resistant seeds, will not only help feed a burgeoning population, but also make good commercial sense for investors. Similarly, business savvy investors can capitalise on the opportunities in the energy, insurance and financial sectors to ensure viability of their investments.
One of the opportunities for the private sector lies in accessing vast amounts of international climate funding streams available for countries like Pakistan. Advanced economies have formally agreed to jointly mobilise $100 billion per year by 2020, from a variety of sources, to address pressing mitigation and adaptation needs in developing countries.
The Green Climate Fund (GCF) is a comparatively new funding institution, having started operations in 2014. However, it is currently the most important one, since much of the climate finance for developing countries will be channelled and disbursed by this fund. Accessing funds from the GCF is dependent on meeting the stringent fiduciary standards and submitting ‘bankable’ project proposals in line with the fund’s requirements and national development priorities.
The GCF recognises that the private sector is a crucial player for climate investment and has a special Private Sector Facility, with a mandate to fully engage private sector investors, developers, entrepreneurs, corporations, and small- and medium-sized enterprises (SMEs) in climate-sensitive and resilient projects, throughout the developing world.
Ali Tauqeer Sheikh, CEO of LEAD Pakistan, says: “Companies can access international climate funds to finance initiatives such as solar parks, wind farms, disaster resilient infrastructure, flood protection embankments, even mass transit transport schemes such as the metro bus”. He also says: “And in this manner, a company can not only contribute towards climate compatible development but also gain monetary benefit.”
In Pakistan, private sector climate investment has so far been rather small. However, given enabling conditions and removal of existing barriers, the private sector can perform a critical role in building an alternative future for the country. This is because contributing towards emissions reduction and building resilience will not only contribute towards combating climate change but, if done right, can also ensure a high rate of return.
The writer works as team leader, Climate Finance Readiness in the Climate Action Programme of Lead Pakistan.
Email: Email: fovaislead.org.pk