Innovative financing to put $100bn climate funding goal in reach
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Innovative financing to put $100bn climate funding goal in reach

Japanese Foreign Minister Fumio Kishida during a meeting with Russian President Vladimir Putin December 2, 2016 in St. Petersburg, Russia.
Japanese prime minister Fumio Kishida

IFFIm model may prove valuable in reaching target

The developed world has so far failed to provide poorer countries with the annual $100bn of climate finance it promised 12 years ago to deliver in 2020.

The OECD’s report on the topic, published in October, projected that the developed world will exceed that amount in 2023, but some still hold out hope that the target will be reached in 2022.

Japan’s prime minister, Fumio Kishida, has provided a possible lifeline by promising “up to $10bn over the next five years” in his speech at the COP26 conference in Glasgow this week. Although he did not specify at the time, experts appeared to assume this will be delivered in the shape of $2bn a year for five years.

Kishida said that the $10bn would include Japan’s contribution “to the launch of Innovative Financial Facility for Climate as we partner with the Asian Development bank and others to support the decarbonisation of Asia and beyond”.

Alone, this would not be enough to tip the developed world into honouring its $100bn a year pledge. The OECD has two forecasts for 2022. The first assumes that multilateral development banks and countries fully deliver on their intended climate finance commitments. The second makes a more pessimistic assumption that there will be some delays from macroeconomic factors or capacity constraints.

The optimistic assessment puts 2022’s developed world contribution to climate finance at $97bn, while the pessimistic figure is $5bn lower. So, even with optimistic assumptions, Japan’s $2bn a year would not quite tip the balance. In 2023, the forecasts are $101bn and $106bn.

However, there are two separate models of financial engineering that could make the difference — and the World Bank would probably play a role in both.

The first would be adapting the model of the International Financial Facility for Immunisation (IFFIm), for which the World Bank manages the treasury operations and which raises money to fund Gavi, the Vaccine Alliance’s delivery of vaccination programmes.

Vaccination programmes are much more powerful if they are delivered immediately, but countries tend to pledge an amount of money delivered over several years.

IFFIm issues bonds backed by these pledges so that Gavi can pay for vaccination programmes before all pledges are delivered.

Using the IFFIm model would allow any such funding vehicle to to raise the $10bn from the public bond markets that Japan has pledged over the five years upfront, pushing the amount of climate finance available for the developing world to more than $100bn in 2022.

The other method would be a more traditional development bank approach, wherein institutions such as the World Bank and the Asian Development Bank would use Japan’s money as a guarantee, then leverage it to mobilise a larger amount of private capital.

Supranationals frequently take risky first loss positions in investments, assuming a higher proportion of the risk to make investments more palatable for the private sector.

Alternatively, the money could be treated as part of a supranational’s capitalisation, against which it could borrow a larger amount in capital markets — perhaps via ESG-themed bonds — and lend the proceeds to green projects.

John Kerry, the US special presidential envoy for climate, has suggested that with the help of development banks an additional $8bn could be raised, although it is not clear whether he means $8bn per year for five years to total $40bn, or whether he means $8bn over the $10bn total, raising $18bn. Nevertheless, if his hopes that this can be achieved next year are well founded, then $8bn should be enough to bridge the gap to $100bn.

The difference between the two methods is not merely cosmetic. Using the IFFIm method to raise the money upfront would mean the money can be spent immediately, with no expectation of return.

Leveraging it and crowding in an additional $6bn of private finance would mean that the money must be invested in projects that can generate the revenue required to repay the money with interest — probably a narrower field of potential projects.

Theoretically, it would be possible to use both methods — borrow to raise the money upfront, then leverage it. However, this would probably cause logistical problems and mean that capacity problems become a potential constraint, as finding perhaps $40bn of projects ready for investment in a single year could prove difficult.

Whether or not it takes part in leveraging or administering Japan’s pledge, the World Bank, on its own account, will be providing an average of $5bn a year in climate finance to the developing world for the next five years under its Climate Change Action Plan.

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