Abstract
Finance scholars are only recently attempting to bridge the gap in climate finance. This paper is essentially a literature review of the interaction of climate change and finance through the lens of financial theory. The demand for financing climate-resilient infrastructures such as clean energy projects, energy-efficient buildings, low-carbon transportation, water, waste management systems, and the supply side of financing these infrastructures was reviewed. Financial theories and frameworks such as the Modigliani and Miller theorem, capital asset pricing model (CAPM), option pricing, efficient market hypothesis, and agency theory were also amenable to analyzing climate change and finance problems. Specifically, the factors to consider when financing and funding climate-resilient infrastructure include the financing profile of the investment; potential for cost recovery from users; the extent to which quality is contractible; the level of uncertainty and complexity of the project and policy frameworks; financial market conditions; and optimal allocation of risks. As data collection improves, climate finance research can continue on a great ride with enormous benefits to the global community. Keywords: Climate risk, Modigliani and Miller theorem, Asset pricing, Efficient capital markets, Option pricing. DOI: 10.7176/JESD/11-18-04 Publication date: September 30 th 2020
Highlights
The earth's average temperature of about 15oC in May 2020 was not unusual given past fluctuations
Nature-induced increment in temperature is linked to the greenhouse effect, which describes how the atmosphere traps some of the Sun's energy
The "human drivers only" trend-line of increase in global temperature is highly correlated with observed temperatures implying that it can be within the control of humans to address the risk of global warming
Summary
The earth's average temperature of about 15oC in May 2020 was not unusual given past fluctuations. International public climate finance is projected to play an increasingly prominent role in leveraging and enabling private investment in sustainable infrastructure Some of this will be distributed through established development banks and agencies. The GCF and the Adaptation Fund have introduced several relatively new institutional features to channel a www.iiste.org larger share of climate finance to the local level, including direct access modalities and fit-for-purpose organizational accreditation and project approval processes. These are intended to reduce the transaction costs for local governments and civil society. Climate finance architecture risks entrenching differential access to public resources and continuing the political exclusion that contributes to climate vulnerability
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