Paved with obstacles
The path to successful transition financing is littered with obstacles. One of the biggest obstacles is the limited financial resources of many governments, particularly in developing countries, to finance the transition on their own. The different costs of capital in developed and developing countries, which are exacerbated by structural obstacles such as sovereign risk, further complicate the situation.
In addition, current financing flows for adaptation and mitigation fall far short of needs, with the largest gaps in developing countries. This deficit is exacerbated by regulatory, cost and market barriers that prevent investment in low-carbon projects. The majority of financial resources are mobilised domestically, but the depth of capital markets in developed countries is far greater than in developing countries, leading to an imbalance in the mobilisation of large-scale financial resources. The corresponding funds are not available in the regions most affected by climate change.
Overcoming these challenges requires the cooperation of national and international actors. Targeted financial market framework conditions and an effective infrastructure form the foundation for “financial inclusion”. Clear policy guidance from governments and the international community, together with accelerated financial cooperation, plays an important transformative role in expanding financial flows for climate protection and adaptation.
Private institutional investors also play a key role in supporting transition initiatives, underscoring the importance of integrating just transition considerations into broader ESG and green finance initiatives. A mix of public action and private commitment can effectively overcome barriers to financing the transition.
In the broader discourse about financing the transition, blended finance is proving to be a compelling mechanism to catalyse the massive shift toward sustainability. Blended financing combines public and private financing. The public sector serves private investors to reduce investment risks in developing countries and thus increase their willingness to invest in climate protection and the Sustainable Development Goals (SDGs). This approach is particularly important for low- and middle-income countries, where the perception of risk often outweighs the willingness of private investors to invest capital.
By providing a buffer of public or philanthropic resources, blended finance not only attracts private investment, but also ensures that these investments have tangible environmental and social impacts. As the world grapples with the urgency of climate action and sustainable development, blended finance is emerging as a key enabler, ensuring that the transition to a greener economy is not just a vision but a financially viable reality. This innovative financing model is a glimmer of hope and aims to close the gap between the investments currently made and the investments necessary for a sustainable path into the future.
Fairness and justice
A just transition is not only about environmental sustainability, but also about fairness and justice in the transition process. The interdependence between climate and social issues is evident, as policies that focus on timely and cost-effective climate action without considering social and economic resilience can inadvertently increase social vulnerability. Therefore, climate finance that supports a just transition is crucial to the success of a low-carbon transition at the global level.
This area of tension between ecological and social aspects is omnipresent. In the real estate sector, the tension between social and environmental goals is often evident in the development of green buildings in urban areas. A vivid example of this tension is the effort to build energy-efficient and environmentally sustainable buildings in neighborhoods that have previously been inhabited by low- and middle-income people.
On the one hand, green buildings make an important contribution to the goals of ecological sustainability (e.g. lower energy consumption, lower greenhouse gas emissions). On the other hand, the introduction of “green buildings” in these neighborhoods may inadvertently lead to social problems such as gentrification. Developing environmentally sustainable real estate often attracts higher-income residents and drives up property values and costs of living. This can lead to long-established, lower-income communities being displaced, leading to an erosion of the social fabric and the loss of affordable housing. This area of tension highlights the need for integrated approaches that balance environmental sustainability and social justice.
Paths into the future
The transition financing landscape is complex - with challenges affecting government, the private sector and individuals. Nevertheless, the opportunity to make a difference is immense. The transition to a low-carbon economy can be achieved through credible corporate climate plans, greater transparency and the promotion of public-private partnerships. Financing the transition is not just about reducing environmental risks, but also about creating a future where social prosperity and sustainability go hand in hand.
