Investors have trillions to fight climate change. Developing countries get less of it
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One of the thorny issues in the annual UN climate negotiations in Egypt is how to bring money to low-income countries to help them adapt to climate change.
Governments of industrialized nations, whose emissions have largely been caused by global warming, have pledged to help. But public money alone cannot cover the trillions of dollars that developing countries need to deal with rising temperatures.
Many private investors see great opportunities to advance – and profit from – the fight against climate change. However, less of their money goes to poor nations, which are already bearing the brunt of extreme weather despite contributing little to the pollution that fuels climate change.
says Bella Tonkonoji, director of the Climate Policy Initiative, a nonprofit that works with governments and businesses to promote economic growth while tackling climate change. “There is a lot that needs to be done to make it viable for the kind of huge money that is now being raised to invest in emerging economies.”
A major obstacle to private investment is the perception that the risks are greater in developing countries than in industrialized nations. To better manage cross-border challenges such as climate change, government leaders say it is time to reform institutions such as the World Bank and the International Monetary Fund, which use money from the public sector to attract private investment to emerging economies.
But world leaders say it is also in the interest of the private sector to play a greater role in helping poor countries deal with climate change.
“I am not here to ask the private sector to give up interest in profits,” Philip Davis, the prime minister of the Bahamas, said at the United Nations climate conference. “I’m here to say that in a world of profound instability, your profits are at great risk.”
World leaders are trying to build a “highway” for climate finance in developing countries
Investors in private markets and in public stock exchanges invested $165 billion in climate technology companies in 2021, according to BloombergNEF, roughly equal to Algeria’s gross domestic product.
While it is difficult to track and compare sources of climate finance, this amount is much more than what developing countries receive from private investors. Of the $83.3 billion in climate finance that went to developing countries in 2020, only $13.1 billion was from private sources, according to the latest data from the Organization for Economic Co-operation and Development.
Experts say the bulk of this private funding is used for things like energy and transportation projects aimed at reducing emissions in developing countries. This is because they tend to generate more direct revenue for investors than adaptation projects such as building flood defenses, which are designed to help countries deal with the warming that is already occurring.
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“The main opportunity area now for private finance is largely renewable energy,” says Amar Bhattacharya, who is part of an independent group of experts that met before COP27 to advise conference leaders on how to increase climate finance. “But there is no ready-made kind of highway, yet, for the massive influx of private finance into investment opportunities in emerging and developing countries.”
Africa, for example, accounts for a large share of the world’s potential solar development but is attracting only a small portion of investment in renewable energy, says Inga Sathrin, Head of Government Affairs at Scatec ASA, a project developer with a lot of experience in developing countries. Sæthren says many investors are willing to support projects in Africa that bring reliable profits. However, these types of deals can be difficult to obtain because they require developers with “strong market knowledge and a network to navigate the various stakeholders,” she says.
The lack of infrastructure is also a problem. In some places, project developers are finding they can’t build as large as they’d like, because there hasn’t been enough public investment to expand local power grids, said Katie Uth of the Energy Center for Growth, which promotes energy policies that align with countries’ development goals, In Washington, D.C. in October.
This underscores the need for governments and development banks to create the right conditions for private investment.
Calls for modernizing development banks grow louder
Multilateral development banks such as the World Bank provide financial and technical support to developing countries, which helps reduce risks and attract private investors.
But many say the system needs to be modernized to attract the private investment needed to combat climate change. Of the roughly $2.6 trillion needed annually over the next few years to eliminate or offset global warming emissions by mid-century, 70% could come from the private sector, says Citi, the US bank.
Despite their mandate to eradicate poverty, development banks tend to focus too much on avoiding risks and profits, says Jacqueline Novogratz, CEO of Acumen, a company that invests in developing countries. What they should do, she says, is to try to attract as much private investment as possible to developing countries to “make real change”.
In October, US Treasury Secretary Janet Yellen called on international development banks to rethink how they stimulate investment, especially for global challenges such as climate change that stretch across national borders. This can include issuing more grants in lieu of loans to provide financing. “If the global community benefits from investments in climate, the international community must help bear the cost,” Yellen said in prepared notes at the Center for Global Development in Washington, DC.
US Special Presidential Climate Envoy John Kerry echoed Yellen, saying the world needed to “reimagine” the post-World War II development banking system.
“Public finance is an indispensable component, often to unlocking private investment on the scale needed to finance the energy revolution — to get rid of the risks, and to create blended finance,” Kerry said in October at the Council on Foreign Relations in Washington. , Capital
“We need more synergy between public and private financing,” Kerry added. “It’s been talked about for a long time; it has to happen.”
In a joint statement at the start of the UN climate conference, a group of 10 development banks including the World Bank and the European Investment Bank said increasing private investment in low-income countries was among their “critical priorities”. Banks say they are focusing on reducing financial risk and making sure countries have plenty of attractive projects to offer to investors.
For those looking for a breakthrough at this year’s climate conference in the Egyptian resort of Sharm el-Sheikh, UN meetings often feature big announcements. But turning promises into action was the problem.
“I often get frustrated because we’re talking in these big phrases: what to do, what to stand for,” Novogratz says. “What we have to do is start putting things together for real [investment programs]real promises, to empower those organizations that know how to implement on the ground.”
A deal unveiled Monday at COP27 offers a glimpse of what that might look like.
SouthBridge African Investments and the Arab Bank for Economic Development in Africa say they are creating a $2 billion fund to provide grants and loans to communities and entrepreneurs reclaiming land in Africa. Most of the money comes from private investors. The Bezos Earth Fund is splitting $50 million in charitable funding.
Annie Dasgupta, CEO of the World Resources Institute, says the new investment fund is a “breakthrough” in getting money directly into the hands of local businesses and nonprofits.
“Africa is a young continent,” Southbridge Investments CEO Franny Lottier said in a statement. “In the face of crises, it has evolved into the innovation factory on Earth.”
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