Greening finance

Speaking at the opening session of Davos 2022, Fatih Birol, Executive Director of International Energy Agency told the world that it needs to stop looking beyond its immediate energy needs and make long term, sustainable investments for the future. Birol’s statement captures the core challenge facing global governments. Rising inflation, high interest rates, a renewed interest in self-sufficiency and a move towards deglobalisation all against a background of post-pandemic recovery and ongoing geopolitical instability, presents financial policy makers, when it comes to climate change and sustainability, with a series of conflicting policy decisions and choices. No doubt, the immediate priority is supporting society’s most vulnerable social groups - coincidently the hardest hit by the pandemic - with safety nets and tools that soften the impact of the current recession and propel things in motion to move forward. In effect, this has meant that with few exceptions, financial and environmental policies have been fluid, uncoordinated, and mismatched.

With global public debt reaching a record USD 303 trillion in 2021, there is no doubt that public budgets will fall short of the required financing and will have to “bank” on private investors with support from government and/or international financial institutions in the form of priority lending, interest rate subsidisation, and refinancing opportunities. The bulk of these investments are likely to be in clean energy solutions. Estimates indicate that phasing out fossil fuels entails redirecting USD 24 trillion in planned investments into carbon efficient, “clean” investments, with over 90% of these solutions mostly (technology) clean energy investments._⁵ In addition to prioritising these financial tools for climate change mitigation over socio-economic considerations, an added challenge to green investment is demonstrating the long term gains and return on investment to investors in a niche, relatively new, and mostly misunderstood sector. 

Growing evidence shows that global inequalities are increasing - at both the national and transnational levels. 97% of new sustainable investment funds are concentrated in high-income countries, highlighting the potential and scope for green finance in the developing world. 

Recognising this, the 55 countries responsible for approximately 55% of the world’s greenhouse gas emissions committed in the Paris Agreements of 2016, among other things, USD 100 billion in climate finance by 2020 and to continue to invest at this level until 2025. While trillions of dollars are needed to adequately meet the goals set by the Paris Agreement, this pledge is significant as a gesture of goodwill and responsibility towards the broader global economy.In the absence of clear measures or guidelines to measure progress towards fulfilling these obligations, it is hard to quantify the contributions that have been made. A report by the Organisation for Economic Cooperation and Development (OECD), using data submitted by the wealthy nations themselves, estimates that USD 78 billion and USD 80 billion in contributions were made by developed countries to developing countries in 2018 and 2019 respectively. Importantly, these figures have been disputed as overly inflated, with the argument that as the bulk of the money has come through grants and loans, the calculation of the value should be based on the value of the below market interest and not the full size of the loan. Another argument is that some countries count the full amount of their development aid as going towards climate change - regardless of the nature of the development project it is funding. It is argued that this calculation would place the total actual contributions within the range of USD 19 - 22.5 billion.9 The bulk of the transnational finance that has been provided has been directed towards middle income (as opposed to low income) countries, with estimates that only 8% - 2% of the funds reach the countries in most need. In addition, the bulk of the funding has focused on reducing greenhouse emissions._¹⁰

While useful as a means of mitigating the impact of climate change, it does not address the core focus point of many developing countries: adapting and adjusting livelihoods to cope with the changes put in place by the climate crisis. The question of the nature of the funding that developing countries receive loops back to broader issues in the multilateral order. Grants and loans to developing countries to mitigate the impacts of climate change are an “easier sale” for governments that have to justify these budget allocations to their constituents. Private capital investors are comfortable with projects that demonstrate tangible impacts and consequently returns. To address this issue - the V40 (the top 40 countries most impacted by climate change), have adjusted their demands. Instead of focusing on the USD 100 billion 2022 pledge, they are looking for a plan that demonstrates how developed countries will deliver on the USD 500 billion over the next five years._¹¹