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By Karen Orenstein
This week in Washington, DC, U.S. Special Envoy for Climate Change Todd Stern is hosting a ministerial meeting on mobilising climate finance. This invitation-only event for finance and climate ministries of select donor countries typifies the extraordinary emphasis rich governments are placing on private finance as the solution to meeting developing countries’ climate needs.
Unfortunately, they are trumpeting the private sector as a solution without first thoroughly investigating whether the real needs of ordinary people in lower-income countries can actually be met by private financiers and companies. It is with this in mind that Friends of the Earth U.S. and the Pan African Climate Justice Alliance have released a new report, Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund?
Policymakers concerned with international climate finance, particularly board members of the nascent U.N. Green Climate Fund (GCF), should start by asking the question, as we do in our report: What are the needs of developing countries, especially the poorest and most vulnerable, as they confront the climate crisis? Only then can we consider whether private finance and support for the private sector will help equitably and effectively meet those needs, upholding the requirements of the GCF Governing Instrument and the United Nations Framework Convention on Climate Change.
Our report deconstructs ideological notions of “leveraging” private finance, and examines the track record of the private sector, private financiers and development finance institutions in developing countries.
It concludes that private finance will be especially difficult to deploy responsibly in low- and lower-middle income countries, as well as in marginalised communities in all developing states. Further, private climate finance cannot be a substitute for direct public finance. Adaptation in particular is likely to offer few commercially profitable opportunities for private investors.
SMALL ENTERPRISES OVERLOOKED
The report recognises that micro, small and medium enterprises (MSMEs) are the most important economic actors and provide most of the employment in developing countries, and that directing finance towards these enterprises can be extremely difficult. Most MSMEs focus on subsistence, with high informality rates, low returns and low investment volumes.
As a result, international donors and financiers often ignore them. And without rigorous and well-articulated effort to address this dynamic, the GCF would likely do the same in its support for the private sector.
When development finance institutions have tried to respond to the challenges of working with MSMEs, they have tended to use financial intermediaries to deploy funds. Financial intermediaries may include commercial and investment banks, private equity and venture capital funds, microcredit institutions, insurance and other financial institutions. But extensive evidence demonstrates that a reliance on financial intermediaries often results in inadequate monitoring and transparency, poor development outcomes, compromised environmental and social standards and serious deficiencies in accountability to affected communities and other stakeholders.
Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund? concludes that the GCF should approach private companies and financiers slowly, and with a high degree of caution. It should only engage them to the extent that they can guarantee compliance with high standards on environmental, social and development effectiveness; implement robust processes to address financial, social and environmental risks; and produce effective mitigation and adaptation outcomes.
We hope that Todd Stern and other government representatives attending the climate finance ministerial this week will focus on how policymakers can support quality livelihoods for pastoralists in Tanzania or wastepickers in India, for example, rather than how best to guarantee high returns for Wall Street and the City of London.
Karen Orenstein is an international policy analyst with Friends of the Earth U.S.