Bridging the Climate Investment Gap: ADB's Call for Enhanced Governance

The Asian Development Bank's report, "A Governance Framework for Climate-Relevant Public Investment Management," underscores the need for integrating climate considerations into public financial and investment management processes to address the widening gap in infrastructure and climate-related investments. Improved governance, transparency, and accountability are crucial for efficient deployment of climate finance, ensuring sustainable and resilient economic growth in Asia and the Pacific.

The impact of climate change is undeniable, with extreme weather events and rising temperatures threatening human welfare and economic stability. To combat these challenges, substantial investments in climate mitigation and adaptation are necessary. The Asian Development Bank (ADB) has taken a proactive stance, committing significant resources to support its developing member countries (DMCs) in addressing these climate challenges. However, despite international efforts, the investments needed to meet climate targets remain insufficient, highlighting the critical need for improved governance in Public Financial Management (PFM) and Public Investment Management (PIM) processes.

The Climate Investment Gap

Infrastructure investment has always faced significant shortfalls, but climate change has exacerbated these gaps. The Asia and Pacific region, in particular, is highly vulnerable to climate-related disasters, requiring robust investments in climate-resilient infrastructure. According to the ADB, approximately $26.2 trillion is needed from 2016 to 2030 to restore economic growth, eliminate poverty, and build climate-resilient infrastructure in the region. This monumental task cannot be achieved by public resources alone; private sector involvement is essential to bridge the investment gap.

Greening Public Financial Management and Investment Processes

Integrating Climate into PFM

The quality of investment preparation and execution is largely determined by PFM processes. Integrating climate considerations into these processes can significantly enhance investment efficiency. The ADB report outlines a four-step budget cycle that includes setting fiscal targets, budget preparation, budget execution, and audit and evaluation—all incorporating climate considerations. This approach ensures that climate priorities are embedded in financial planning and management, enhancing transparency and accountability.

Climate-Informed PIM Processes

PIM processes, which control public investment planning, project appraisal, and the funding, financing, and delivery of investments, are equally critical. Strong governance within PIM is essential for closing the investment gap. The ADB emphasizes the importance of institutional capacity, whole-of-government coordination, standardized evaluation criteria, transparency, accountability, stakeholder participation, independent scrutiny, and consistency in climate-informed PIM processes. By adopting these principles, countries can ensure that climate-related investments are prioritized and implemented effectively.

Addressing Climate Fiscal Risks and Investment Planning

To effectively manage climate risks, countries should integrate adaptation and mitigation responsibilities into regular investment planning. This involves investing in sector-specific climate risk understanding, using frameworks to address uncertainty, adopting rolling investment plans, and enhancing approval processes with climate risk expertise. National adaptation plans and climate change mitigation projects should be developed in tandem with business-as-usual planning to ensure a comprehensive and coordinated investment strategy.

Project Appraisal and Prioritization

Strengthening governance for climate-responsive investments requires robust climate analysis in project appraisal and selection. Cost-benefit analysis and economic appraisal are critical for prioritizing the right projects. The report highlights the importance of evaluating the costs of climate hazards, mitigation options, adaptation measures, and indirect costs associated with operational disruptions. By quantifying these costs and benefits, governments can make informed decisions that maximize the impact of limited public resources.

Funding and Financing Climate Investments

Effective management of climate-related investments includes ensuring that projects are fully funded within fiscal constraints before proceeding to financing and implementation. Integrating investment planning with the budgeting process ensures that projects are financially sustainable and can proceed without delay. This approach improves the efficiency of climate investments and enhances the overall governance of public financial resources.

Path Forward

The ADB's report concludes that good governance in PFM and PIM processes is essential for effectively deploying climate resources. Countries can close the climate investment gap by integrating climate considerations into regular investment planning and management frameworks and ensuring sustainable and resilient economic growth. As the climate crisis intensifies, the need for robust, transparent, and accountable governance in managing public investments has never been more critical.