Three Ways Finance Departments Can be a Secret Weapon Against Climate Change

Finance ministries can take a leadership role in healing the planet. Photo: Alin Andersen
Finance ministries can take a leadership role in healing the planet. Photo: Alin Andersen

By Hiranya Mukhopadhyay, Hanif Rahemtulla, David Bloomgarden

Finance ministries are empowered with functions that allow them to lead a comprehensive, government-wide approach to address climate change.

Climate change is one of the most pressing global challenges, presenting profound implications for the environment, economies, and societies. Addressing this issue demands collaborative efforts from governments, businesses, and civil society. 

While environment and climate change departments often lead climate policy development and implementation,  finance departments are overlooked in the guiding and bolstering of climate action.

Central agencies, notably ministries of finance, must champion a comprehensive government-wide approach, encompassing all pertinent agencies, and incorporating climate considerations into public financial management and public investment management policies and decisions. 

They can also incentivize national development banks to take on stronger green mandates. Many projects may have robust economic returns that in the absence of strong financial returns may not easily find private funding. These projects may have important downstream and positive spillover effects to accelerate the transition to a de-fossilized economy.

Similarly, finance ministries in their supervisory role can support the financial system in identifying stronger requirements on environmental, social and governance (ESG) reporting standards and disclosure requirements. This would generate multiple benefits including enhancing investment opportunities. 

Unlike many other government ministries, finance departments generally possess a suite of functions, capacities and instruments that empower them to instigate transformations across the economy essential for realizing a climate-resilient, net-zero future. 

Finance ministries or departments can take a lead role in climate policy in the following ways: 

Budget Allocation for Climate Investments: Finance departments hold the mandate to allocate budgets across various governmental sectors. They critically assess cost-benefit analyses, life-cycle costs, and value-for-money in public-private partnerships, ensuring efficient allocation to climate mitigation and adaptation initiatives. This encompasses prioritizing investments in renewable energy, sustainable transport, and climate-resilient infrastructure. By designating funds and incentives for eco-friendly projects, finance departments can amplify the scale and efficacy of climate action.

Fiscal Policy: Fiscal strategies, encompassing taxation and subsidies, have a pronounced effect on greenhouse gas emissions. Finance departments can sculpt these policies to deter carbon-heavy activities and promote low-carbon alternatives, such as imposing carbon taxes or offering tax breaks for green technologies.  Aligning fiscal policies with climate objectives propels a shift towards a sustainable economic model.

Mobilizing Climate Finance: Effective climate action frequently necessitates financial resources surpassing governmental capacities. Finance departments are instrumental in harnessing climate finance from global avenues like climate funds and developmental agencies. They can secure funding for climate endeavors and ensure its judicious application to meet climate targets.

Finance departments are pivotal to the success of climate policies

Several countries in Asia and the Pacific are integrating climate action into their budgetary cycles. Nepal's Ministry of Finance, for instance, incorporates a Climate Budget in its Consolidated Financial Statements. Countries like the Philippines employ climate budget tagging to trace climate spending.

Indonesia established the Committee for Acceleration of Priority Infrastructure Delivery, an inter-ministerial consortium inclusive of the Finance Ministry, tasked with coordinating infrastructure planning and project prioritization based on societal and economic returns.

In 2023, the Kyrgyz Republic instituted an inter-ministerial council, backed by the ministries of finance and economy and commerce, to initiate an early-stage approval mechanism. This ensures that preliminary public investment proposals seeking budgetary support align with national socio-economic and environmental strategies.

However, obstacles like the absence of tools and data for climate project prioritization, misaligned project pipelines, and steep project preparation costs hinder ministries from establishing robust, climate-informed project pipelines.

Multilateral development banks and bilateral development partners have set up project preparation funds to facilitate investment readiness and broader pipeline development. Continued capacity building is paramount to equip policymakers to discern and select viable, fiscally sustainable projects.

Innovative financing tools, like the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP), can generate substantial climate financing. Quality infrastructure governance fosters a sturdy, sustainable pipeline of resilient infrastructure projects.

 Finance departments are pivotal to the success of climate policies. In nations with limited institutional capacity, well-sequenced policy reforms, aligned with national capabilities and political backing, can enhance budget allocation capabilities, mold sustainable fiscal policies, and rally climate finance for adaptation and mitigation projects.

Active engagement, coupled with inventive financial tools, can propel sustainable growth while alleviating climate change repercussions. As the global community confronts the climate crisis, it's imperative for finance departments to acknowledge their indispensable role in sculpting a greener, resilient, and inclusive future.