Can we trust the climate bet of 130 trillion dollars of private financing?

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A group of 450 banks and insurers, under the name The Glasgow Financial Alliance for Net Zero (Gfanz), has committed $ 130 trillion [€112 trillion] to fight climate change by 2050.

Mark Carney, UN special envoy on climate action and finance and group leader, said they had “all the money needed” to fund the transition to renewable energy, demonstrating that at the summit on this year’s climate (COP26), private financing is at the center of the concerns. .

  • Multi-billionaire businessman and former New York City mayor Michael Bloomberg has joined Carney as co-chair of the Glasgow Financial Alliance for Net Zero (Gfanz) (Photo: European Commission)

Carney promises to “mobilize trillions of dollars of capital to finance decarbonization in emerging and developing countries.”

Larry Fink, CEO of BlackRock, an investment firm with 8 trillion euros under management, was a co-signer. Multi-billion dollar businessman and former New York City mayor Michael Bloomberg has joined Carney as co-chair.

However, critics were quick to point out that much of that capital is stuck in real estate mortgages or is still currently being invested in fossil-fueled infrastructure. We do not know how much of the $ 130 trillion can actually be invested in green projects.

Meanwhile, last year, banks invested nearly € 900 billion in the fossil fuel industry, according to a group of activists Tropical Forest Action Network. All the biggest investors in fossil fuels are on the Gfanz list.

To push these investors in the right direction, the World Bank, G20 countries and the Gfanz Alliance have pushed governments to help make green investments profitable, for example by covering part of the initial cost.

“Mix finances, reduce investment risks and create the capacity to have bankable agreements. It’s doable for water, it’s doable for electricity, it’s doable for transport,” he said. US climate envoy John Kerry told reporters. during Gfanz’s presentation in Glasgow last week.

But improving the climate resilience of homes or infrastructure is actually not as easily bankable as a wind farm or solar power project that delivers a rate of return – let alone if they are located in low-income countries that are often in the areas most affected by hurricanes, flash floods and droughts.

“Approaching the turn [climate] projects into bankable projects ignore the fact that a majority of the needs of the ecological transition will simply not be bankable and will not offer any return on investment “, economist of NGO counterbalance, Xavier Sol, wrote in an editorial for EUobserver last month.

This point was underscored by the Prime Minister of Barbados, Mia Amor Mottley, when she told the assembly of world leaders in Scotland that investments in climate change projects in Pacific island countries had in fact declined in recent years.

But while she proposed a public finance program backed by the richest governments that would give low-income countries like Barbados access to the same monetary firepower as the United States and countries in the eurozone have been able to use for years to fight their crises, Carney and the Gfanz Alliance are pushing for a private finance solution.

“We need a radical new approach to raising private capital,” Carney wrote in an editorial ahead of COP26.

Attractive option?

“Read them as calls for the financialization of public goods in asset classes #WallStreetConsensus,” researcher and economist Daniela Gabor tweeted last week.

She has written extensively about the real risks of this “risk reduction” strategy, which is part of a paradigm she calls the “Wall Street consensus.”

In this model, investments in clean infrastructure are securitized into marketable assets, which can be traded in financial markets and used as collateral for new borrowing (thus converting billions to trillions, as promised by Carney and the World Bank. ).

Far from representing a “radical new approach”, Gabor shows that the model Carney, Bloomberg and Fink are selling at COP26 has been developed for years and builds on existing programs like the G20. Infrastructure as an asset class, albeit on a much larger scale.

It is touted as an attractive option for countries with a lack of (easy) access to money as no taxpayer money is needed.

It builds on the promise that investments (green assets) can easily be leveraged to garner new investments, in the same way that mortgages can be repackaged and sold in financial markets.

But by converting climate projects into green assets, investors become important players in the decision-making process, giving a premium to projects that promise a rate of return – often at the expense of less bankable projects.

And there’s another caveat: Governments that subscribe to these so-called public-private partnerships (PPPs) often become contractually responsible in case the investments don’t work as intended.

Billion dollar mishaps

Gabor details one such investment that went wrong in his Wall Street consensus study.

In Nigeria, a consortium of Wall Street investors, the World Bank and the Netherlands Development Bank (FMO) have invested € 780 million in the 460-megawatt Azura power station on the outskirts of Benin City.

When completed, it became apparent that the dilapidated power grid could not handle the amount of power produced in the new power plant.

As stipulated in the contract, the Nigerian government became responsible for the loan and had to repay lost income to investors worth up to € 1 billion.

In a similar case still pending, the Spanish government had to repay € 1.35 billion to private investors and the European Investment Bank (EIB) when a gas storage project led to earthquakes endangering a nearby nuclear power plant.

Investments in clean technologies or building local resilience – renovating homes, improving infrastructure to withstand extreme weather conditions or droughts – or disaster clean-ups are often complex singular projects that require specialist knowledge of the area. environment and community to face all eventualities and prevent risks.

Risk reduction programs eliminate the need for an appropriate risk assessment of private partners. Public institutions like the World Bank and the EIB supported the projects and the risks were pushed onto governments through complex PPP contracts – “the risk-free state always pays,” warns Gabor.

Governments need ‘the heavy lifting’

The Gfanz alliance has promised too much, warned an anonymous banker quoted in the Financial Times. “This number implies that finance is greening the world,” he said, when in reality governments will have to do a lot of the lifting – especially in high-risk, low-income environments.

“Private financing may be appropriate in certain circumstances”, economists Maria Jose Romero, Flora Sonkin, written in an article published by Eurodad, a financial NGO based in Brussels, ahead of COP26.

“But it is only when democratic development plans are followed that high quality and equitable public services are prioritized and international standards of transparency and accountability are met.”


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