As the stage is set for the upcoming United Nations climate change conference in Glasgow, climate finance is one of the four major issues ahead of the summit. According to last evaluation, developed countries are falling behind on their commitment to mobilize $ 100 billion in climate finance per year by 2020.
Much of this discussion is fairly high profile and subject to relatively high public scrutiny. But a critical dimension that is still lacking in public discourse is this: how to use this climate finance.
This ‘how’ touches on a fundamental reason for using public finance for climate: public finance must be used to stimulate actions which in turn will lead to a profound transformation of the economic, financial and social systems where every action is taken. is positive for the climate.
One of the three goals of the Paris Agreement is to “make financial flows consistent with a trajectory towards low greenhouse gas emissions and climate resilient development” (commonly referred to as Article 2.1c). This, according to the COP26 Private Finance Hub, would require us to: “ensure that every business financial decision takes climate change into account”.
The artificial goal of $ 100 billion per year will not be enough on its own to meet all the needs in the face of climate challenges. Instead, the global community aims to use these public funds to support additional actions and catalyze other actions that meet the goals of the Paris Agreement.
The Green Climate Fund was created by the United Nations climate meeting and one of its goals was to be the channel for that funding. “The Fund will play a key role in channeling new, additional, adequate and predictable financial resources to developing countries and will catalyze climate finance, both public and private, and at the international and national levels. [sic]”, agreed the Parties by creating the Green Climate Fund at the United Nations climate meeting in 2011.
Those in the negotiating room remember that they expected the Green Climate Fund to become the main channel for this $ 100 billion. But that $ 100 billion was not going to be enough. It was supposed to further catalyze the trillions of dollars a year needed to tackle climate change.
To do this, the Green Climate Fund was supposed to work with the private sector. The founding documents of the fund focus in great detail on the private sector and on expected results. It was also quite new for the time.
No climate fund has had this mandate, and certainly not on this scale. The independent evaluation unit of the Green Climate Fund recently concluded a independent assessment of its private sector approach and the results have great relevance for the use of public funds to engage the private sector, for the global good of climate change action.
When the Green Climate Fund was created, there was a lot of pressure to get things going and start disbursing funds. The orientation of the fund’s initial portfolio proves that the institution can function. The initial climate finance and Green Climate Fund dollars went to projects that look like any other climate project – a predictable and ready investment opportunity, or “vanilla” as they are often called. But now is the time for the fund and the world at large to direct this climate finance towards its original purpose.
Private sector interest in climate finance and markets has changed since the establishment of institutions like the Green Climate Fund and the early days of climate finance. Areas like renewable energies are now profitable in several contexts.
Climatic obligations are oversubscribed, and many private sector players are generally very interested in make investments that align with climate goals. And we haven’t even started talking about the implications of the commitments of several countries to reduce investments in traditional energy or May 26 implications. But it is not uniform.
There are several areas and sectors that are still neglected by climate action and the private sector. Think of a fruit vendor or a fisherman on a small island in the Pacific. They are largely disconnected from formalized financial systems, and the private sector would view investments in these sectors and areas as far too risky. To help these vulnerable populations adapt to climate change, public finance should invest in these areas and sectors, to give signals that it – the public sector – is ready to take the first risks. This action should pave the way for private investments that take into account climate needs as well as the well-being of communities. Indeed, it is an essential part of global agreements on climate finance.
What does this mean in practice? Public climate finance channeled through the Green Climate Fund and other institutions would actively seek and invest in projects and contexts that are otherwise too risky for the private sector. These can be projects involving early stage technologies or business models that are not commercially viable.
These could be in countries or regions where the private sector would not go otherwise due to high interest rates, weak regulatory frameworks or lack of capacity. And here’s the even more controversial part: Public climate finance will need to provide concessional finance or even grants, which could lead to short-term losses for institutions like the Green Climate Fund.
This distinguishes public finances from institutions such as the World Bank which focus on the leverage effect of additional private sector financing. Instead of leverage, public climate finance will need to focus on catalyzing the private sector. To use a popular idiom, it would be like teaching a person to fish rather than handing them the fish.
Public sector finances should invest in policy and legal environments, capacity building, with overall relaxation of investments. And those investments would then catalyze systems that align with global development and climate goals. Public institutions like the Green Climate Fund can make this possible, because unlike the World Bank and other financial institutions, in the Green Climate Fund, developing countries have equal seats on the board. and actually decide. As the Parties begin to negotiate in Glasgow, it will be important to focus the $ 100 billion on public institutions so that long-term global goals can be met. The “how” is as important as the “how much”.
Archi Rastogi is Interim Evaluation Advisor at the Independent Evaluation Unit of the Green Climate Fund and Adjunct Researcher at the Institute of Water Policy at the National University of Singapore.