As the stage is set for the upcoming United Nations Climate Change conference in Glasgow, climate finance is one of the four major issues before the summit. According to the latest assessment, the developed countries are falling behind on their commitment to mobilise $100 billion in climate finance annually by 2020.
A lot of this discussion is quite high profile and under relatively high public scrutiny. But one critical dimension still missing from the public discourse is this: how to use this climate finance.
This “how” hits at a fundamental reason for the use of public climate finance: public finance is to be used to spur actions that will in turn lead to a wholesale transformation in economic, financial and social systems where every action is climate positive.
One of the three objectives of the Paris Agreement is “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (popularly called Article 2.1c). This, according to COP26 Private Finance Hub, would need us to: “ensure that every professional financial decision takes climate change into account”.
The artificial target of $100 billion annually will not be enough by itself to address all the needs to address climate challenges. Instead, the global community is aiming to use such public finance has to support additional action, and catalyse other actions that meet the objectives of the Paris Agreement.
The Green Climate Fund was established by the UN Climate meeting and one of its objectives was to be the channel for this finance. “The Fund will play a key role in channelling new, additional, adequate and predictable financial resources to developing countries and will catalyse climate finance, both public and private, and at the international and national levels [sic]”, agreed the Parties as they established the Green Climate Fund at the UN Climate meeting in 2011.
Those who were in the negotiating room recall expecting the Green Climate Fund to become the main route for this $100 billion. But this $ 100 billion was not going to be enough. It was supposed to further catalyse the trillions of dollars per annum needed to address 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 a lot of detail on the private sector and what results it would be expected to produce. This was also quite unprecedented for the time.
No climate fund has had this mandate, and definitely not at this scale. The independent evaluation unit of the Green Climate Fund has recently concluded an independent evaluation of its approach to the private sector and the results have a lot of 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 established there was a lot of pressure to get things off the ground and start disbursing funds. The focus of the initial portfolio of the fund proves that the institution can work. Initial climate finance and Green Climate Fund dollars went to projects that look like any other climate projects – predictable and ready opportunity for investments, or “vanilla” as they are often called. But the time has come now for the fund and the world at large to direct this climate finance for its originally intended purpose.
The interest of the private sector in climate finance and markets have changed since the establishment of institutions like the Green Climate Fund and the early days of climate finance. Areas like renewable energy are now profitable in several contexts.
Climate bonds are oversubscribed, and there is generally a lot of interest in many private sector actors to make investments that align with climate targets. And we have not even begun to talk about the implications of commitments by several countries to reduce investments in traditional energy or the implications of May 26. But this is not uniform.
There are several areas and sectors that are still overlooked by climate action and the private sector. Think of a fruit seller or a fisherperson on a small island in the Pacific. They are largely disconnected from formalised financial systems, and the private sector would see investments in these sectors and areas as far too risky. To help these vulnerable populations adapt to climate change, public finance would need to make investments in these areas and sectors, to provide signals that it – the public sector – is willing to take on the first risks. This action should set the ground for private investments that take into account climate needs as well as the welfare of the communities. Indeed, this is a core part of the global agreements on climate finance.
What does this mean in practice? Public climate finance that is channelled through 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 that involve early-stage technologies or business models that are not commercially viable.
These could be in countries or areas where the private sector wouldn’t otherwise go because of high interest rates, weak regulatory frameworks or lack of capacity. And here is the even more controversial part: public climate finance will have to provide concessional funding or even grants, that might result in short-term losses for institutions like the Green Climate Fund.
This sets public finance apart from institutions such as the World Bank that focus on the leverage of additional finance from the private sector. Instead of leverage, public climate finance will have to focus on catalysing the private sector. To use a popular idiom, this would be like teaching a person to fish rather than handing over the fish.
Public sector finance would have to make investments in policy and legal environments, capacity building, with an overall easing of investments. And these investments would then catalyse systems that align with the global goals of development and climate. 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 the developing countries have equal seats on the board and actually call the shots. As Parties start negotiating in Glasgow, it will be important to focus the $100 billion towards public institutions so that the long-term global goals can be achieved. The “how” is as important as the “how much”.
Archi Rastogi is an Evaluation Advisor ad interim at the Independent Evaluation Unit of the Green Climate Fund and an adjunct fellow at the Institute of Water Policy at the National University of Singapore.
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