BENEFITS OF FINANCING SUSTAINABLE DEVELOPMENT

Sustainable development finance comes with many benefits to nations and the world as a whole. In this section, we discuss a number of benefits of financing sustainable development.

Synergy in financing sources helps with raising funds from multiple sources in both developing and developed countries. Funds for sustainable development are raised from many sources, including private, government, and international bodies. Investments in renewable energy, biodiversity and the ecosystem, green bonds, and education and health have increased astronomically over the years. For instance, the Frankfurt School-UNEP (2018) report noted that investment in renewable energy has continued to increase each year since 2004; the world has invested USD2.9 trillion in green energy sources; and the investment was largely driven by developing countries. Again, the funding sources used for these areas had backward and forward linkages for other sectors of the economy.

Well-financed sustainable development through funds generated for a green economy helps to reduce greenhouse gas emissions. The best way to address climate change is to drastically reduce greenhouse gas emissions such as methane and carbon dioxide. Money that is charged through a carbon tax and issuances of green bonds can be used to finance the reduction in greenhouse gas emissions.

Another benefit of synergy in financing sources is economic growth. Sustainable development supports current and future generations, so mechanisms put in place to finance it must be driven by growth. Investing in sustainable cities helps to improve the infrastructure of those cities, which in turn improves the economic activities of those countries and facilitates economic growth. Additionally, renewable energy investment is a sure way to provide clean energy sources for industrial and economic growth. When energy is made clean and reliable and when factories are able to have a constant supply of energy, output increases.

Financing sustainable development will help to improve the employment fortunes of Africa's youth and women. In addition, 80% of employment in Africa is driven by the natural resource-based sectors, such as agriculture, mineral resources, forestry, and fisheries. Similarly, the tourism industry in Africa employs over 6.3 million people, and this sector also relies primarily on the continent's natural and cultural wealth (World Travel & Tourism Council, 2009). All these sectors need support in enhancing the green economy, which will create sustainable jobs and improve people's livelihood. Therefore, sustainable development financing from private and public sources can help to create much-needed jobs.

Another benefit of financing sustainable development is to ensure that there is food security for all. Financing food security to reduce postharvest losses will help to reduce the over 33%-35% malnourished population in Africa. Funding issues of environmental degradation, poor soil and water management will rapidly improve crop yield of farmers and help to make quality food available. Also, forest conservation through financing to replace falling trees and controlling illegal logging and overgrazing will help to make food growth in those areas more secure for human consumption. This means that climate change financing is important for the African continent.

SOURCES OF FINANCING SUSTAINABLE DEVELOPMENT

In this section, we discuss the various sources available for financing sustainable development. Here, we focus on environmental finance, private sector finance, and innovative sources of financing sustainable development. These financing mechanisms are important in addressing the challenges raised in section 12.3.

Environmental finance

The environment is an important dimension when it comes to addressing the sustainable development goals. Thus, environmental finance is critical for the success of the SDGs. Some of the environmental issues are climate change, biodiversity and the ecosystem, and renewable energy. The sources of finance required to address these environmental issues are important. Environmental finance is concerned with the impact of environmental issues on financing decisions. There are a number of ways that the environment can be financed. These include climate finance, finance for biodiversity and the ecosystem, renewable energy finance, and green finance. We discuss them in turn.

CLIMATE FINANCE

Climate change is one of the key issues to be considered when it comes to meeting the sustainable development goals. This is because anthropogenic climate change presents an unprecedented challenge to the well-being of humans and threatens economic growth in both rich countries and poor countries. To tackle climate change problems, long-term private and public investments are required. Therefore, climate finance covers a wide range of investment vehicles that are required to reduce excessive greenhouse gas emissions. To this end, there is a clear difference between development finance and climate finance. While development finance provides resources for global public goods and public investments that cannot be financed by the poorest countries, climate finance focuses mainly on greenhouse gas emissions. Progress has been made regarding donor partners' pledge for climate finance. At the Copenhagen Conferences of Parties (COP) 15, the developed countries agreed to commit USD30 billion as a fast start programme for 2010-2012 and committed to provide USD100 billion annually by 2020 to finance climate change mitigation.

Schmidt-Traub and Sachs (2015) argued that to properly finance climate change mitigation, investment in the following areas is required:

  • • Infrastructure - low-carbon energy and transmission, efficient buildings, low-carbon industrial plants, sea walls to protect against rising sea levels, climate-resilient cities, and water management infrastructure.
  • • Agriculture - low-carbon agriculture and animal husbandry, drought- resistant farming practices and infrastructure, improved water management infrastructure, soil-erosion control, climate-resilient livestock management practices, and improved food storage facilities.
  • • Biodiversity and ecosystem sendees - improved monitoring systems, reduced deforestation, and integrated water resource management.
  • • Research, development, demonstration, and deployment (RDD&D) - providing climate-resilient technologies for energy, agriculture, water management, and healthcare; providing cutting-edged research to identify new ideas in energy technology, water resource management, agriculture and health, particularly for Africa.

On such investment, the success story of Woodlot management in Tanzania can provide great lessons. See Box 12.2 for the story.

BOX 12.2 African success stories: Woodlot management for climate change adaptation in Tanzania

In the Makete District of the United Republic of Tanzania, forest, woodland, and grassland resources are essential to the local economies. They also play a crucial role in protecting the watersheds that are vital for the conservation of the environment for agriculture and livestock production. Tanzanian authorities and local communities, working together and sustained by international support, have improved smallholder livelihoods through woodlots management practices as a strategy for climate change adaptation while creating a new stream of income for local communities and revenues for the city. Following an assessment of smallholder woodlot management practices and the marketing of timber, user groups were assisted in developing their own woodlot operational plans and harvesting rules, in setting rates and prices for products, and in determining how surplus income would be distributed or spent. This produced significant improvements in the conservation of woodlots in area and density and helped enhance soil and water management.

This improved knowledge has allowed producers to increase their incomes, and it has enabled the Makete District government to achieve a 64% increase in council revenue for 2009/2010, following the collection of royalties from timber sales. The creation of new sources of income triggered the setting up of community savings and credit societies that provide financial credits to low-income earners, using their woodlots as sources of collateral. This has promoted inclusive growth, enhanced the number of savings and credit operations among members, and enabled the provision of loans to finance income-generating activities. What is more, the concrete evidence of these benefits has increased the national government's interest in expanding climate- change-adaptation measures that improve rural livelihoods and the economy as a whole.

BIODIVERSITY AND ECOSYSTEM FINANCING

Source: UNEP/UNDP Climate Change Adaptation and Development Initiative (CC DARE) - ccdare.org and United Nation (2012) has a low impact on biodiversity - for instance, timber produced from reduced-impact logging and goods, whose environmental impact is low as a result of reduced pollution load (biodegradable). The idea is that some consumers may decide to buy and even pay premiums to companies that have green products, and this will push such companies and many others to adopt sustainable production methods. In recent times, markets for such products have witnessed considerable growth.

  • • Biodiversity in climate change funding emphasizes how to leverage biodiversity benefits, with huge amounts of funding flowing to climate change mitigation and adaptation. Policymakers can harness mechanisms for reducing emission for deforestation and degradation as well as ecosystem-based adaptations.
  • • Biodiversity in international development finance provides policymakers with the opportunity to harness synergies and better mainstream biodiversity in broader development objectives. When policymakers are able to brainstorm and provide quality solutions to improve finance for biodiversity management and conservation, it will contribute more broadly to SDGs, which are crucial to reducing poverty and protecting rural livelihoods.

RENEWAL ENERGY FINANCE

Renewable energy is energy derived from resources that are continually replenished, such as wind, solar energy, and tides. Renewable energy finance is capital intensive and thus risky for many investors to venture into its production and supply. Because electricity is not generated and stored, its production must be matched by corresponding demand. Most countries or electricity generators use renewable energy sources only in periods of peak demand. Globally, countries are moving from subsidy regimes in both fossil fuels and renewable energy to auctions where the market is allowed to interact with supply and demand forces. Also, corporate bodies wishing to buy green electricity have various options, including installing photovoltaic (PV) panels on their warehouses roofs or in some countries buying renewable energy certificates, thereby boosting revenues for clean energy plants. According to Frankfurt School- UNEP Centre (2017, pp. 33-41), a number of financing options are available for renewable energy: [1]

expanding and many more people are drifting towards lower-middle- income status. Investors in renewable energy should take advantage of this development and invest in developing countries. A success story of energy feed-in tariffs in Kenya is illustrated in Box 12.3. This is another story of the energy investment potential in Africa.

• Debt consists of the majority of the capital required for renewable energy projects that are funded through project finance. In developed markets, the project debt level is about 75% to 80% of the cost of an onshore wind installation, and the remainder is through equity finance. Similarly, a solar project may meet the same debt proportion, while biomass and offshore wind projects will typically get less (i.e. 65% to 70% debt) because of the higher perceived risk.

BOX 12.3 African success stories Renewable energy feed-in tariffs in Kenya

Kenya adopted a renewable energy feed-in tariff (REFIT) in 2008, a policy it revised in January 2010. The REFIT aims to stimulate market penetration for renewable energy technologies by making it mandatory for energy companies or utilities to purchase electricity from renewable energy sources at a predetermined price. This price is set at a level high enough to stimulate new investment in the renewable sector. This in turn ensures that those who produce electricity from renewable energy sources have a guaranteed market and an attractive return on investment. Aspects of a REFIT include access to the grid, long-term power purchase agreements, and a set price per kilowatt-hour (kWh). Kenya REFIT covers electricity generated from wind, biomass, small hydro, geothermal, solar, and biogas, with a total electricity generation capacity of 1,300 MW.

This policy has the following advantages:

  • 1 It ensures environmental integrity, including the reduction of greenhouse gas emissions.
  • 2 It enhances energy supply security, reducing the country's dependence on imported fuels and helping it cope with the global scarcity of fossil fuels and its attendant price volatility.
  • 3 It improves economic competitiveness and creates jobs.

As Kenya's greatest renewable energy potential is in rural areas, the effects of the feed-in tariff policy are expected to trickle down and stimulate rural employment. Additional investments could be attracted towards renewable energy in Kenya if the feed-in tariff policy in Kenya acquired a more solid legal status (AFREPEN/WP, 2009).

For more information, visit www.unep.org/greeneconomy/ SuccessStories/FeedintariffsinKenya / tabid /29864/Default.aspx.

Loans for solar water heaters in Tunisia

The solar water heater market in Tunisia showed a dramatic increase when low interest loans were made available to householders, with repayments collected through regular utility bills. This reduced the risk for local banks while showing borrowers the impact of solar heating on their electricity bills. Prosol - a joint initiative of Tunisia National Agency for Energy Conservation, UNEP, and the Italian Ministry for the Environment, Land and Sea - has helped more than 105,000 Tunisian families get their hot water from the sun, based on loans of over USD60 million, a substantial leverage on ProsoTs initial USD2.5 million cost. Its success has led the Tunisian government to set an ambitious target of 750,000 m2 of solar panels for 2010-2014, a goal that represented solar coverage comparable to that in Spain or Italy, countries with populations several times larger than Tunisia's. Many jobs have been created, as 42 suppliers and more than a thousand installation companies have sprung up to service the solar market. The tourism and industry sectors are also involved, with 47 hotels engaged as of late 2009, and there are plans to encourage the industry sector to make greater use of the sun's energy. A project is underway to make photovoltaic energy available to a further fifteen thousand households through a similar loan and repayment scheme.

For more information, visit www.unep.org/unite/30ways/ story.aspx?storyID=49.

Source: United Nation (2012)

Yieldco vehicles are often issued in the energy sector to raise more funds to finance renewable energy activities.

  • Project bond - a bond backed by single project or multiple projects for which the investor has direct exposure to the risk of the project, with or without recourse to the bond issuer.
  • Asset-backed security (ABS) - a bond collateralised by one or more specific projects, usually providing recourse only to the assets, except in the case of covered bonds (included in this category). For covered bonds, the primary recourse is to the issuing entity, with secondary recourse to an underlying cover pool of assets, in the event that the issuer defaults.
  • Supranational, subsovereign, and agency (SSA) bond - a bond issued by international financial institutions (IFIs) such as the World Bank or the European Investment Bank (i.e. 'supranational issuers'). SSA bonds have features similar to a corporate bond relating to 'use of proceeds' and recourse to the issuer. Agency bonds are included in this category (e.g. issuance by export-import banks), as are subsovereign national development banks (e.g. the German KfW).
  • Municipal bond - a bond issued by a municipal government, region, or city. A national government entity could theoretically also issue a 'sovereign' bond; no green sovereign bonds have been issued to date.
  • Financial sector bond - a type of corporate bond issued by a financial institution specifically to raise capital to finance on-balance sheet lending (i.e. to provide loans) for green activities (e.g. ABN AMRO or Agricultural Bank of China).

  • [1] Utility-scale renewable power projects are usually financed either onbalance sheet by a utility, energy company, or large developer or witha mixture of equity and debt provided directly to the project itself. • Institutional investors have become key sources of equity finance forprojects, particularly in recent times, such as by using direct investment by institution in project equity and indirect investment througha pooled vehicle such as a yieldco. For instance, the direct investmentinstitutions such as pension funds and insurance companies haveinvested an estimated of USD2.8 billion in European renewable energyprojects in 2016. Africa and other developing countries provide hugeopportunities for renewable energy investment since the population is
 
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