Look to vaccine bond model for climate finance
Leverage can't solve everything
The axiom of events like COP26 is that we cannot meet the challenges of climate change without private finance. That is true. The scale of the problem requires amounts of money far beyond what the public sector can command. Only by crowding in the vast sums asset managers control do we stand a chance of footing the bill.
But it is important to acknowledge the limitations that relying on the private sector brings. Ultimately, private investors expect a return. That’s fine if you’re building a windfarm, but much harder to achieve when it comes to equally vital and expensive investments such as flood defences.
Policymakers' emphasis is often on making sure the largest possible pile of money is available for investment in climate projects, trumpeting that every public dollar is leveraged with another three or four private dollars. But that will mean some projects — those that don’t easily become investible assets — will be neglected.
Developing countries have complained bitterly at COP that rich countries are not financing enough adaptation infrastructure, and concentrating too heavily on mitigation assets such as renewable energy.
That doesn’t mean capital markets have no role to play. If you are giving away money, rather than investing it, it’s painful to do it all at once. Far easier to promise, as Japan did at the beginning of COP26, to spread a donation over several years.
The International Finance Facility for Immunisation was created to address precisely this situation. Donor countries were pledging money to support a global vaccination programme by Gavi, the vaccine alliance. Issuing bonds backed by these future donations has enabled more of the money to be obtained earlier, saving many lives.
As countries begin to take the environmental disaster the world is facing seriously, more pledges like Japan’s $10bn over five years will appear.
Given the urgency of climate change, it is obvious that $10bn spent now is more valuable than $10bn spent over the course of five years.
The Iffim framework has already proved its worth by helping Gavi administer 1.1bn vaccines between 2000 and 2019. In the last two years, it has borrowed over $1bn against countries’ pledges and helped the world fight the coronavirus pandemic.
It’s time this financial model was replicated to assist the fight against the next, and much larger, fight: limiting climate change to 1.5 degrees.