Opening his “Summit for a New Global Financial Pact” late last week in Paris, French president Emmanuel Macron told delegates the world needed a “public finance shock” to tackle the ever more urgent and interlinked goals of combating climate change and global poverty, and protecting nature. In emerging market and developing countries excluding China, more than $2tn in investments each year is estimated to be needed to tackle climate change and its impacts by 2030; current investments are running at about $500bn. Mobilising such sums will entail huge efforts from multilateral development banks, governments, and the private sector. But as well as being more ambitious in raising finance, global actors must be cleverer about how they do it.
Raising finance will not be straightforward. Total government debt currently equates to about $86tn. Around 60 per cent of low-income countries are in debt distress, or at high risk of it. Many feel they should not be paying for the damage caused by historic emissions from industrialised economies. Competition to attract green investment is meanwhile heating up, and the private sector is put off by the higher cost of capital in developing countries.
Shifting from “billions to trillions” needs innovation. It means leveraging multilateral development banks better, de-risking private sector investments, being more creative about debt reduction, and building new revenue streams.
The MDB system, which holds around $1.8tn in assets, will be central. MDBs should accelerate efforts to use their balance sheets more efficiently — which some studies suggest can raise investment capacity by up to $1tn more, without undermining their triple-A credit ratings. Encouraging wealthier shareholders to inject even modest extra capital could also boost lending capacity, as would issuing hybrid capital to institutional investors. MDBs could also consider assembling multi-asset portfolios from their projects into which institutional asset managers can invest.
The mobilisation of private capital by MDBs remains relatively small. Part of this reflects the real and perceived risk of investing in low-income countries. The cost of capital of a typical utility-scale solar project can be three times higher in key emerging economies than in advanced nations, the International Energy Agency says. MDBs need to play a greater role in de-risking projects. This may involve taking subordinated tranche positions in deals, being ready to accept first-loss slices, or providing foreign exchange guarantees for financing in volatile currencies.
MDBs and governments should build up a suite of financial products to match the funding problem they are trying to solve. For example, supporting research and development into potential climate solutions may involve tools such as grant competitions and long-term contracts, which pre-commit funding for innovative but expensive projects.
Reducing low-income nations’ debt load will also free up funds for sustainable development. International co-ordination among creditors, including China, remains key. There are creative options to be explored, including “debt-for-climate” swaps, which provide debt relief to fund green initiatives. The World Bank’s plan to allow countries hit by disasters to pause repayments on loans is also sensible.
Unearthing new revenue streams will be important too. A global carbon tax would, for example, both provide incentives to curb emissions and funds to redistribute to low-income countries, but consensus is elusive.
The penny is dropping on the scale of money and effort needed to meet the climate challenge. Seriousness must be matched by smartness if the planet is to get there before it is too late.
Source: Economy - ft.com
