The limits of the magic solution

"The numbers that are thrown around about the potential of green capital mobilization are illusory. [...] There is a lot of piffle in this area." These were some of the remarks made by Lawrence H. Summers, former US Treasury Secretary and President Emeritus of Harvard University, in wrapping up a panel discussion in Washington D.C. last October.¹

At COP29 in Baku, which ended on 24 November, a new climate financing goal was agreed at the last minute: developed countries have pledged to triple funding, from the previous target of USD 100 billion per year to USD 300 billion per year by 2035. This is far too little in view of the needs of developing countries, which are estimated to total USD 2,400 billion a year. In a nebulous formula, it was further agreed to ‘secure the efforts of all actors’ to increase funding for developing countries, from public and private sources, to 1.3 trillion dollars a year by 2035.

Despite not being central to the COP29 agenda, mobilising private climate finance is still considered the silver bullet by many public and private players. The definition of "climate finance" does not in fact specify what portion must be covered by public and/or private funding. This vagueness has spawned much uncertainty as to the source of the funds being allocated to climate, and allows governments ample leeway in meeting their commitments. And there is great temptation to use private funds to fill the public funding gap.

The fact is that since the conclusion of the Paris climate agreement in 2015, many public and private players – the ones Lawrence Summers has in mind – have stepped up their efforts to advocate for the design of "innovative financial instruments" that benefit from public subsidies and invariably pursue the same aim: that of de-risking in order to "catalyse" private investments, whether for the climate or for sustainable development. And this credo is not about to disappear. In the back of their minds, numerous delegations, including Switzerland, are thinking that whatever the final amount owed by each developed country, it will be possible to secure a substantial part of it by "mobilising private capital".

Let’s take stock

Let us consider for a moment the current state of climate finance in developing countries. The latest OECD² figures show that:

• Eighty per cent (80%) of the total USD 115.9 billion in climate finance from industrialised countries (in 2022) came from public funds (bilateral and multilateral attributable to developed countries).
• Only some 20% comprises private funds mobilised using public funds. After several years of stagnation, the amount rose from USD 14.4 billion in 2021 to USD 21.9 billion in 2022, or by 52%. By way of comparison, total financing mobilised for sustainable development also rose significantly in 2022, by 27% (from USD 48 billion in 2021 to USD 61 billion).
• Climate-related export credits remain negligible and volatile in volume terms, and their share of the total has therefore remained low.
• The bulk of private financing (68%) continued to be mobilised in middle-income countries (MICs) and was concentrated in a limited number of developing countries, and allocated to a limited number of major infrastructure projects. A mere 3% was allocated to low-income countries (LICs).
• The lion’s share of private finance has gone to emission reduction (84%). Private finance for adaptation is just 16%, even though that amount, too, has increased – from USD 0.4 billion in 2016 to USD 3.5 billion in 2022; again, this funding, too, can be attributed to a small number of large-scale projects.
• Almost half the private finance mobilised is invested in the energy sector, and to a lesser extent, in the financial and industrial sectors, including mining.

The OECD recalls (time and again) that "a number of challenges may affect the potential to mobilise private finance" to combat climate change in developing countries. These include the general environment that may be enabling (or not) for investment in beneficiary countries, the fact that many climate projects are not profitable enough to attract large-scale private investment; or, the fact that individual projects are often too small to obtain significant commercial funding.

A credo nevertheless on the wane

Few ideas seem as hackneyed as the hope that a few billion dollars in public funds will be able to mobilise trillions in private investment for sustainable development and climate protection. This credo is increasingly being challenged, and not just by non-governmental organisations.

The Bridgetown Initiative 3.0, for example, has reassessed its expectations regarding the mobilisation of the private sector. Launched in 2022 by Mia Mottley, the charismatic Prime Minister of Barbados, the third version of this initiative was published in late September. It aims to rethink the global financial system in order to reduce debt and improve access to climate finance for developing countries. While Bridgetown 2.0 called for over USD 1.5 trillion per year to be mobilised from the private sector for a green and just transition, version 3.0 has scaled back the amount being requested to "at least USD 500 billion".

In the light of the outcomes in terms of the volumes and characteristics of private finance mobilised to date, a number of conclusions can be drawn:

• First, private climate finance, whether or not mobilised by means of public funds, focuses primarily on emission reduction projects in middle-income countries, mainly in the energy sector considering the profitability of these large projects, while private funds for adaptation in low-income countries remain marginal.
• Second, the stagnation of global private climate finance casts doubts over the potential for private resources to grow as rapidly and as extensively as their advocates had hoped.
• Public funding must therefore remain central to efforts to help developing countries mitigate emissions and, above all, adapt to climate change and remedy unavoidable loss and damage. To that end, "new and additional" funding must be provided, separate and apart from development cooperation budgets.