Unlocking private finance to catalyse climate action in developing countries

By Tony Clamp, GCF Private Sector Facility Director, ad interim

Tony ClampThere 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 finance to develop and implement them.
The COVID-19 pandemic has not only led to 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 in the absence of public support. Developing countries, which are already the most vulnerable to climate change, are the hardest hit by this crisis.

While OECD countries have managed to inject trillions of dollars of new money to finance their economic stimulus measures to respond to the crisis, the opposite has been true for developing countries. The massive outflow of capital from investors, a fall in remittances and foreign direct investment, and further pressure on existing debt burdens have all added significant stress to government balance sheets and fiscal capacities in developing countries.

There is a paradox at the heart of climate finance. On the one hand, trillions of dollars are earning negative interest rates in many OECD countries. On the other hand, there are an estimated $23 trillion in opportunities for climate-smart investments in emerging markets alone between now and 2030. Addressing this paradox would address the present climate financing gap and enable developing countries to access finance at scale to implement green and resilient recovery measures. This paradox is caused by barriers on both the supply and demand side of private finance which, in turn, drive up the expected risk-adjusted return of 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 fall in OECD countries with expansionary monetary policies, and perceptions of investment risk rise in developing countries.

Recovery from the COVID-19 crisis coincides with a pivotal moment in the fight against climate change. 2020 presents countries with the dual challenges of managing economic recovery and submitting new or revised climate action plans (NDCs). Simultaneously, we start a decade in which emissions must be cut by 45% in line with the Paris Agreement's goal to limit temperature rise to 1.5°C.

Even though they are faced with the biggest shock to the global economic system since the Great Depression, governments do not need to compromise their economic recovery objectives with their Paris Agreement commitments. Low-emission, climate resilient stimulus measures can help policy makers fulfil both needs at once - but the clock is ticking.

Given the limited fiscal and monetary capacity of developing countries to achieve this dual objective, leaders must draw on innovative financial structuring to ensure green stimulus measures do not compound existing debt burdens. 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 by aligning its financial flows with low-emission, climate resilient pathways.

As the world's largest dedicated climate fund supporting developing countries respond to the challenges of climate change, the Green Climate Fund (GCF) is uniquely positioned to connect investors with developing countries' Nationally Determined Contributions (NDCs) and climate strategies to help accelerate the origination of bankable climate projects. Notably, GCF supports developing countries by addressing supply and demand side financing barriers by providing a range of financing instruments to make climate projects low-risk, bankable and attractive to investors. By attracting public and private investment, GCF is achieving transformative results.

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

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