T HE world leaders who spoke at the inaugural sessions of the United Nations climate conference in Glasgow (the 26th Conference of the Parties, or COP26) were all on the same page when it came to recognising the urgency of curbing carbon emissions and limiting the level of global warming. But when it came to the nitty-gritty of deciding what needs to be done and by whom, multiple differences emerged.
Principal among those differences was on how much must be mobilised to finance mitigation and adaptation efforts globally by rich countries, which, en route to attaining developed country status and thereafter, are responsible for an overwhelmingly large share of cumulative carbon emissions. Associated differences were on issues relating to the source, forms and use of that finance. Finally, little has been delivered in Glasgow by way of advance on the quantity or quality of climate finance. Most disappointing was the declaration by developed countries that they would not be able to deliver even on the minimal pledge made in Copenhagen in 2009 of ensuring climate finance to the tune of $100 billion a year starting from 2020. The Organisation for Economic Cooperation and Development estimates that developed countries delivered close to $80 billion in 2019. The target set for 2020, which was not achieved, has now been pushed to 2023.
This delay will mean that there is no way that over the period 2020-25 developed countries will make available the promised $600 billion even while all concerned agree that what is needed is not billions but trillions of dollars. This is despite the fact that pledges by individual developed countries are way below what a fair contribution from them should be. According to the Joe Thwaites and Julie Bos of the World Resources Institute: “Three major economies—the United States, Australia and Canada—provided less than half their share of the financial effort in 2018, based on objective indicators such as the size of their economies and their greenhouse gas emissions.”
Developing countries have in fact demanded that the goal should be for developed countries to mobilise $1.3 trillion annually by way of climate finance. But there is no hope that the gap, however large, is likely to be bridged. Although the 12-year-old promise of $100 billion by 2020 has not been met, developed countries still seem reticent to beef up volumes. This came through in discussions on a mandated new “collective quantified goal” that was to take that annual figure to significantly higher levels starting from 2025.
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In an effort to postpone substantive discussion to fora where the pressure to yield would be lower, developed countries dodged specifying an enhanced figure at COP26 and diverted the discussion to defining the process through which that figure and its contours should be decided. In fact, a number of developed countries do not want the long-term finance agenda to continue under the COP.
The low financing figures reported may themselves be inflated. Some of the climate-specific flows are being delivered by repurposing conventional overseas development assistance and are therefore not additional flows being provided as part of developed countries’ responsibility to contribute a fair share to global mitigation and adaptation expenditures. Moreover, there is little transparency in identifying how much, if at all, the supported projects contribute to the emission reduction effect even though investment in or lending to them is listed under climate finance contributions. Overall, the definition of climate finance is still in question, with widespread disagreement on what should be included under that head.
Besides quantitative figures—faith in the sanctity of which has been shaken by the failure to meet even the minimal $100 billion in 2020—there are many other ways in which progress on organising the finance needed to address global warming has fallen short. Most developing countries are stressed by the burden of external debt they currently carry, which rose during the COVID-19-induced crisis, making restructuring or default unavoidable in many cases. This would mean that flows of climate finance cannot be in the form of debt, especially on commercial terms. Grants and concessional finance must constitute a dominant share. But despite the disappointingly small quantity of finance made available, the grant component of that finance remains low. Bangladesh, for example, underlined the fact that even in the case of vulnerable least developed countries as much as two-thirds of climate flows take the form of debt.
Finally, the share of finance for adaptation projects in total climate finance flows is way below the recommended 50 per cent. For the poorest among developing countries, which in any case are near-negligible carbon emitters, adaptation and making up for or minimising loss and damage are the real challenges. But the global effort at putting in place mechanisms that assess adaptation requirements and those required to avert, minimise or address loss and damage and direct resources in those directions is severely wanting. In sum, if climate finance trends are indicative, there is little evidence of ambition and real commitment to limit warming to less than 2 °C and as close to 1.5 °C as possible.
Turning to private finance
A troubling signal from Glasgow is that, to make up for this huge shortfall in publicly committed (even if not fully publicly funded) climate finance, there is an attempt to shift attention to the major role that private finance can play in the climate space. This highlighting of private finance is surprising, not least because given the likely low returns in a lot of climate spending outside commercially promising areas like renewables, private players are likely to be investment shy. But citing limits to the volume of public finance that can be mobilised and to what it can do, a major role for private finance is seen as unavoidable. So, demonstrating that private finance is willing to step forward is crucial for developed governments reticent about contributing their fair share to address the task at hand.
Almost on cue, on the sidelines of the Glasgow conference, Mark Carney, the U.N. Special Envoy for Climate Action and Finance, attempted to inject an element of optimism into the downbeat conversations inside the venue. The Glasgow Financial Alliance for Net Zero (GFANZ) that he has put together, he declared, has now attracted the support of around 450 private financial institutions that have between them $130 trillion worth of assets under management. The eagerness of these private players to jump on to the net-zero bandwagon is surprising to say the least.
At the start of 2020, capital with firms committing to the net-zero emissions agenda was just $5 trillion. That has now risen to $130 trillion. Given the pledge of these firms to support the climate cause, Carney’s claim is that these assets, amounting to about two-fifths of the assets of the global financial system, can now be redirected to deliver at least as much as $100 trillion of investments that would help ensure a global transition to net zero by 2050. This was not of course a decision of the parties negotiating in Glasgow but an off-conference parallel promise.
It did not take long for sceptical voices to question Carney’s claim, alleging that the GFANZ initiative provided a platform for “greenwashing” enthusiasts. Flagging assets under management of financial firms, which are under pressure in the new environment to declare that they are climate conscious, is deeply problematic. Adding up assets being managed by each is likely to involve double counting since some firms recruit others to identify and make investment decisions on their behalf. In an integrated financial world, the same funds can show up in the books of more than one entity. Even available funds cannot be reallocated at will to climate-friendly projects, given the many considerations that determine the choice of an investment manager’s portfolio and the likelihood that some investments are in effect locked in for relatively long periods.
And, finally, private investors looking for yields, even if they are backers of sustainable development goals, are unlikely to back climate-friendly projects if returns elsewhere are better. And, at the moment, high-emission projects in the fossil fuel industry do look attractive. With coal supply short of demand and oil and gas prices rising sharply, it was clear, even as COP26 was under way, that there is much to be gained from investing in carbon-emitting fossil fuels despite the long-term risk of being saddled with stranded assets.
Not surprisingly, the Rainforest Action Network found that 93 banks that had signed the GFANZ pledge had provided $575 billion of lending or underwriting support to the fossil fuel industry in 2020. And a Financial Times investigation found that banks such as BNY Mellon, Barclays and Deutsche Bank have all watered down their pledges to combat climate change and continue their financing of the fossil fuel industry.
The danger here does not stop with “greenwashing”. Once private finance of the magnitudes being cited are declared as available, the effort will be to ensure that it flows in directions that align with the goals of the Paris Agreement. Since there are risks involved in climate finance, “de-risking” such investments to attract private capital becomes an acceptable objective. That often involves providing public guarantees or first-loss capital from public funds. As a consequence, a chunk of the even limited funding could be used to mobilise private financing, which unless subject to monitoring and regulation may not actually deliver much on climate goals. “Available” private capital becomes not just a claim that diverts attention from inadequate public funding but is also a drain of public funds. That, if it happens, can harm the climate cause.