Can Private Finance’s $130 Trillion Climate Bet Be Trusted?

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

Mark Carney, UN special envoy on climate finance and action and leader of the group, said they have “all the money we need” to finance the transition to renewable energy, showing that at this year’s climate summit (COP26) private finance is a central focus. .

  • Billionaire businessman and former New York mayor Michael Bloomberg joined Carney as co-chair of the Glasgow Finance 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 billion euros under management, was one of the signatories. Billionaire businessman and former New York mayor Michael Bloomberg joined Carney as co-chairman.

However, critics were quick to point out that much of this capital is either stuck in home mortgages or is still invested in fossil fuel infrastructure. It is unclear how much of the $130 billion can be spent on green projects.

Meanwhile, banks last year poured nearly €900 billion into the fossil fuel industry, according to an advocacy group. Rainforest Action Network. All the biggest investors in fossil fuels are on the Gfanz list.

To nudge these investors in the right direction, the World Bank, G20 nations and the Gfanz alliance have been lobbying governments to help make green investments profitable, for example by covering part of the upfront cost.

“Combine the finances, de-risk the investment and create the capacity to have bankable deals. That’s doable for water, it’s doable for electricity, it’s doable for transportation,” US Special Envoy Mr. USA for climate, John Kerry. at the Gfanz presentation in Glasgow last week.

But improving the climate resilience of households or infrastructure is actually not as easy to finance as a wind farm or solar project that secures a rate of return, even less so if they are located in low-income countries that are often They are found in the regions most affected by hurricanes, flash floods and droughts.

“The approach of converting [climate] bankable projects ignores the fact that most needs for the ecological transition will simply not be bankable and will offer some return on investment,” economist at NGO accountantXavier Sol, wrote in a opinion piece for EUobserver last month.

This point was highlighted by Prime Minister of Barbados Mia Amor Mottleywhen he told the gathering of world leaders in Scotland that investment in climate change projects in Pacific Island nations has dwindled in recent years.

But while he proposed a public financing scheme backed by the richest governments that would give low-income countries like Barbados access to the same monetary power that the United States and eurozone countries have been able to use for years to fight their crises, Carney and the The Gfanz alliance promotes a private financing solution.

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

Attractive option?

“Read this as calls to finance public goods in #WallStreetConsensus asset classes,” researcher and political economist Daniela Gabor tweeted last week.

She has written extensively about the real risks of this ‘de-risking’ strategy, which is part of a paradigm she calls the ‘Wall Street consensus’.

In this model, investment in clean infrastructure is securitized into tradable assets, which can be traded in financial markets and used as collateral for further loans (thereby turning billions into trillions, as Carney and the World Bank promised).

Far from representing a “radical new approach,” Gabor shows that the model that Carney, Bloomberg and Fink are peddling at COP26 is years in the making and builds on existing programs like the G20. Infrastructure as an asset classalbeit on a much larger scale.

It is presented as an attractive option for countries with a lack of (easy) access to money because no money from taxpayers is needed.

It is based on the promise that investments (green assets) can be easily leveraged for new investment, in the same way that mortgages can be reorganized and sold on financial markets.

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

And there’s another caveat: Governments that sign up to these so-called public-private partnerships (PPPs) often become contractually liable if the investments don’t work out as intended.

Billion dollar mishaps

Gabor details one such investment gone wrong in his study of the Wall Street Consensus.

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

When it was over, it became clear that the dilapidated electrical grid could not process the amount of energy produced at the new power plant.

Under the terms of the contract, the Nigerian government took responsibility for the loan and had to repay the investors’ lost income of up to €1 billion.

In a similar case still ongoing, the Spanish government had to pay private investors and the European Investment Bank (EIB) €1.35 billion when a gas storage project triggered earthquakes that endangered a power plant. nearby core.

Investments in clean technology or building local resilience (renovating homes, upgrading infrastructure to withstand extreme weather or drought) or disaster cleanup are often complex one-off projects that require specialized knowledge of the environment and the community to complete. detect all contingencies and prevent risks.

Risk elimination schemes eliminate the need for proper risk assessment by private partners. Public institutions such as the World Bank and the EIB supported the projects and the risks were transferred to the governments through complex PPP contracts: “the State without risk always pays”, warns Gabor.

Governments are needed for 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 making the world greener,” he said, whereas in reality, governments will have to do much of the lifting, especially in high-risk, low-income settings.

“Private finance may be appropriate in some circumstances”, economists María José Romero, Flora Sonkin, wrote in an article published by Eurodada financial NGO based in Brussels, ahead of COP26.

“But only when democratically owned development plans are followed, high-quality and equitable public services are prioritized, and international standards of transparency and accountability are met.”

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