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What Is Climate Finance?

As climate knowledge, scientific data, and sustainable innovations continue to take shape, so do the terms we use to describe the climate crisis and our climate change mitigation efforts. One relatively recent term in green parlance is climate finance—but what is climate finance exactly, and what implications does it hold for individuals and our global community?

In its most distilled essence, climate finance refers to any financial effort made toward reversing the effects of long-term environmental degradation and making human systems more sustainable. 

With some climate finance basics under your belt—and a grasp of why these initiatives are so crucial for our biosphere—you can catalyze your journey towards greener money management for the common good.

Climate Finance 101

Climate finance strives to prioritize the health of the planet and economic prosperity globally for both developed countries and developing countries, in equal measure. Climate finance is comprised of three key elements:

  1. Incentivizing world governments to make international investments in climate change mitigation 
  2. Striving for green economies that value stewardship and profitability in equal measure
  3. Encouraging individuals to make financial choices that fuel sustainable development of the economy

From a climate finance perspective, consumers (that’s you!) are a lynchpin that determines whether or not green development succeeds. And if consumers can act collectively, prioritizing environmental considerations in your overall financial goals can help you invest profitably, wisely plan for your financial future, and save money on each purchase you make.

But what does this look like in practice? Individuals can embody climate finance principles by:

In May of 2021, United States President Joe Biden introduced his Executive Order on Climate-Related Financial Risk, with the goal “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk (consistent with Executive Order 13707 of September 15, 2015 (Using Behavioral Science Insights to Better Serve the American People), including both physical and transition risks.”

Why Do We Need Climate Finance?

A sustainable economy can be built with investments in climate action, according to studies and reports done before the COVID-19 pandemic. However, you may be wondering; how much money will it take to help solve climate change?

The world will need to invest significantly in infrastructure over the next 15 years, spending roughly US$90 trillion by 2030, according to World Bank data from October 2019. 

But these investments can be recouped. If transitioned to a green economy, the World Bank states an investment of $1 would yield, on average, $4 in benefits.

If we’re to shift our collective mentality from short-term profiteering to investing in our future, it’s essential to understand how climate finance speaks to what we value most. 

How Climate Finance Empowers Environmentally Responsible Companies

Let’s talk about buying power—your ability to purchase products and thereby influence markets, trends, and innovations.

Imagine that you need to buy a new sweater. You have two retail options in your area—KnitWorld and SweaterCorp. Let’s break down a hypothetical profile of both companies:

  • KnitWorld offers a sweater for $16.00. As a company, they:
    • Operate a carbon-neutral storefront
    • Source their materials sustainably
    • Donate to an organization lobbying for climate action policies
  • SweaterCorp sells a similar sweater for $13.00. While cheaper, SweaterCorp is known to:
    • Buy the cheapest possible materials, regardless of environmental impact
    • Use fossil-fueled vehicles to fulfill local deliveries
    • Publicly support political candidates that don’t prioritize climate legislation

If your goal is to buy a sweater that will save you money in the short term, you’d pick SweaterCorp’s product. But if you want to purchase a sweater, invest in a green business, and send a message that sustainable companies are more likely to earn your dollar, KnitWorld is your brand. 

In this way, consumers can use their buying power to tip the scales in favor of environmental responsibility—a core tenet of climate finance. 

How Climate Finance Sends a Message to Changemakers

When you empower companies that operate with the climate in mind, you also send a message to brands that don’t. While this might not seem significant on an individual level, it can have a massive impact at scale. 

If everyone in your town always chose KnitWorld over SweaterCorp, the latter would likely take the hint. And, if they want to respond to market pressures (and keep turning a profit), they’ll have to conform to consumer demands for environmental responsibility. 

These market shifts won’t go unnoticed. As climate finance grows in popularity, even mega-emitters (those 90 global companies that generate nearly ⅔ of all greenhouse gas emissions) will have to become more sustainable to appeal to consumer values.

Climate finance sends a message to changemakers—business owners, influential CEOs, and government representatives—that sustainability must come first. Public corporations must be honest about their climate risk and consequences.

3 Ways to Get Started with Climate Finance

What could climate finance look like in your everyday life? Aside from shopping responsibly, consider the following tactics:

  • Shift to green investing – If you want to start climate change investing, purchase shares in responsible companies or climate investment funds that aggregate sustainable brands.
  • Donate to community organizations – Empower local organizations—groups working towards climate change advocacy, bolstering climate innovations, or conducting research—with your wallet. 
  • Divest from your big bank – Major financial institutions continue to bankroll fossil fuel projects, financing $740+ billion for non-renewable energy projects in 2021 alone. Instead of allowing your bank to use your hard-earned savings for unsustainable climate projects, switch to an environmentally responsible alternative offering sustainable financial solutions, like an eco-friendly debit card.

Aspiration: Paving the Way for the Climate Finance Takeover

Climate finance is one major tactic for pressuring the market, companies, consumers, and governments to prioritize climate action and environmental responsibility globally, in both developed countries and developing countries. As one of the key sources of climate finance—an individual with buying power—you play a critical role in its achievement. 

If you’re ready to transition to a climate-first money management strategy, join us at Aspiration where we make climate fintech your tool for changing the world. We’re the antithesis of big banking: we channel your savings into bolstering renewable and sustainable development projects championing solutions to our modern climate crisis. Climate finance is the future, so start exploring our green money management solutions and eco-friendly climate investment funds today.

Sources: 

United Nations. Introduction to Climate Finance. https://unfccc.int/topics/climate-finance/the-big-picture/introduction-to-climate-finance 

United Nations Environment Programme. About Green Economy. https://www.unep.org/explore-topics/green-economy/about-green-economy 

Corporate Finance Institute. Bargaining Power of Buyers. https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-buyers/ 

Science.org. Just 90 Companies Are to Blame for Most Climate Change, This ‘Carbon Accountant’ Says. https://www.science.org/content/article/just-90-companies-are-blame-most-climate-change-carbon-accountant-says 

The White House. Executive Order on Climate-Related Financial Risk https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk The United Nations. Financing

Climate Action. https://www.un.org/en/climatechange/raising-ambition/climate-finance

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