Experts gave insights on the real-world operationalisation of Article 2.1(c) of Paris Agreement while country blocs put forth views on its scope and complementarity with Article 9
The Sharm el-Sheikh Dialogue’s first workshop of the year on the scope of Article 2.1(c) of the Paris Agreement and its complementarity with Article 9 was held over the last two days of the Bonn Climate Change Conference.
The Dialogue was established at the 27th Conference of Parties (COP27) to the United Nations Framework Convention on Climate Change (UNFCCC) in Sharm El Sheikh, Egypt in 2022 to provide an independent space within the negotiation framework for these discussions.
What are Articles 2.1 (c) and 9 of Paris Agreement?
Article 2.1(c) of the Paris Agreement calls for a reconfiguration of the global financial system to bolster the global response to climate change. It aims to ‘make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’. It is widely interpreted to be the overarching finance goal of the Paris Agreement.
Aligning the world’s public and private finance flows towards climate mitigation and adaptation in accordance with Article 2.1(c) is known as ‘Paris alignment’.
Article 9 of the Paris Agreement, on the other hand, places the obligation specifically on developed countries to provide financial resources to assist developing countries with climate mitigation and adaptation. It further stipulates that ‘developed country parties should continue to take the lead in mobilising climate finance from a wide variety of sources, instruments, and channels, noting the significant role of public funds’, and that there should be special consideration of countries particularly vulnerable to climate impacts.
What did expert and practitioner panels say
The workshop in Bonn was focused on climate adaptation and Paris alignment. It featured panel discussions where experts and practitioners offered insights on making finance flows consistent with adaptation and climate resilience objectives, showcasing both national and regional cases and examples.
They also delved into the benefits and impacts of linking approaches for climate-consistent and scaled-up finance flows with broader sustainable development objectives.
Ambassador Seyni Nafo, coordinator of the Africa Adaptation Initiative, highlighted challenges in aligning finance flows with Africa’s adaptation and resilience needs because of the “lack of capacity to adequately perform climate impact analyses as basis of adaptation action; insufficient ability to develop sound projects and programs at the scale and speed necessary; unawareness of the adaptation investments cases there are; inability to meet requirements and successfully follow all steps for accreditation to climate funds; and highly scarce concessional finance and technical assistance to support private investments”.
In practice, different financial actors carry out real-world activities to operationalise ‘Paris alignment’ under Article 2.1(c). One such financial actor is central banks. Irene Heemskerk, head of the climate change centre, European Central Bank, provided key perspectives on the role of central banks and financial supervision for a climate-resilient financial system.
Heemskerk made economic arguments on why there is a need to adapt vis-à-vis the risks managed by central banks through their monetary policy and regulatory functions. One such risk is the widening of the insurance protection gap due to climate change.
“On average, only one-fourth of climate-related catastrophe losses are insured in Europe. Climate change-related losses put pressure on the macroeconomy and financial stability,” Heemskerk pointed out. She added that insurance against climate-related catastrophe losses is necessary because the more insurance there is, the quicker economies take to bounce back; less insurance translates to increased pressure on the fiscal space of the governments.
Furthermore, climate change and environmental degradation pose financial risks that banks must address. According to Heemskerk, the approach of the European Central Bank — which oversees the banks within the European system — involves assessing the economic impacts and financial risks by:
- Integrating climate change impacts into climate scenarios and the analytical frameworks used for macroeconomic projections;
- Improving the availability of data to support physical risk analysis;
- Exploring the impact of adaptation; and
- Working with other banks and supervisors that are part of the Network of Central Banks and Supervisors for the Greening of the Financial System (NGFS). NGFS is a group of 114 central banks and supervisors, launched at the Paris One Planet Summit, contributing to the development of climate- and environment-related risk management in the financial sector.
On the private sector side, Rob Cameron from Nestle, a multinational food and beverage company, encouraged the private sector to deploy investments representing climate-consistent financial flows in decarbonisation activities.
To support its Net Zero programme, Nestle made part of its financial flows consistent with the Paris Agreement in order to undertake decarbonisation activities such as deforestation, regenerative agricultural practices, and just transition.
Plenary reflections
The plenary reflections made at this year’s workshop saw commonalities and divergences emerge between different country blocs on the implementation of Article 2.1(c).
Sehr Raheja, programme officer for climate change at Delhi-based think tank Centre for Science and Environment, who moderated a breakout group discussion at Bonn, said one of the overarching divergences was on Article 2.1(c) and its complementarity with Article 9 was “whether Article 2.1(c) is the way of implementing obligations that are within the UNFCCC and the Paris Agreement”.
The divergence also extended to the private sector’s involvement in climate adaptation, including climate-risk-informed approaches driving up the cost of capital for countries perceived as high-risk and the manner in which credit-rating agencies influence the access to capital for certain countries.
There were certain commonalities or convergences between country groups on certain issues, as mentioned by Raheja. There is consensus on the inadequacy of finance for climate adaptation, with some regions lagging more than others. Developing countries also have existing fiscal constraints and debt burdens, with a simultaneous need to receive more financing for climate adaptation.
Other areas of agreement included the need to train professionals and institutions to use financial and economic tools for climate resilience, the need for increased inter-ministerial collaboration between countries’ environmental, land, water and climate ministries with the finance ministry and the role of the public sector in financing climate adaptation.
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