During the UN climate conference, developing countries view promises of funding from rich nations with skepticism. Stimulating private financing requires incentives for investors to cross the line, writes Marilyn Waite.
Marilyn Waite is executive director of the Climate Finance Fund, board member of the European Financial Reporting Advisory Group (EFRAG) and board member of the EPA’s Environmental Financial Advisory Board (EFAB).
Private finance and the UN climate talks make odd bedfellows. During COP26, as private financiers joined climate action via coalitions like the Glasgow Financial Alliance for Net Zero (GFANZ), talks of mobilizing trillions were often held skepticism from the climate movement.
Many interest groups from emerging and developing countries (EMDE) who are still waiting poor The $100 billion in annual public finance support pledged during COP15 simply posed the question to the broader financial community, “Where’s the money?”
The reality, however, is that private finance from wealthy countries was never designed and had no intention of investing in climate solutions beyond national borders.
Promoting renewable energy in low- and middle-income countries has simply never been ingrained in the psyche of big banks or a driver for engagement. The North Star for most private finance efforts in Europe and the US has been and remains balance sheet decarbonization. And most of their balance sheets aren’t much in emerging markets.
This critical caveat about the “Glasgow trillions” that rich countries’ climate finance should stay in the rich countries has been lost in translation.
While climate-friendly commercial and residential investment is growing from the banks and asset managers, which tend to align themselves with large-scale climate efforts, there has been no special carve-out for investment in less prosperous economies.
If one in four US dollars ever crosses any type of national border, it’s for climate investments less than 15%. The average US bank’s car loan book is transitioning from an internal combustion engine to an electric vehicle, but this capital shift relates to a car in the United States — not a car in Kenya.
Another element lost in translation is the wrong interpretation of what Assets under Management (AUM) means. That headlines speak of over $100 trillion AUM committing to net-zero GHG emissions, but it’s important to clarify that AUM does not mean investments.
A large proportion of money managers’ assets under management are tied up in high-quality stocks. In other words, just because an asset manager holds Apple stock doesn’t mean those assets will be liquidated to fund a wind farm. AUM does not directly translate to decarbonization of the real economy.
Of course, all funding, including the more than $200 trillion available from private funds, must play a role in achieving a just, equitable, diverse and inclusive low-carbon economy.
It matters that among the financiers we have all hands on deck. However, the market rule is: decarbonizing a balance sheet in country A does not mean mobilizing climate-friendly capital in country B.
What would move the needle to help private finance in a prosperous economy achieve climate solutions in a less prosperous economy? incentives. Incentives for lenders and investors to cross a line.
First, there is no better way to scale climate solutions than to benefit from local banks and community-based financial institutions (FIs). Local institutions understand their market best, including how to manage risks and seize opportunities.
Wealthy economies can incentivize their banks to take minority stakes in emerging and frontier market banks, particularly for climate credit. triodoshas invested in 90 FIs in 42 developing and emerging countries.
A second type of incentive would be inflation protection. Inflation was on 8.5% in March 2022 in emerging and developing countries. There are many inflation-linked bonds around the world, such as B. the US Series I Savings Bond, which protect investors in high-inflation environments.
Creating climate-related inflation-linked bonds for developing countries would attract investors. This would also give public budgets in wealthy economies the opportunity to provide start-up capital for such products.
Inflation alone is not an emerging market phenomenon and one of the critical obstacles to cross-border transactions is exchange rate risk; Incentives to invest in local currency are crucial.
Ultimately, policymakers must free up for the EMDE climate what they have freed up for pensions – tax-exempt or tax-deferred benefits.
For example, in the US, a Roth Individual Retirement Account (IRA) is an investment vehicle that allows private investors to save tax-free for retirement: the investment can grow tax-free and can be withdrawn tax-free after the age of 59.
In France, the Plan d’épargne retraite (PER) allows for retirement savings in line with tax breaks. Why not create an equivalent for cross-border climate investing, available for private pension funds and institutional investors holding the asset for 20 to 30 years? This would be especially helpful when the underlying assets are green financial institutions in EMDEs.
The solution to moving climate capital from rich economies to emerging markets requires a rethink in the climate movement, including acknowledgment that climate finance regulations and private capital incentives are not currently designed to push boundaries.
To solve this, serious work needs to start “at home” to create incentives in affluent economies.