- Sustainable Economic Systems
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- Carts before horses at Green Climate Fund
Carts before horses at Green Climate Fund
by Karen Orenstein, Deputy Director of Economic Policy
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Originally posted on Reuters
The board of the fledgling U.N. Green Climate Fund (GCF), which met in South Korea last month, continues to gloss over the foundational issues of the purpose of the Fund and who it is supposed to serve – even though these questions underlie most of the ongoing debate and dialogue.
Should the GCF focus on meeting the adaptation and mitigation needs of ordinary people in developing countries – especially the most vulnerable and marginalised (the position of Friends of the Earth)? Or is the GCF meant to move as much money as possible into, out of and within developing countries, based on the idea that maximising financial flows will maximise climate action? There is some overlap between these two purposes, but there is also a lot of distance.
Flawed sequencing has marked the GCF’s deliberations. Before deciding on its “financial instruments and modalities”, policymakers first need to agree on the GCF’s purpose and objectives. Neither has the board yet discussed the fundamental issue of whether the GCF is a fund (that receives and passes on money and would therefore have to be mostly grant-based) or a bank (that lends money directly via loans and indirectly through capital markets, and could generate additional revenue and recycle funds).
Despite these unanswered questions, in June the GCF board spent a lot of time debating its private sector facility (PSF). The UK, United States, Australia, Norway and Switzerland are pushing hard to rapidly make the GCF into a banking institution that would attract international capital. In contrast, Egypt, France, India, Democratic Republic of Congo (DRC) and others cautioned that the GCF should start simple, with grants and concessional loans.
Because the basics of the GCF have not been thoroughly debated, the relatively detailed PSF discussions are taking place in something of a vacuum – rather like having one fully furnished room in a house that has yet to be built.
Regrettably, there has been very little time spent even on what must be the primary structures of the GCF: a mitigation window and an adaptation window. So we left Korea with commitments to establish a bunch of taskforces – a Private Sector Advisory Group, a Risk Management Committee and an Investment Committee — but with no real idea of how the PSF is supposed to relate to the rest of the Fund.
The elephant in the board room remains the utter lack of funds for the GCF, as well as inadequate international climate finance more broadly. But the co-chairs would not include the establishment of a resource mobilisation unit in the final decision text, as suggested by India and DRC.
Perhaps this shouldn’t be too surprising given that, at the last GCF meeting in March, the United States objected to setting any specific timeline to mobilise resources for the Fund. So, oddly enough, we left Korea with a decision that had no mention of how to raise money but went into considerable detail on how the PSF will be organised.
NO PARALLEL FUND
Going into the meeting, there was a real danger the PSF would be set up essentially as a parallel fund, with its own governance structure that would allow for private-sector board members with voting rights. There was even a suggestion that its establishment be outsourced to the International Finance Corporation (IFC), an arm of the World Bank.
Fortunately, this was not borne out, and the PSF will operate “under the guidance and authority of the Board as an integral component of the Fund.” Thus it could have been worse, and we have opportunities at the next board meeting to make sure the PSF doesn’t go in the wrong direction.
On the other hand, some governments have stymied efforts to ensure that the “[private sector] facility will promote the participation of private sector actors in developing countries, in particular local actors, including small- and medium-sized enterprises (SMEs) and local financial intermediaries” (as required by the GCF Governing Instrument). Despite valiant efforts by countries like Zambia, which called for a paper on promoting the involvement of local businesses in small-island developing states and least developed countries, binding language on SMEs did not prevail.
Similarly, attempts by India and others to ensure that adequate resources are allocated to SMEs, as compared to international corporations, were also foiled.
In order to get the GCF up and running as soon as possible, there has been a strong push for it to work as much as possible through “national, regional and international intermediaries” (and in some of the decision text out of Korea, “subnational intermediaries” are also included in this grouping).
The term “intermediaries” was bandied about a lot at the board meeting, with some board members publicly admitting they don’t really know what different people mean when they use the term.
But it is clear that, in many cases, “intermediaries” refers to financial intermediaries (FIs) – which may include national and multilateral development banks, commercial and investment banks, private equity and venture capital funds, microcredit institutions and insurers.
While FIs may end up being a significant part of the GCF, they also pose many risks and limitations. The GCF must very carefully examine the track record of how development finance institutions have used FIs, so that it does not repeat their mistakes. We have seen FIs fail to meet developing-country priorities, and poorly implement social, environmental, fiduciary, transparency and accountability standards.
We must not end up with a fund that has a poor record on environmental, social and development impacts, and is also biased towards multinational corporations and the largest emerging markets.