Can finance save the world’s vulnerable nations?
There are so many challenges related to climate change, so many disparate actors required for their remedy and so much money required to do it, that it is tempting to see the whole situation as unfixable. Perhaps that is why some of the countries most vulnerable to climate change are not willing to talk about it. There is one positive counterbalance: all the ingredients needed to meet climate finance goals are available. But getting the money where it needs to go, with private capital alongside, will require a level of global coordination rarely seen.
Climate change finance is a jigsaw that must be assembled by thousands of people who each have a piece but do not know what the other pieces look like, or even where they are. It must be assembled against an exacting time limit, which, if missed, will mean widespread death and displacement. It is a massive and intricate puzzle. But on the bright side, at least we have all the pieces.
Climate finance is also the ultimate story of the tension between macro and micro. Macro does not get any bigger than global warming: carbon emissions wreck the world equally; a democratic contribution to everybody’s rising sea level and everybody’s acidifying soil. It is a truly global problem that requires global coordination to create a global solution. But understanding the micro level is essential: the Pacific island village that needs funding because its wells have become saline, or the individual rural sub-Saharan citizen, who might be converted from burning kerosene to using solar energy.
The architects of climate change finance must at one end wrestle with the enormous sums involved – the Paris Agreement pledged $100 billion of investment a year – and the need to channel it to the most arcane and specific needs of the vulnerable, where deployment might depend on the right outcome of a tribal meeting or the ability to get a digger off a barge at high tide to a roadless island with no quay.
The good thing is that the will to get this done is exceptionally widespread. Also, the money is there to do what needs to be done.
“There are no big mysteries,” says Rachel Kyte, special representative of the UN secretary-general for Sustainable Energy for All, and previously the World Bank’s special envoy for climate change. “There’s plenty of money in the world. If you were going to start baking, you’ve got all the ingredients on the table in front of you.
“What we haven’t been able to do yet is get the ingredient mix right.”
It is clear to anyone with even a passing interest in the subject that the enormous sums required to combat climate change can only be raised with the deep-seated commitment of private-sector funds. But private capital cannot be forced to go anywhere it does not want to go – a pension fund has no interest in donation, but a cast-iron mandate to make more money without risking what it has already got.
The key to everything is to find a mechanism through which private capital is attracted to invest in projects with a positive climate change outcome – whether mitigation like a wind farm or adaptation like a sea wall – because those projects carry an attractive risk-adjusted return.
And the key to that is to build something scalable. Green bonds are the first wave of this idea: using an existing structure that everybody understands and tagging on green intentions for the funds once raised.
Next, asset-backed structures will be absolutely indispensable, and they will be aided in their growth by technology that allows us to receive and interpret data on a large scale very quickly. Every new renewable initiative is potentially a source of receivables that can be securitized; every asset that can be securitized is potentially a source of up-front funding to do more.
There is plenty of financial engineering that needs to go on behind the scenes, but the key to it all will be simplicity. As one interviewee puts it: “We don’t want financial alchemy. We want scale.”
There is a need to recognize that there are places the private sector may never reach, and there will always be a role for donor funding and for multilateral grants. Our research for these features has taken us to places where the private sector won’t go, where flat-broke governments and crushingly poor people are decades away from any capacity to create a revenue stream.
But there is a middle ground of blended finance already being attempted that can get us part of the way to these communities. While multilateral development banks can never stop protecting the desperate with grants, their longer-term goal will be the leverage of other people’s capital by absorbing risks that the private sector just cannot stomach. Pooling mechanisms, with insurers involved, can also help create structures accessible when needed.
The V20, really, is an idea, and there is nothing wrong with that. Ideas are powerful and will help in the big international conferences. But V20 is not and will never be a funding body
Every perspective is inevitably different, and tensions between the different actors are to be expected. So the Green Climate Fund (GCF), which gained enormous significance in the wake of the Paris Agreement as the agreed method of delivering funds to individual country-level climate projects, is a powerful and well-resourced organization with the capacity and intention to do a great deal of good. But it is also required to make sure it does not squander money either on ill-conceived and unsustainable projects or in providing it to corrupt individuals or governments. And so it has rigorous due diligence and application processes.
None of that is unreasonable, unless you are the person in a Pacific island finance ministry entrusted with understanding how to fill in these forms. The lack of capacity in the poorest and more vulnerable parts of the world to understand the mechanics of international climate finance, much less access it, is a serious problem. They have to hire in expertise, spending the money before they have got it, just to get to the start line and learn how to request things in the right format.
Consequently the funds dispersed by the GCF to date are a tiny fraction of the funds that have been committed to it. The GCF declined an interview. Maybe it is just a question of time as people learn how to deal with a new method of approval and dispersal; maybe it is a structural problem that needs addressing.
Yet we must also be careful of presenting poorer countries as powerless victims of stubborn international bureaucracy. The countries themselves must create policy frameworks that allow for investment and efficiency. They must eventually create tax bases and, if economic growth follows climate adaptation, a culture of paying for things like water in order to ensure its continued availability. They must take responsibility for the maintenance of donor-funded projects, for the policing of corruption and for reducing bureaucracy. And they must communicate.
Take the V20, the Vulnerable Twenty Group of nations – a mirror of the G20, deftly ignoring the fact that it now has 43 members. It was set up under then-Philippines secretary of finance Cesar Purisima’s chairmanship as a method for the poorest and most vulnerable to speak collectively. It proved its worth within months when addressing the Paris climate summit that led to the Paris Agreement and a global commitment to keep temperature rises to 2 degrees Celsius (albeit a level that will still probably see several of its members disappear beneath rising seas).
But between the multilateral meetings, the V20 does not really exist in any practical sense without Purisima, and if you doubt this, try contacting its members. Euromoney is unlikely ever again to put such commitment into a series on climate change finance for vulnerable nations, with correspondents on four continents deployed and interviews conducted on six. But the V20, through the current chair of the Ethiopian ministry of finance, refused to give an interview, after ignoring two months’ worth of requests. Euromoney’s correspondents, no strangers to emerging markets inertia and bureaucracy, sought to visit V20 members on the ground from the Dominican Republic to Kenya, Sri Lanka to Palau, and were either refused or ignored.
We arrived in places as far afield as Costa Rica and Kiribati for pre-agreed meetings with ministers who then failed to show up or cancelled. The most adept vulnerable countries seeking to combat their climate change challenges, notably previous administrations in the Maldives and Kiribati, have had the ability and the willingness to communicate it, and this is essential.
The V20, really, is an idea, and there is nothing wrong with that. Ideas are powerful and will help in the big international conferences. But V20 is not and will never be a funding body. It is mechanisms for channelling funds to where they need to go that will take climate-vulnerable nations where they need to get to, with a considerable impact on poverty alleviation along the way.
So this is the problem: fixing climate change requires dozens of individual governments, policymaking bodies, multilaterals, private-sector bankers, institutional investors, donors, funds, NGOs and ultimately ordinary people to get on to exactly the same page and agree on a way forward. All at a time when the most powerful man in the world is denying the very existence of the problem.
It is a big ask. But the capacity exists for the job to be done.