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For developing countries, the challenge of raising funds to meet the costs of climate change seems incredibly daunting.

Rich countries have generally failed to deliver the amounts they pledged – which, anyway, fall far short of what is needed. Borrowing is unattractive for low-income countries, more than half of which are in debt distress or at high risk. And blended finance, in which multilateral institutions, such as development banks, attract commercial capital – once seen as having great potential – has proven to be a wet squib.

This has led development economists to conclude that, rather than tinkering with solutions to a fraction of the problem, what is needed is an overhaul of these multilateral institutions to increase their firepower.

“One of the main problems is that multilateral financial institutions are fundamentally unsuited to the challenges,” says Daniel Munevar of the Debt and Development Finance Department at the United Nations Conference on Trade and Development. “The only thing that should be done is to leverage their balance sheets more, but there is no political commitment to do so.”

Quantifying the amount of financing that must be mobilized is a challenge in itself. US Treasury Secretary Janet Yellen spoken last month of the “trillions and trillions of dollars” needed to combat climate change in developing countries. A widely quoted McKinsey report identified a global need for additional capital expenditure for energy and land use systems alone of $3.5 billion per year for the next 30 years.

A recent UN report says adaptation spending — dams to stem sea level rise or irrigation to deal with droughts — will require up to $300 billion a year by 2030 and $500 billion a year by 2050 for developing countries. That’s not counting investments in mitigation – like renewable energy and electric vehicles – where most funding is directed today.

But the funding provided so far is only a fraction of those amounts. In 2009, developed countries pledged $100 billion a year by 2020 to reduce greenhouse gas emissions and finance adaptation in developing countries. This promise was not kept. Between 2020 and 2025, according to Oxfampoor countries face a combined deficit of $75 billion.

Blended finance also disappointed. The amount mobilized for development rose from $15 billion in 2012 to more than $50 billion in 2018, according to the OECD. But that growth then reversed and the money poured in, while welcome, won’t have much of an impact.

“Blended finance is likely to remain a niche market,” says Simon Cooke, emerging markets portfolio manager at Insight Investment, who sees greater opportunities in green bonds.

In emerging markets, he argues, bondholders can make a particularly big difference, as more than 60% of companies issuing green bonds in these jurisdictions do not have publicly traded shares. Issuance of green bonds, indeed, has taken off. From a few hundred million dollars in 2012, annual emissions grew to nearly $500 billion worldwide last year, according to data compiled by Dealogic. About $200 billion has been issued by companies, including nearly $80 billion in emerging markets.

However, only about $10 billion was raised last year by governments and government-backed issuers in developing countries.

Ugo Panizza, a professor at the Graduate Institute of International and Development Studies in Geneva, says that while green bonds will play a role, “they will not be the magic bullet that will solve the climate finance needs of poor countries”.

One problem is that, while a large proportion of corporate green bond issuance is for mitigation projects, the costs to governments lie primarily in adaptation. Sovereign emissions are difficult to control. The issuance of corporate green bonds is often deposited in a special account for green purposes, but most governments do not allow this. Indeed, the contracts of sovereign green bonds issued by developing countries often contain language that protects the issuer from any action if it does not respect its green commitments.

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“A big problem with green sovereign bonds is that they are not enforceable,” says Panizza. “There’s too much hype.”

Others question the wisdom of encouraging poor countries to issue more debt, green or otherwise, as they grapple with the debts they incurred during the pandemic.

“The IMF tells us that 60% of the world, where a good part of the emissions come from, does not even have the budgetary space to deal with the Covid crisis”, points out Kevin Gallagher, director of the University of Boston. Center for Global Development Policy. “How are they going to mobilize trillions by 2030, when our promise of $100 billion a year is still a drop in the ocean?”

Much of the answer, he and others argue, is that multilateral development banks such as the World Bank are taking a less conservative approach.

Studies suggest that two steps – increasing their guarantee to include callable capital and accepting a one-notch downgrade from credit rating agencies – would allow them to quadruple the amount of grants and concessional loans they provide to poor countries. This could free up trillions of dollars in additional annual funding.

But the World Bank argues that its own triple-A rating is the cornerstone of its financial model and that lower ratings would reduce rather than increase its firepower.

Still, as Yellen and others urge multilateral lenders to do more, change may soon be upon us. A independent review capital structures of these banks commissioned by the group of major economies of the G20 must present its findings by the middle of this year.

For emerging market climate finance, this could well be a game-changer.