Developed countries, which are feeling the current lack of money, have telegraphed at the beginning of the COP29 summit that a large part of the finance promised through the negotiations must come from sources that they cannot directly control. That includes the private sector through loans and other “innovative” financial structures.
Complex and costly proposals to expand private finance have been opposed by heavily indebted developing countries, which have pushed for narrower goals that emphasize providing publicly funded funds. The strategy also raises a fundamental question: How can a country engage a third party, which is not part of the UN process, to mobilize hundreds of billions of dollars? The answer will be crucial in determining the credibility of the new promises made in Baku this year.
In the diplomatic jargon of COP29, the main focus for the Summit is to approve the New Collective Quantified Goal on climate finance, which will replace the previous goal of pledging $100 billion per year from rich countries to developing countries by 2020. do not believe in the process . Developed countries came through the last two years in the initial commitment, and some dispute whether the $100 billion per year real milestone has been met. The countries at this summit will negotiate an even bigger goal – currently placed at around $2 trillion per year.
On the table is a greater role for private financial institutions and multilateral development banks such as the World Bank. In fact, even the final goal depends a lot on the party. Of the $116 billion developed countries contribute in 2022, 63% through multilaterals and private finance mobilization, according to estimates from the OECD. The current proposal is to increase it dramatically, even as developing countries insist that they cannot afford to pay more debt. Some have spent more on debt repayment than on education or health.
Another pressing problem is that MDBs, banks and investors are not negotiating parties in the UN climate talks. They are also not under the direct control of the COP. “It’s often the case that the UN system wants to tell the MDBs what to do, but there’s no real impact,” said Chris Humphrey, senior research associate. at ODI Global think tank and G20 advisor on improving investment capacity of MDBs. “It’s a long-standing tension.” Countries can, to varying degrees, influence MDBs through their respective shareholdings. Rich countries, for example, can afford to pay more. But MDBs are subject to their own governance structures and have other funding priorities beyond climate change, such as poverty reduction. The world’s largest MDB group on Tuesday pledged $120 billion in annual climate financing by 2030, but stressed the capital constraints it faces going further.
There is also the potential for a major stumbling block created by former President Donald Trump’s return to the White House. The US is the largest shareholder in most non-European MDBs, including the World Bank, and the future commitment to these financing activities under the Trump administration is in serious doubt.
The COP process has less control over the funding flow of private financial institutions. Much of Wall Street has spent the past year withdrawing from green commitments or betting against clean energy and climate technology. Bankers and investors have repeatedly explained that they will only put money in if there is a profit.
Further complicating matters, there is no universally agreed system for tracking public climate finance, meaning that countries have been able to dispute when or if funding targets have been met. Adding more private funds to the mix, especially if they are not tied to public funds used to reduce investment risk, will be even more ambiguous. Green finance figures very often among banks and asset managers.
Still, providing financing through various layers of public and private finance – what is called the “onion” approach – may be the only way to collect cash tranches with a small national budget. “If you consider the concentric circles of influence and importance, where the resources raised are now in the MDBs,” said Vera Songwe, co-chair of the Independent High-Level Expert Group on Climate Finance. “This is a way to get the kind of quantum we want.”
André Corrêa do Lago, secretary of climate, energy, and environment at Brazil’s Ministry of Foreign Affairs, is more skeptical. “Clearly” the private sector and development banks have a role to play in climate finance, Corrêa do Lago said, but their contribution should not be up for debate. He would rather countries focus on what they can bring to the table, rather than trying to prove that they can implement money from sources outside of their own pockets.
“You cannot replace (the contribution of) developed countries with development banks and new donors, they must be additional,” he said. “Unfortunately, the method presented is not very convincing.”
