Climate finance: What we know and what we should know?

To cope with the increasing pressure from climate change, the world has steadily reached a general consensus, in the form of the Paris Agreement, in December 2015, which entered into force in the following year. A 2-degree Celsius global warming limit, or preferably 1.5-degree target relative to the pre-industrial levels, is set in the agreement. Among many efforts to achieve this target, peaking carbon emissions as soon as possible and achieving carbon neutrality by the mid of this century are necessary movements and have been adopted by over 130 nations nowadays. The challenges are however, enormous and require profound changes to the current system. One of the most important issues is climate finance, or specifically, climate financing and investment. For example, according to IEA (2021), $5 trillion annual energy investment is needed to deliver net-zero target by the end of the current decade. Where the capital supply at this scale come from and how to facilitate effective investment have become major issues, making climate finance a heated topic to explore.

An early definition of climate finance is proposed by the United Nations Framework Convention on Climate Change (UNFCCC) as “local, national or transnational financing-drawn from public, private and alternative sources of financing that seeks to support mitigation and adaption actions that will address climate change”, which is obviously a narrow concept and requires further extensions to capture the complexity the world has encountered (see also Zhang et al., 2019). While climate change has been recognized as one of the major crises faced by the world, such concerns are not same for everyone. There are disparities in terms of development, with developed countries being much better placed to achieve climate objectives than the developing countries. The aspiration for development often clashes with sustainable development goals. Some examples include the Sri Lankan economic crisis being compounded by the government mandate to switch to organic farming, and the protests by Dutch farmers over the recent climate regulations in agriculture. In all such cases the government actions to cut emissions or achieve environmentally sustainable growth has received either cold or belligerent reaction from the parties involved. By setting up mechanisms to promote investments in sustainable ventures the institutions and industry can achieve their environmental goals without compromising too much on the development. This also provides a viable opportunity for developing countries to contribute to the environmental cause. Given that the nature of climate change is a global issue, it is thus important to set up systems aligning the interests between developing and developed nations. In other words, a common ‘language’ or global standard on climate finance is needed.

Following the Article 4.3 of the UNFCCC (1992), developed countries should provide financing support to developing countries in the process of mitigation and adaptation to climate change, which is also reaffirmed in the Paris Agreement. A global climate finance architecture has developed following these commitments. It is a complex system involves multilateral and bilateral channels, with a growing number of countries setting up national climate funds (www.climatefundsupdate.org). The World Bank Group, for example, delivered a record $31.7 billion in 2022 to help countries address climate change, making it the largest multilateral climate finance provider for developing countries in climate action. The basic principles for climate change funding are established (Schalatek et al., 2022) covering different phases, namely, fund mobilization, fund administration and governance, and fund disbursement and implementation. The global climate finance architecture is however, continuously evolving as the resources needed for sustainable development are increasing. The current institutional structure, principles and governance system need to reform to adapt to the new challenges.

In the past decades, various new financial instruments have appeared. Green bonds or climate bonds, for example, have become popular since its first launch by the European Investment Bank (EIB) in 2007. In 2021, the total green bond issuance exceeds half a trillion ($517.4 billion) according to Climate Bonds Market Intelligence. Despite its fast development, questions on how to classify a bond as ‘green’ and whether green bonds actually bring environmental benefits remain unclear. The implementation of the emission trading system (ETS) has also created new financial products under the general umbrella of carbon finance. Technical progress also provides new opportunities to provide financing resources to support climate actions. The new features and risk elements associated with these climate-driven financial innovations have triggered intensive attention in the academic world. In addition, the development of climate finance also related to changes in financial services, which induces significant demand for human resources, talents and experts with interdisciplinary backgrounds.

Researchers have given a lot of attention to the topic of climate finance in recent times and have explored various avenues of research in the area. This research though extensive needs to be summarized so that one can answer the question regarding its major themes, its development, and the future directions to take.

A precise split between green and climate finance is impossible. In most conceptualisation climate finance is seen as a subset of green finance, it itself being a subset of sustainable finance. The European Parliament define these as “Climate finance provides funds for addressing climate change adaptation and mitigation, green finance has a broader scope as it also covers other environmental goals (e.g. biodiversity protection/restoration), while sustainable finance extends its domain to environmental, social and governance factors (ESG).” ¹ This corresponds closely to the definitions used by the UN in its inquiry into a sustainable financial system 2016²

This study tries to summarize the research in the field and provide a snapshot of the research using bibliometric analysis. The two objectives for this study are to present 1) a quantitative assessment of the performance of different constituents of the research and 2) a qualitative assessment of the themes, their development, and future directions. Due to the volume work produced by the researchers, the bibliometric analysis is an appropriate method for this type of analysis. The bibliometric analysis is described as a variant of systematic literature reviews (Mukherjee et al., 2022) which involve the application of quantitative and statistical tools on the bibliographic data (Broadus, 1987, Pritchard, 1969). We contribute to the research of climate finance in two ways, we believe. First, we provide a comprehensive, up-to-date overview of the evolution and state of the field, illustrating its main players and arenas and showcasing its evolving nature. Second, we provide, through two separate but complementary approaches, an ontology of 6 themes which seem to capture the majority of the research outputs. We discuss these themes, the overlaps and gaps, and suggest therefrom a set of topics which would appear to be under-researched. We believe this will be useful to future researchers.

The rest of the study is summarized as follows. The following section presents an overview of the methodology used for this review. The two-section following that present the performance and thematic analysis of the corpus respectively. Finally, the last section concludes the study.