Driving Green Investments: How Fiscal Reforms and Governance Can Spur Climate-Resilient Development

Financing is key to lowering greenhouse gas emissions and investing in climate-resilient development. Photo: Simon Berger
Financing is key to lowering greenhouse gas emissions and investing in climate-resilient development. Photo: Simon Berger

By Hanif Rahemtulla, João Pedro Farinha, David Bloomgarden

Governments in Asia and the Pacific are navigating fiscal reforms and enhancing governance to align finance with climate action. This includes using national adaptation plans, climate-inclusive fiscal frameworks, and green budget tagging initiatives.

 Large financing needs must be addressed to lower greenhouse gas emissions and invest in climate-resilient development. An estimated $1.7 trillion per year will need to be invested in infrastructure in Asia and the Pacific between 2016-2030 to meet both climate and development goals. 

Investment in adaptation is estimated to cost an annual $160 billion to $340 billion in developing countries by 2030 and $315-$565 billion by 2050. This is much higher than the current $49 billion invested in adaptation globally.

Finance ministers are driving financial and fiscal reforms to scale up and align finance with climate action, but barriers to investment persist. Governments face challenges in planning and developing bankable and fiscally sustainable projects. The lack of data on climate costs and benefits further complicates public investment decisions. 

In addition, climate adaptation targets are often insufficiently detailed to integrate into medium-term expenditure processes. These hurdles underscore the importance of addressing governance issues and integrating climate change considerations into public financial management and project implementation management processes for effective green investments.

 Governance and its intersection with climate change is fundamental to green investment projects achieving their objectives. The performance of public investment needs to improve for governments to maximize climate benefits. Data analysis reveals that a significant percentage of major investment projects worldwide experience budget overruns, delays, and fail to achieve their intended benefits. Both advanced and developing countries are affected by these shortcomings.  

Governments are initiating project implementation management reforms by integrating climate costs and benefits into strategic planning and fiscal frameworks. Developing countries as well as advanced economies are drawing up national adaptation plans. 

These strategies often lack integration with sector development plans or investment priorities, which limit their consideration in annual budget processes. Improved project implementation management practices are essential to maximizing climate benefits and ensuring successful implementation of green investment projects.  

The strategic planning and fiscal framework stage, which establishes the policy framework and fiscal constraints, plays a crucial role in analysing green priorities. This phase involves defining a national development strategy, aligning it with resource limitations, and setting a medium-term fiscal framework. The framework should offer an environmentally and fiscally sustainable pathway towards long-term goals, incorporating climate and environmental impacts through forecasting and scenario analysis. 

In Bangladesh, the Medium-Term Macroeconomic Policy Statement and Bangladesh Economic Review provide qualitative information, and the MoF has developed a Climate-Inclusive Macroeconomic Framework. 

Additionally, fiscal risk management should account for increased frequency of extreme climate events. The medium-term fiscal framework can also facilitate the estimation and communication of budget spending levels required to achieve medium-term emission reduction targets (for example, see Indonesia’s First Mitigation Fiscal Framework).

Even in developing countries with weak institutional capacity, climate is too important a threat to wait before acting.

During the budget preparation phase, collaboration led by the ministry of finance is crucial for allocating resources within fiscal constraints. It is essential to include green priorities and concerns, supported by a medium-term budget framework. 

Budget documentation plays a vital role in communicating climate-related objectives and policies. Incorporating environmental and climate-related instructions in budget circulars compels ministries to consider these factors in their budget submissions. However, limited availability of local-level climate data can hinder the integration of environmental concerns into budget decisions. 

Tagging climate-related expenditures provides an overview of resource allocation and enables progress monitoring. Green budget tagging assesses each component of the budget based on its climate or environmental impact, categorizing it as beneficial or harmful to green objectives. Nepal, Cambodia, Indonesia, and the Philippines are countries acutely affected by climate change that have adapted climate budget tagging initiatives.

Governments should ensure that the financial management information system adequately accounts for climate-related expenditure. Fiscal transparency is necessary to ensure that legislatures, markets, and citizens have access to information to hold government accountable for climate-sensitive targets.   

Some countries rely on ad hoc reporting by line ministries, while others have dedicated climate expenditure reports. Enhanced risk management for climate-related emergencies reduces fiscal risks. Control and audit mechanisms, including internal and external audits, play a crucial role in evaluating climate policies’ efficiency and effectiveness. 

Bangladesh is an example of a country that has developed Guidelines for Planning and Climate Performance Audit. Parliamentary oversight bodies can examine reports from audit institutions and request corrective measures if necessary.

 A governance approach to green public fiscal management is a vital component of the path towards a sustainable and resilient future. Governments can mobilize green investments and strengthen resilience by aligning public finances and sustainability goals with well-defined public financial management processes for managing revenue, expenditure, debt, and public investment, and by integrating climate data into fiscal policies and decision making.

This requires that basic conditions to implement a public financial management system are in place and strong capacity and leadership of the ministry of finance. Even in developing countries with weak institutional capacity, climate is too important a threat to wait before acting. 

In such cases countries can begin with early-stage public financial management reform, sequencing of reforms, backed by political ownership and effective communication to stakeholders.