Unlocking private finance to catalyze climate action in developing countries

Through Tony clamp, Director of the Private Sector Facility of the GCF, ad interim

There are two fundamental challenges to recovering better and more sustainably from COVID-19: greening economic stimulus measures and ensuring that developing countries can access adequate funding to develop and implement them.
The COVID-19 pandemic has not only resulted in untold human suffering, but has also caused the loss of tens of millions of jobs, with tens of millions more at risk of being lost without public support. Developing countries, which are already the most vulnerable to climate change, are the hardest hit by this crisis.

While OECD countries have succeeded in injecting trillions of dollars in new money to finance their economic stimulus measures to respond to the crisis, the reverse has been true for developing countries. Massive capital outflows from investors, declining remittances and foreign direct investment, and additional pressure on the existing debt burden have all worsened the public balance sheets and fiscal capacities of developing countries.

There is a paradox at the heart of climate finance. On the one hand, trillions of dollars earn negative interest rates in many OECD countries. On the flip side, there are roughly $ 23 trillion in climate-smart investment opportunities in emerging markets alone by 2030. Addressing this paradox would close the current climate finance gap and enable developing countries to access large-scale financing to implement resilient stimulus measures. This paradox is caused by barriers on both the supply and demand side of private finance which, in turn, increase the expected risk-adjusted return on potential investments.

The impacts of the economic crisis and financial instability caused by COVID-19 are likely to exacerbate the climate finance paradox as yields decline in OECD countries with expansionary monetary policies and perceptions of the investment risk increase in developing countries.

The exit from the COVID-19 crisis coincides with a pivotal moment in the fight against climate change. 2020 presents countries with the dual challenge of managing economic recovery and submitting new or revised climate action plans (CDNs). At the same time, we are entering a decade in which emissions must be reduced by 45% in line with the Paris Agreement target of limiting temperature rise to 1.5 ° C.

Even as they face the biggest shock to the global economic system since the Great Depression, governments do not need to compromise their economic recovery goals with their commitments in the Paris Agreement. Low-emissions, climate-resilient stimulus measures can help policymakers meet both needs – but time is running out.

Given the limited fiscal and monetary capacity of developing countries to achieve this dual goal, policymakers need to rely on innovative financial structuring to ensure that green stimulus measures do not increase the burden of existing debt. The climate crisis is too big, too serious and too urgent to rely on the resources of public institutions alone. The private sector also has a key role to play in aligning its financial flows with low-emission and climate-resilient pathways.

As the world’s largest dedicated climate fund helping developing countries meet the challenges of climate change, the Green Climate Fund (GCF) is uniquely placed to connect investors to Nationally Determined Contributions (NDCs) and climate strategies of developing countries to accelerate the creation of bankable climate projects. In particular, GCF supports developing countries in removing barriers to supply and demand finance by providing a range of financing instruments to make climate projects low risk, bankable and attractive to investors. By attracting public and private investment, the GCF achieves transformative results.

In order to catalyze actions to help developing countries maintain their climate ambition in the era of COVID-19, the GCF is organizing its 3rd edition Private Climate Investment Conference (GPIC) October 14-16, 2020. The virtual gathering, scheduled from 8:00 am to 11:00 am Eastern Daylight Time, will provide a platform for leaders in business, finance and technology to share experiences, innovations and best practices to strengthen and expand public-private partnerships.

The conference will also serve as an important link to global policy dialogues, including the Financing for Development Initiative in the Age of COVID-19 and Beyond, and the 2021 United Nations Climate Change Conference (COP 26). . Alignment of investor portfolios with the Paris Agreement target of 1.5 ° C, carbon pricing, climate innovations and the role of technology transfer, as well as the positioning of solutions based on nature as a priority for private investment, are among the topics that will be discussed during the event. Find out more and register to join https://g.cf/gpic2020.