Can we trust the climate bet of 130,000 billion dollars financed by the private sector?



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 combat climate change by 2050.

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

  • Multi-billionaire businessman and former New York Mayor Michael Bloomberg has joined Carney as co-chair of the Glasgow Financial Alliance for Net Zero (Gfanz) (Picture: 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-billionaire businessman and former New York Mayor Michael Bloomberg joined Carney as co-chairman.

However, critics have been quick to point out that much of that capital is tied up in mortgages or is still currently invested in fossil fuel infrastructure. It is unclear how much of the $130 trillion can actually be invested in green projects.

Meanwhile, banks invested nearly 900 billion euros in the fossil fuel industry last year, according to an activist group Rainforest Action Network. All of the biggest fossil fuel investors 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 finance, reduce investment risk and create the capacity to have bankable deals. It’s doable for water, it’s doable for electricity, it’s doable for transport,” said US climate envoy John Kerry told reporters. at the Gfanz 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 energy project that provides a rate of return – even less if they are located in low-income countries that are often in the regions most affected by hurricanes, flash floods and droughts.

“The Approach to the Bend [climate] projects into bankable projects ignores the fact that a majority of ecological transition needs will simply not be bankable and will not offer any return on investment”, economist for NGO counterweightXavier Sol, wrote in an editorial for EUobserver last month.

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

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

“We need a radical new approach to mobilizing private capital,” Carney wrote in an op-ed ahead of COP26.

Attractive option?

“Read these as calls for the financialization of public goods into #WallStreetConsensus asset classes,” researcher and political 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 tradable assets, which can be traded in capital markets and used as collateral for further borrowing (thereby converting billions into trillions, as promised by Carney and the World Bank).

Far from representing a “radical new approach”, Gabor shows that the model that Carney, Bloomberg and Fink are selling at COP26 took years to prepare and builds on existing programs like the G20. Infrastructure as an asset classalthough on a much larger scale.

It is being touted as an attractive option for countries that don’t have (easy) access to the money because no taxpayer money is needed.

It builds on the promise that investments (green assets) can easily be leveraged to attract new investment, similar to how 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, favoring projects that promise a rate of return – often at the expense of less bankable projects.

And there’s another caveat: governments that sign these so-called public-private partnerships (PPPs) often become contractually liable in case the investments don’t go as planned.

Billion Dollar Misadventures

Gabor details one such investment gone 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 plant on the outskirts of Benin City.

Upon completion, it became clear that the dilapidated power grid could not handle the amount of energy produced at the new power plant.

As stipulated in the contract, the Nigerian government became responsible for the loan and had to reimburse the investors’ loss of income up to 1 billion euros.

In a similar case still ongoing, the Spanish government had to repay 1.35 billion euros to private investors and the European Investment Bank (EIB) when a gas storage project caused earthquakes which endangered a nearby nuclear power plant.

Investments in clean technologies or building local resilience – renovating homes, improving infrastructure to withstand extreme weather or droughts – or post-disaster cleanups are often complex one-off projects that require specialist knowledge of the environment. environment and the community to deal with all eventualities and prevent risks.

Risk reduction programs eliminate the need for proper risk assessment by private partners. Public institutions such as the World Bank and the EIB have backed the projects, and risks have been shifted to governments through complex PPP contracts – “the risk-free state always pays”, warns Gabor.

Governments need to “lift heavy loads”

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

“Private financing may be appropriate in some circumstances,” said economists Maria Jose Romero, Flora Sonkin, written in an article published by Eurodada 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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