Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund?

New Report from Friends of the Earth U.S. and Pan African Climate Justice Alliance

This week in Washington, DC, U.S. Special Envoy for Climate Change Todd Stern is organizing the Ministerial Meeting on Mobilizing Climate Finance. This invitation-only event, hosted for finance and climate ministries of select donor countries, typifies the extraordinary emphasis rich governments are placing on private finance as the solution to meeting developing countries’ climate needs. Unfortunately, they are trumpeting the private sector as a solution without first thoroughly investigating whether or not the real needs of ordinary people in lower income countries actually can be met through supporting private financiers and companies. It is with this in mind that Friends of the Earth U.S. and the Pan African Climate Justice Alliance are releasing the report, Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund?

Policymakers concerned with international climate finance, particularly board members of the nascent Green Climate Fund, should first be asking the question posed in our report: what are the needs of developing countries, especially the poorest and most vulnerable, as they confront the climate crisis? Only then can we consider whether private finance and support for the private sector help equitably and effectively meet those needs, and uphold the requirements of the GCF Governing Instrument and the United Nations Framework Convention on Climate Change.

Rather than lionize the role of the private sector, our report instead de-constructs ideological notions of “leveraging” private finance and examines the track record of the private sector, private financiers and development finance institutions in developing countries. It concludes that private finance will be especially difficult to deploy responsibly in low and lower-middle income countries, as well as in marginalized communities in all developing countries. Further, private climate finance cannot be a substitute for direct public finance; adaptation in particular is likely to offer few commercially profitable opportunities for private financiers.

It recognizes that micro, small and medium enterprises (MSMEs) are the most important economic actors and provide most of the employment in developing countries, and that directing finance towards these enterprises can be extremely difficult. Most MSMEs focus on subsistence, with high informality rates, low returns and low investment volumes. As a result, international donors and financiers often ignore them. Without rigorous and well-articulated effort to address this dynamic, the GCF would be likely to do the same in its support for the private sector. When development finance institutions have tried to respond to the challenges of working with MSMEs, they have tended to use financial intermediaries to deploy funds. (Financial intermediaries may include commercial and investment banks, private equity and venture capital funds, microcredit institutions, insurance and other financial institutions.) But extensive evidence demonstrates that a reliance on financial intermediaries frequently results in deeply inadequate monitoring and transparency, poor development outcomes, compromised environmental and social standards and serious deficiencies in accountability to affected communities and other stakeholders.

The report concludes that the GCF should approach private companies and financiers slowly and with a high degree of caution, and only engage them to the extent that they can guarantee compliance with high standards on environmental, social and development effectiveness; implement robust processes designed to address financial, social and environmental risks; and produce effective mitigation and adaptation outcomes.

We hope that Mr. Stern and other government representatives attending the climate finance ministerial can seriously take into account the findings and recommendations of Pro-poor Climate Finance: Is There a Role for Private Finance in the Green Climate Fund?The focus of the meeting should start and end with how policymakers can support quality livelihoods for pastoralists in Tanzania, for example, or wastepickers in India — rather than how to guarantee high returns for Wall Street and the City of London.