Can the climate bet of $130 trillion in private finance be trusted?

A consortium of 450 banks and insurers, called the Glasgow Financial Alliance for Net Zero (Gfanz), has pledged $130 trillion. [€112 trillion] To tackle climate change between now and 2050.

Mark Carney, UN Special Envoy on Climate Action and Finance and group leader, said they have “all the money needed” to fund the transition to renewable energy, showing that private financing at this year’s Climate Summit (COP26) is a central focus.

  • Billionaire businessman and former New York mayor Michael Bloomberg has joined Carney as co-chair of the Glasgow Financial Alliance for Net Zero (Gfanz) (Image: European Commission)

Carney pledges to “mobilize trillions of dollars in capital to finance decarbonization in emerging and developing countries.”

One of the signatories was Larry Fink, CEO of BlackRock, an investment firm managing €8 trillion. Billionaire businessman and former New York mayor Michael Bloomberg has joined Carney as co-chair.

However, critics were quick to point out that a significant portion of that capital is stuck in mortgages or is currently still invested in fossil fuel infrastructure. It is unclear how much of the $130 trillion could actually be invested in green projects.

Meanwhile, banks last year invested nearly €900 billion in the fossil fuel industry, according to an activist group. Rainforest Action Network. All of the largest fossil fuel investors are on the Gfanz List.

To push these investors in the right direction, the World Bank, the G20 countries and the Gfanz Alliance have been pushing governments to help make green investments profitable, for example by covering a portion of the initial cost.

US Special Climate Envoy John Kerry told the press, “Incorporate financing, remove risk from investment, and create the ability to get bankable deals. It’s water-able, it’s electricity-capable and it’s transportable.” At the Gfanz show in Glasgow last week.

But improving the climate resilience of homes or infrastructure cannot easily be transferred to banks such as a wind farm or solar project that guarantees a rate of return — even lower if they are located in low-income countries that are often in the areas most affected by hurricanes, floods and droughts.

Turning Approach [climate] projects into bankable projects that ignore the fact that the majority of environmental transformation needs will simply not be bankable and offer no return on investment,” Economist Counter Balance for NGOs, Xavier Sol, wrote in EUobserver editorial last month.

This point has been highlighted Barbados Prime Minister Mia Amor Motley, when told by the World Leaders Assembly in Scotland that investment in climate change projects in Pacific island nations has actually declined in recent years.

But while it has proposed a public finance scheme backed by wealthier 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 Gfanz are pushing to find A solution for private financing.

“We need a radical new approach to mobilizing private capital,” Carney wrote in an opinion piece prior to COP26.

Attractive option?

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

I’ve written extensively about the actual risks of this “no-risk” strategy, which is part of a model I call the “Wall Street Consensus”.

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

Far from representing a “radical new approach,” Gabor explains that supermodel Carney, Bloomberg and Fink selling at COP26 have been years in the making, building on existing programs like the G20’s Infrastructure as an asset class, albeit on a much larger scale.

It is presented as an attractive option for a country that lacks (easy) access to money because there is no need for taxpayer money.

It builds on the promise that investments (green assets) can easily be leveraged to earn new investments, in the same way that mortgages can be regrouped and sold in the financial markets.

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

And another caveat: Governments that enroll in so-called public-private partnerships (PPPs) often become contractually liable if investments do not work out as intended.

Billion dollar accidents

Gabor details that one such investment faded into her study of the Wall Street Consensus.

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

Upon completion, it became apparent that the dilapidated power grid could not handle the amount of energy produced at the new power plant.

As stipulated in the contract, the Nigerian government became liable for the loan and had to compensate investors for lost income worth up to one billion euros.

In a similar case still underway, the Spanish government had to repay private investors and the European Investment Bank (EIB) €1,35 billion when a gas storage project led to earthquakes endangering a nearby nuclear power plant.

Investments in clean technologies, building local resilience – renovating homes, improving infrastructure to withstand severe weather or drought – or disaster clean-ups are often complex individual projects that need expert knowledge of the environment and society to window into all emergencies and risk prevention.

De-risking schemes exclude the necessity of appropriate risk assessment from private partners. Public institutions such as the World Bank and the European Investment Bank have backed projects and risks have been pushed to governments through complex PPP contracts – Gabor warns that “a risk-free country always pays”.

Governments need to ‘lift the heavy loads’

The Givens alliance has been over-promising, an anonymous banker warned, citing the Financial Times. “This number indicates that financing is greening the world,” he said, when in reality, governments will have to do a lot of lifting — especially in high-risk and low-income environments.

“Private financing may be appropriate in some circumstances,” said economists Maria José Romero and Flora Sunkin, Written in a paper published by Eurodad, a financial non-governmental organization based in Brussels, prior to COP26.

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

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