Bankers and financiers showed up in full force at an event outside the venue where they rolled out carefully orchestrated pledges and laid out their visions for how markets can solve the climate crisis. Inside the tent, chaotic diplomacy unfolded, as always, with governments trying to find enough funds to seal a deal on cutting emissions.
Getting financial help for developing countries to transition to clean energy and adapt to a warming planet has always been at the core of COP negotiations. Wealthy countries promised in 2009 that $100 billion per year would be provided by 2020. Only four-fifths of that has been achieved.
Most of that money comes via public sources such as multilateral development banks, and it’s nowhere near enough. That’s why these institutions, and the rich nations that fund them, are eager to get behind the idea of “blended finance”: using public money to subsidize the cost of capital or mitigate losses for private investors. Essentially, taxpayers take on risk so that banks and companies can join in without fear.
The concept has only been around for about six years, but support has reached a fever pitch. As climate-themed investment soars, commercial money managers are looking at green emerging-market opportunities — ideally with the risks in vulnerable countries underwritten by someone else.
There’s no shortage of helpful suggestions for how to structure such deals. Fixed-income fund manager PIMCO last year proposed a pan-African repo facility to entice more investors into the region’s sovereign bonds; an initial version debuted last month. British insurer Prudential Plc devised a plan to help close coal-fired power stations in Southeast Asia, with support from multilateral development banks. Blackrock Inc. says wealthy countries should grant $100 billion a year to de-risk emerging economies in order to facilitate clean energy investments. The Glasgow Financial Alliance for Net Zero, whose members oversee $130 trillion of assets, wants to develop “country platforms” to help coordinate private investments.
(Michael R. Bloomberg, the owner and founder of Bloomberg News parent Bloomberg LP, is co-chair of GFANZ.)
It all sounds good, in theory. But developing countries tend to be understandably wary of anyone advocating a neat climate finance solution.
Middle-income countries know the hazards of funds denominated in hard currencies. Any downturn can cause a vicious circle of weakening domestic currencies, like Latin American countries experienced in the 1980s and Southeast Asian nations endured in the late 1990s. All developing nations are aware of the onerous conditions — often unpopular with local constituents — that have come with development finance in the past. It’s why their negotiators are especially wary of any strings attached to finance promised during the annual United Nations talks.
One of the most significant announcements at COP26 was when the U.S., U.K., European Union, France and Germany promised to provide up to $8.5 billion for South Africa to transition away from coal. It’s something developing nations have been proposing for years. If rich nations want them to abandon the dirtiest fossil fuel, they should pay them to keep it in the ground. Yet details are not yet clear, and President Cyril Ramaphosa says the money must be given primarily as grants rather than loans, and support local agendas.
There’s another tension at play. Many developing countries need funds so they can adapt to more extreme weather, not just to cut emissions. But investors aren’t interested in helping to build a sea wall or early warning system. Clean energy projects can produce revenue streams. Adaptation measures mostly don’t.
Even less suitable for private finance is what’s called “loss and damage.” This is money to respond to the disasters that are accelerated by climate change, from heatwaves to drought and flooding. There’s no upside for investors seeking returns when what countries need can be as basic as funds to truck water into a village during an emergency, or to recover after a devastating cyclone.
Part of the problem is the uneven power dynamic that underpins the entire finance debate. Poor, climate-vulnerable countries have their own ideas for how those funds can be channeled, but they struggle to be heard. Barbados Prime Minister Mia Mottley called at COP26 for $500 billion worth of Special Drawing Rights, the reserve currency issued by the International Monetary Fund, to be given annually to help developing countries with transition costs. Her advisor, Avinash Persaud, has argued that the IMF should channel SDRs allocated in August to deal with the fallout of Covid-19 entirely to adaptation.
Donor countries, global institutions and corporate elites who want to help developing countries decarbonize and adapt would do well to pay more attention to what they’re actually asking for. In a small way, perhaps, the tide is turning and they will have little choice.