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Is Sustainable Finance the Solution to Funding Sustainable Development Goal 13: Climate Action?

Environmental Law student Amanda Scheichet discusses the impact of sustainable finance initiatives on the United Nations’ sustainable development goals.

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It has been almost ten years since the SDGs (Sustainable Development Goals) were adopted in 2015 by the United Nations General Assembly as a call to action to end poverty, protect the planet, and ensure prosperity for all by 2030. These 17 interconnected goals address a wide range of issues, spanning across ESG (Environmental, Social, Governance) topics, including gender equality, industry and infrastructure, climate action, environmental degradation, and eradicating extreme poverty1. With only six years to go to reach these ambitious goals, the 2024 Financing for Development Report outlines that nearly half are “moderately or severely off track,” and over 30 percent have either stagnated or regressed since 20152. The report partially attributes these setbacks to the compounded effects of the climate crisis, a strained global economy “awash with debt”, the COVID-19 pandemic, and the war in Ukraine, all which have hindered progress towards the SDGs3.

Additionally, one of the most significant impediments to meeting these goals is inadequate financing, with both public and private capital proving insufficient4. Estimates show that achieving the SDGs will require annual funding from $5.4 trillion to $6.4 trillion, with an additional $7 trillion to cover the cost of developing countries in need5. The 2024 Financing for Development Report suggests that this gap can be addressed by domestic and international private businesses through sustainable finance mechanisms like impact investing, socially responsible investing, and the alignment of ESG principles to business operations6. These financial systems may be able to support sustainable investments at a scale and pace aligned with the SDGs and the Paris Agreement, stemming from their potential to mobilize substantial private and public capital for environmental and social projects, while integrating sustainability considerations into financial decision-making7. 

UN Sustainable Development Goal 13: Climate Action (SDG 13), whose main objective is to limit global temperature rise to 1.5°C above pre-industrial levels. It is imperative to address as the target year approaches with more frequent and intense extreme weather that threatens humans and natural ecosystems8. The Sixth Intergovernmental Panel on Climate Change Assessment Report underscores an urgent need to address climate change drivers, particularly through reducing carbon dioxide and other greenhouse gas emissions9. SDG 13 comprises four targets: 1) strengthening resilience and adaptive capacity to climate related disasters or hazards in all countries, addressing disaster risk through strategies on the local and national levels in response to the rise in extreme weather events and natural disasters; 2) integrating climate change measures into national and international policies, aligning with existing legal obligations under the Paris Agreement and the UN Framework Convention on Climate Change (UNFCCC); 3) enhancing education and awareness on climate change mitigation and adaptation; and 4) mobilizing $100 billion annually to support developing countries in mitigation efforts, with emphasis on marginalized communities in developing countries, especially women and children10. 

Measuring the impact of sustainable finance on this goal is challenging, as it was not primarily designed for private, non-state investors. SDG 13 may be measured, in part, by tracking the number of investee companies that have committed to net-zero emissions and other initiatives related to clean energy and low-carbon manufacturing.

Given the all-encompassing nature of climate change, interconnected environmental goals will inherently influence the climate action goal, either positively, with progress in areas such as renewable energy and biodiversity, or negatively, like setbacks in environmental goals, such as deforestation or unsustainable land use, given the all-encompassing nature of climate change."

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Amanda Scheichet

Environmental Law Student, American University Washington College of Law

The UNFCCC reports that global climate finance flows averaged $803 billion annually in 2019–2020, reflecting a 12 percent increase from previous years13. While this increase is positive, it remains insufficient to combat climate change impacts and is outweighed by fossil fuel investment, at around $5 trillion, exceeding climate financing for adaptation and mitigation in 202014. Developing countries face even greater financial challenges, requiring an estimated $6 trillion by 2030 to meet their pledged contribution under the Paris Agreement, with adaptation costs alone totaling an estimated $330 billion annually15. The tension in a disproportionate foundation for collaboration lies with the fact that the impacts of climate change are felt most by developing countries with poor infrastructure despite them having contributed the least to climate change; for example, Pakistan emits less than 1 percent of global emissions yet has seen $30 billion in damages from severe flooding16. Opportunities for private investment in SDG 13 remain limited as the goal’s structure focuses on government commitments and actions17. One avenue is that the UN encourages partnerships between private sector investors and environmental policy. By having more harmonized sustainability reporting, companies can clarify the fiduciary duties of institutional investors, promote long term investments, and still include climate change risks18.   

Therefore, funding gaps persist where sustainable finance doesn’t pull its weight in the key components to SDG 13, adaptation and mitigation. Adaptation is “adjustments in ecological, social or economic systems in response to actual or expected climatic stimuli and their effects.”19 Simply put responses to a changing climate. As climate impacts increase, countries, businesses, and other entities must shift traditional practices and implement new structures to manage climate risks effectively20 . Adaptation actions range from sea walls to protect against flooding to modifying crop selections based on drought or rainfall patterns21. Adaptation is crucial to a sustained climate response, financing it requires contributions across sectors to develop solutions that prepare society for future climate risks22. Climate change adaptation can be fostered by investing in disaster resilience and setting incentives for disaster risk reduction23.

The global adaptation funding gap continues to widen due to accelerating climate impacts and slower adaptation finance growth24. Developing countries will require $212 billion annually in adaptation finance through 2030, and $239 billion per year from 2031 to 2050, beyond the SDG targets’ timeline25. Adaptation finance primarily originates from public sources, often as grants, but increasing private sector involvement is essential to foster resilience and drive innovation26. From 2016 to 2020, over 70 percent of climate finance from developed to developing countries took the form of loans—an unsustainable model for long-term adaptation efforts, placing more debt on developing countries27. Private sector contributions to adaptation finance have been limited, especially in developing countries28.

Leveraging private sector finance from diverse sources—including financial institutions, private equity, corporations, and local communities—can drive innovations in adaptation finance, supporting tools like regional risk insurance pools and fostering public-private partnerships."

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Amanda Scheichet

Environmental Law Student, American University Washington College of Law

The benefits of adaptation measures are extremely important for resilience in the long term, but often require up-front costs, unfeasible for many developing countries; further, as the impacts of climate change intensify, the feasibility of adaptation diminishes due to escalating costs30. 

On the other hand, mitigation efforts focus on reducing emissions and enhancing carbon sinks. To combat climate change and mitigate its effects, the key is to decrease the number of atmospheric emissions, particularly carbon dioxide (CO2), while expanding carbon sinks—areas like forests that absorb CO231. Mitigation strategies often include promoting clean technologies and implementing carbon pricing mechanisms, such as carbon taxes and cap-and-trade systems, to incentivize emissions reduction32. 

A significant advance in climate finance has been the creation of the Loss and Damage Fund at the 2022 United Nations Climate Conference (COP 27)33. Often seen as an ambiguous term, “loss and damage” refers to the consequences of climate change that extend beyond adaptation measures, essentially encompassing compensation for communities already affected by climate impacts34. Specifically, these effects, disproportionately borne by developing countries, include unavoidable risks such as rising sea levels, extreme heatwaves, desertification, and catastrophic events like bushfires and crop failures35. Loss and damage financing is intended to address harms that adaptation strategies could not prevent, particularly for communities lacking resources to adapt and any strategies to reduce or mitigate consequences have failed36.The Loss and Damage fund will become increasingly important to reach SDG 13 as developing countries with vulnerable communities fall victim to rising temperatures and lack adequate infrastructure investment to adapt or mitigate those harms. 

The sustainable finance movement is trending upwards and will continue with this trajectory and growth as the planet experiences more drastic climate impacts and needs to finance solutions."

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Amanda Scheichet

Environmental Law Student, American University Washington College of Law

According to the 2023 UN SDG Report, the reconstruction of climate finance schemes and “designing a new climate finance goal in 2024 are the next milestones to urgently improve both the quantity and the quality of climate finance going forward”38. As regulations on sustainable finance strengthen—such as mandatory disclosure and transparency —the potential for sustainable finance to have an impact on development.  

ESG integration faces several barriers, including resistance from stakeholders who view ESG as “woke capitalism,” and question its relevance and potential trade-offs with financial returns39. As a relatively new concept, sustainable finance has drawn criticisms from investors concerned that ESG initiatives may stray from an organization's business model of long-term value creation40. Additionally, limited data for measuring and reporting ESG performance presents challenges for investors in evaluating practices41. The absence of globally standardized reporting in sustainable finance complicates the assessment of climate impact and risk42. While the private sector has made strides toward voluntary disclosures, this lack of enforcement further limits their transparency and effectiveness43. 

The barriers of implementation include vast gaps in the research and literature in the sustainable finance field44. First, there is the lack of understanding within the financial aspect as sustainable finance is still a new topic and only gained steam in the mid 2010s45. Also, there is the unavailability of substantial data showing the influence of sustainable finance on society and the environment46. These are a few, but major, limitations to the interpretation and implementation of finance for sustainable development on the necessary global scale. Addressing these research gaps is crucial for advancing the knowledge in the field and enabling policymakers and investors to integrate sustainable finance into decision-making processes. Until that is achieved, sustainable finance is limited in how far it can help advance the SDGs.  

Emerging sustainable finance serves as a mechanism to mobilize private capital toward sustainable development objectives. Nevertheless, it raises questions: Is sustainable finance a concrete instrument, or is it just a “trendy” concept lacking a sufficient definition to achieve impact? Can it genuinely advance the SDGs, or is this expectation overly optimistic? What will prompt the financial sector to prioritize climate change—must it be a catastrophic natural disaster or financial crisis compel action? Addressing these issues requires rigorous research of quantified climate risk assessments, and well-defined global mitigation strategies. In the meantime, mandatory climate risk disclosure frameworks are increasing with the aim to increase transparency and accountability. Quickly evolving regulations are enhancing the credibility and the impact of sustainable finance in the long term. 


References

1. Sara Balitzky, and Natacha Mosson, “Impact Investing – Do SDG Funds Fulfil Their Promises?,” European Securities and Market Authority (2024), 3, 4. 

2. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads (New York: United Nations Department of Economic and Social Affairs, 2024), https://financing.desa.un.org/iatf/report/financing-sustainable-development-report-2024#:~:text=The%202024%20Financing%20for%20Sustainable,still%20open%20but%20closing%20rapidly.  

3. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads, 1.

4. Magdalena Ziolo, Iwona Bak, and Katarzyna Cheba, “The Role of Sustainable Finance in Achieving Sustainable Development Goals: Does It Work?” Technological and Economic Development of Economy 27 (2021). Dalia Streimikiene, Asta Mikalauskiene, and Greta Burbaite, “The Role of Sustainable Finance in Achieving Sustainable Development Goals,” Economics & Sociology 16 (2023), 256.

5. United Nations, The Costs of Achieving the SDGs (Geneva: United Nations Conference on Trade and Development, 2024). 

6. United Nations, “Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads.”

7. United Nations, “Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads.”

8. United Nations, Sustainable Development Goals Report 2023: Special Edition, 38 (While SDG 13 is critical, all 17 SDGs are interlinked; thus, financing one can support others, including poverty eradication, health, education, equality, clean energy, economic growth, sustainable cities, responsible production, environmental protection, and institutional strengthening). 

9. Intergovernmental Panel on Climate Change [IPCC], Summary for Policymakers. Climate Change 2023: Synthesis Report. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (Geneva: IPCC, 2023).

10. United Nations, “The Sustainable Development Goals: Goal 13,” https://www.globalgoals.org/goals/13-climate-action/ (accessed 5 Nov. 2024).

11. Emily Hawker, "Making an Impact on SDGs," ESG Investor (jan. 26,2022), https://www.esginvestor.net/making-an-impact-on-sdgs/ (accessed Nov. 5, 2024).

12. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads. Dirk Schoenmaker and Willem Schramade, Principles of Sustainable Finance, Chapter 1 (Oxford: Oxford University Press, 2018), 4.

13. United Nations, “Climate Change,” https://www.un.org/sustainabledevelopment/climate-change/ (accessed 5 Nov. 2024).

14. United Nations, “The Sustainable Development Goals: Goal 13.”

15. United Nations, Sustainable Development Goals Report 2023: Special Edition, 38.

16. United Nations Environment Programme [UNEP], “What You Need to Know about the COP27 Loss and Damage Fund,” UNEP, 29 Nov. 2022, https://www.unep.org/news-and-stories/story/what-you-need-know-about-cop27-loss-and-damage-fund (accessed 5 Nov. 2024).

17. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads. Willem Schramade, “Investing in the UN Sustainable Development Goals: Opportunities for Companies and Investors,” Journal of Applied Corporate Finance 29 (2017), 87–89.

18. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads.

19. United Nations Framework Convention on Climate Change [UNFCCC], “Adaptation and Resilience,” https://unfccc.int/topics/adaptation-and-resilience/the-big-picture/introduction (accessed 5 Nov. 2024).

20. UNFCCC, “Adaptation and Resilience.”

21. UNFCCC, “Introduction to Adaptation and Resilience,” https://unfccc.int/topics/adaptation-and-resilience/the-big-picture/introduction (accessed 5 Nov. 2024).

22. UNFCCC, “Introduction to Adaptation and Resilience.”

23. United Nations, Financing SDGs 4, 8, 10, 13, and 16: Perspectives from the 2019 Financing for Sustainable Development Report, (Geneva: Inter-agency Task Force on Financing for Development 2019), 1, 8.

24. Ede Jorge Ijjasz-Vasquez and Jamal Saghir, “State and Trends in Climate Adaptation Finance 2024,” Global Center on Adaptation and Climate Policy Initiative (2024), 7. UNEP, Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate Investment and Planning on Climate Adaptation Leaves World Exposed (Nairobi: UNEP, 2023).

25. Ijjasz-Vasquez and Saghir, 7 (citing that the UNEP Adaptation Gap Report 2023 estimates a comparable range at USD 130–415 billion annually in adaptation costs for developing countries in this decade).

26. United Nations, Financing for Sustainable Development Report 2024: Financing for Development at a Crossroads.

27. United Nations, Sustainable Development Goals Report 2023: Special Edition, 39.

28. IPCC, 56.

29. IPCC, 55.

30. Adam Behsudi, “What is Mitigation vs. Adaptation?” IMF Finance and Development Magazine vol. 58 (2021), 46–47.

31. Behsudi, 47.

32. Behsudi, 47.

33. United Nations, Sustainable Development Goals Report 2023: Special Edition, 39.

34. UNEP, “What You Need to Know about the COP27 Loss and Damage Fund.”

35. UNEP, “What You Need to Know about the COP27 Loss and Damage Fund.”

36. Preety Bhandari, et al., “What Is ‘Loss and Damage’ from Climate Change? 6 Key Questions, Answered,” World Resources Institute (2024). Preety Bhandari, et al., “The Current State of Play on Financing Loss and Damage,” World Resources Institute (2022).

37. Charles McConnell and Xuan Jin, “Sustainable Finance: The Road So Far and a Look Ahead,” Harvard Law School Forum on Corporate Governance (2023).

38. United Nations, Sustainable Development Goals Report 2023: Special Edition, 39.

39. James Surowiecki, “The War on ‘Woke Capital’ Is Backfiring,” The Atlantic, 31 Jan. 2024, https://www.theatlantic.com/ideas/archive/2024/01/republicans-woke-capital-esg-investment/677294/ (accessed Nov. 5 2024).

40. McConnell and Jin.

41. McConnell and Jin.

42. Pierpaolo Grippa, et al., “Climate Change and Financial Risk,” IMF Finance & Development Magazine vol. 56 (2019), 26–29.

43. Grippa, et al.

44. Anjali Sisodia and Girish Chandra Maheshwari, “Exploring Sustainable Finance: A Review and Future Research Agenda,” SAGE Open (2023), 1, 12.

45. Sisodia and Maheshwari, 13.

46. Sisodia and Maheshwari, 13.