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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a professor at UCL and author of ‘Mission Economy’
After last year’s COP summit, the UN hailed the newly announced loss and damage fund, intended to help countries affected by global temperature rises, as a “breakthrough agreement”. But praise for the fund — which has a home at the World Bank — has been shortlived.
Developing countries say donor countries will have outsized influence over the fund and charge high fees to recipients. But there is a deeper issue: this is too little, too late, and risks replicating the same damaging economic relationships that led us here. There is plenty of finance out there, but it is time to pay more attention to the quality, not just the quantity.
To tackle the climate crisis, we need an economy-wide transformation which puts ambitious objectives, like climate targets, at the centre of our economic and fiscal strategy. We need long-term, patient and mission-orientated finance. Governments — and especially public development banks — are critical in providing the kind of far-sighted long-term funding that traditional financiers shy away from.
They also have huge volumes of assets under management. The total assets held by the world’s more than 520 public development banks and development finance institutions amounts to $22.5tn, of which $20.2tn is held by national development banks (NDBs), and $2.2tn is held by multilateral development banks (MDBs).
It is time to tap into public development finance in ways we have not done before. First, we must tackle our global debt crisis head on. As Mia Mottley, prime minister of Barbados, has argued, countries in the global south face a double jeopardy: they are disproportionately affected by the consequences of climate change, largely caused by the historical emissions of the global north, but they lack the funds to respond to the threat. On average, low-income countries allocate more than twice as much money to servicing their debt as they do to social assistance, and 1.4 times more than to healthcare.
This predicament underscores the need for a more equitable financial architecture that does not unfairly penalise the global south for problems primarily caused by the wealthier nations, and instead provides support for climate change without further eroding their finances. This means historic debt write-offs, debt restructuring and repaying climate loans with non-repayable grants.
Second, the countries in the global south that will experience the most extreme climate disasters face a massive financing gap: they need $4.3tn by 2030 to avoid the worst impacts of climate change. This spending should be treated as an investment, not a cost, and needs to be protected from budget cuts. The cost of inaction far outweighs the cost of action.
Third, the quality of finance matters. It is important to align public development finance (from governments, MDBs and NDBs) around concrete goals — which can help to transform climate challenges into shared investment pathways incorporating both public and private finance. Adopting a mission-oriented approach, setting clear objectives, and raising future expectations for business investments can all combine for a multiplier effect.
When public investment is done strategically, it can create new markets, spur private sector investment, and increase long-term competitiveness. The creation of Germany’s green steel sector, for example, was enabled by a green loans programme for heavy industry. To qualify, steel manufacturers have to comply with zero- or low-carbon processes and provide proof of compliance. This created a new market for CO₂-efficient steel.
Fourth, we must attach progressive conditions to de-financialise the private sector. According to projections by the industry analyst Rystad Energy, the 20 largest oil and gas companies are expected to invest $932bn billion in developing new oil and gasfields over nine years. At the same time, they raised spending on share buybacks by 2,182 per cent in Q4 of 2021.
The answer is a public-private system based not on handouts and subsidies but symbiosis. For example, the US Department of Commerce made its $280bn Chips and Science Act conditional on limiting share buybacks, ensuring worker training and access to childcare, and making semiconductor supply chains more water and energy efficient — ensuring the transition is both fair and climate-conscious.
This month’s COP summit, hosted in the oil-rich UAE, is unlikely to move the needle in this debate. But if we want to make meaningful progress on climate change mitigation, we must do better. It is time to raise our ambition and move from being reactive to proactive, from filling financing gaps to shaping a just, green future.
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