Financing climate change solutions
Editor’s note: The US Environmental Protection Agency stated on April 4, 2024, that it has granted $20 billion in grants to a number of organisations. These monies will be used to finance initiatives in the US that have the potential to prevent or decrease up to 40 million metric tonnes of climate pollution annually.
We choose to reprint a piece written by correspondent Susanne Courtney, which originally appeared in March 2023 as part of our Writings on the Wall climate initiative, in order to raise awareness of the significance of climate finance. The piece describes how international finance may aid in the fight against climate change.
We introduced Decoder Replay so that readers may observe how our correspondents decoded comparable historical events and gain a deeper understanding of contemporary global events. Financing climate change solutions
Unprecedented extreme weather occurrences, such as cyclones, droughts, floods, and more, severely affect people worldwide as a result of greenhouse gas emissions warming the earth. This exacerbates hunger and food insecurity by harming agricultural productivity. Financing climate change solutions
Global efforts towards addressing climate change was already starting to lag before the COVID outbreak.
According to a 2022 assessment from the UK and Egypt, low- and middle-income nations (except from China) require $1 trillion year to satisfy the Paris Agreement’s carbon reduction targets and prevent the climate disasters that they are largely responsible for. Financing climate change solutions
Where will the money come from?
Since 2009, developed countries have committed to ‘mobilizing’ $100 billion annually for climate action. So far, they are well below target. 2020 contributions amounted to only $83.3 billion. And that money mainly targeted Asia and middle-income countries, missing many that need it the most. Financing climate change solutions
There’s the will to reduce carbon but is there the money?
The World Bank, a consortium of five financial institutions with aggregate assets of over $300 billion, is the largest participant in climate finance.
The World Bank committed $31.7 billion to climate action in 2022. It is expected to become ever more significant as wealthier countries reduce their funding for international aid. Financing climate change solutions
Created in 1944 at Bretton Woods to finance the rebuilding of Europe ravaged by World War II, the World Bank is now key to financing efforts to save a planet ravaged by climate change. Financing climate change solutions
“The WB matters because everyone looks to it for money and leadership,” said Paul Cadario, distinguished fellow in global innovation at the Munk School of Global Affairs and Public Policy at the University of Toronto. “Notwithstanding what critics say, the WB is a trusted source of advice and money.
Research officer Bianca Getzel of the global affairs think organisation ODI agrees. Without it, Getzel stated “the international system will not be able to finance climate and development challenges. Financing climate change solutions
Global funds for a greener globe
All countries in the world, with the exception of North Korea and Cuba, are members of the World Bank, a multilateral development bank (MDB). It provides loans to nations so they can thrive economically and end poverty. It generates significant research on international problems that have an impact on prosperity, especially in the world’s poorest nations. Financing climate change solutions
Additionally, it offers significant technical assistance to nations in order to help them create suitable policies and plan mitigation and adaptation strategies for the climate.
Furthermore, the World Bank administers many financial intermediary funds (FIFs) that channel money from governments and private foundations to specific issues such as climate action, HIV/AIDS, health, education and women’s access to finance. Financing climate change solutions
The Global Fund, for example, provides money for programs to eradicate malaria and treat and prevent HIV, and the Green Climate Fund (GCF) provides money for climate projects. These funds, both administered by the World Bank, provide “concessional financing,” which includes grants, loans with highly favourable terms and guarantees. FIFs are the largest sources of concessional finance for developing countries. Financing climate change solutions
This is becoming more and more crucial as funding for development assistance contract.
Private sector funds for the planet
In order to end hunger and poverty and ensure that everyone has access to health care and education by 2030, the globe approved the 17 Sustainable Development Goals back in 2015. At that time, it was evident that member countries would never be able to raise the necessary funds to accomplish those objectives.
The World Bank can close the financial gap by providing inexpensive financing to nations that can sufficiently lower investment risk to draw in new investors. It can accomplish this by raising money from the private sector and emerging donors, such as India and the Gulf states. Financing climate change solutions
The World Bank is facing pressure to adapt its operations due to funding pressures associated with the fight against climate change. The G20 finance ministers received a framework for MDB reform in July 2022 from an independent team of experts, which has the potential to unlock billions of dollars in new credit. Although this study may be difficult to understand for non-experts, it is essential to enhancing the World Bank’s reaction to worldwide climate change emergencies.
Reassessing risk thresholds and appreciating the advantages of callable capital are among the suggestions. Callable capital is funds that member countries promise as security and can access when needed. This enables the World Bank to extend loans beyond its current limits without jeopardising its AAA credit ratings.
The World Bank and other MDBs get most of their money by borrowing on international bond markets. This is the key to the financial power of MDBs. With a small amount of shareholder capital and a strong financial track record, MDBs can borrow substantial amounts from bond investors at excellent financial terms.
Heavily indebted countries rely on the World Bank to transfer these favoured rates to them when borrowing prices soar.
Fighting climate change should not be a credit risk.
U.S. Treasury Secretary Janet Yellen urged the World Bank to move away from lending only to sovereign states in an autumn speech, expediting decision-making and addressing cross-border and hyper-local concerns. Financing climate change solutions
According to Cadario and others, the World Bank need to give provinces and cities direct loans so they may construct robust water systems, for example.
Cities might occasionally be more creditworthy than the nation as a whole, according to Cadario. “Institutional investors would be drawn in by bank lending to cities in the absence of a government guarantee, increasing the amount of money accessible.
Additionally, the Bank is under pressure to take greater steps to draw in new capital to nations and projects that would otherwise be deemed too risky. Other investors are drawn in by concessional financing. The World Bank can encourage more donors to make more impactful and economical investments by enhancing the performance of these concessional funds as trustee for 12 climate FIFs. Financing climate change solutions
Climate Funds for Infrastructure (Climate FIFs) support a wide range of projects, but public and private sector investments are predominantly focused on energy and transport, according to a recent analysis from the Washington, D.C.-based think tank Centre for Global Development (CGD).
The World Bank can mobilize funds for the Earth.
The investigation revealed with alarm that the three largest FIFs, which receive funding from donor nations and sizable philanthropic organisations, fail to disclose their impact and the amount of new capital they raise. Donors find it challenging to evaluate value for money as a result.
One of the report’s authors, Clemence Landers, a senior policy scholar at the CGD, stated that “donors should be shocked by the allocation findings.” “It is unclear how to ascertain whether they are headed to the most important countries. There is nothing strategic about these monies.
According to Landers, in order to boost efficiency, save administrative expenses, and provide better outcomes, the finances must be streamlined.
“The hope is that pressure like this will start bearing fruit in a world where the question is whether donor resources are going to projects and countries where they are most needed, most impactful and most catalytic, Landers stated. Financing climate change solutions
World Bank reforms are essential for reallocating the trillions of dollars that sit on the balance sheets of financial institutions, pension funds, and insurance companies in order to mobilise climate-positive investments at the scale needed to avert catastrophic global warming. The World Bank plays a pivotal role in climate and development finance. Financing climate change solutions
For MDBs, mobilisation need to be a primary goal, according to Getzel. In developing nations, mobilisation is the first step towards creating thriving local capital markets and economies. Considering that is ultimately what nations desire. The need for aid to the poor that existed in the 1980s and 1990s does not exist today. The field of development financing is entering a new phase. Financing climate change solutions
The climate as a long-term investment
The World Bank presented a new “Roadmap” towards the end of 2022 in response to calls for reform. Its goals were to increase lending capacity, develop new financing tools, such as guarantees for loans to the private sector, and move away from the sovereign state lending model that it had been using since the end of World War II.
With a year-long timeline for consultation on the Roadmap, proposed reforms will be pushed to 2024 or later. Will that be fast enough for the Biden administration, the Bank’s largest shareholder? Probably not.
There’s also the bank’s reputation for taking climate action at risk. David Malpass, the head of the World Bank nominated by President Trump, declared he would resign in June, nearly a year ahead of schedule, after seemingly casting doubt on the science underlying climate change caused by fossil fuels.
With 17% of paid-in capital, the United States is the largest shareholder and has historically selected the president of the World Bank.
Ajay Banka, the former CEO and president of Mastercard, was quickly announced by US President Joe Biden as his choice to succeed Malpass. Reform will undoubtedly be at the top of the World Bank’s agenda if it is adopted by all shareholders at the spring meeting.
