Saturday

4th Dec 2021

Analysis

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

  • Mark Carney, former Bank of England governor and leader of the new alliance, promised 'all the money needed' to fund the transition to renewable energy (Photo: Bank of England)
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A group of 450 banks and insurers, going under the name of The Glasgow Financial Alliance for Net Zero (Gfanz), have committed $130 trillion [€112 trillion] to tackle climate change between now and 2050.

Mark Carney, UN special envoy on climate action and finance and leader of the group, said they have "all the money needed" to fund the transition to renewable energy, demonstrating that in this year's climate summit (COP26) private finance is a central focus.

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

Carney promises to "mobilise trillions of dollars of capital to finance decarbonisation in emerging and developing countries."

Larry Fink, CEO of BlackRock, an investment firm with €8 trillion under management, was a co-signnatory. Multi-billionaire businessman and former New York mayor Michael Bloomberg joined Carney as co-chair.

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

Meanwhile, last year banks invested nearly €900bn in the fossil-fuel industry, according to activist group Rainforest Action Network. All the biggest fossil-fuel investors are on the Gfanz list.

To nudge these investors in the right direction, the World Bank, the G20 nations and the Gfanz-alliance have been pushing governments to help make green investments profitable, for example by covering part of the initial cost.

"Blend the finance, de-risk the investment, and create the capacity to have bankable deals. That's do-able for water, it's do-able for electricity it's do-able for transportation," US special envoy for climate John Kerry told press at the Gfanz presentation in Glasgow last week.

But improving the climate resilience of homes or infrastructure is not actually as easily bankable as a wind farm or solar energy project that assures a rate of return - even less so if they are located in low-income countries that are often in regions most affected by hurricanes, flash-floods and droughts.

"The approach of turning [climate] projects into bankable ones ignores the fact that a majority of the needs for ecological transition will simply not be bankable and offer any return on investment," economist for NGO Counter Balance, Xavier Sol, wrote in an op-ed for EUobserver last month.

This point was highlighted by Barbados prime minister Mia Amor Mottley, when she told the assembly of world leaders in Scotland that investment in climate change projects in Pacific island nations has actually gone down in recent years.

But while she proposed a public-financing scheme backed by the wealthiest governments that would give low-income countries like Barbados access to the same monetary firepower the United States and eurozone countries have been able to use for years to fight their crises, Carney and the Gfanz alliance push for a private-finance solution.

"We need a radical new approach to mobilising private capital," Carney wrote in an op-ed ahead of the COP26.

Attractive option?

"Read these as calls for financialising public goods into asset classes #WallStreetConsensus," researcher and political economist Daniela Gabor tweeted last week.

She has written extensively about the actual risks of this 'de-risking' strategy, which is part of a paradigm she calls the "Wall Street consensus."

In this model investment in clean infrastructure become securitised into tradable assets, that can be traded on financial markets and used as collateral for further borrowing (thereby converting billions into trillions, as promised by Carney and the World Bank).

Far from representing a "radical new approach" Gabor shows that the model Carney, Bloomberg and Fink are selling at COP26 has been years in the making, and builds on existing programs like the G20's Infrastructure as an Asset Class, albeit in a vastly grander scale.

It's presented as an attractive option for country's with a lack of (easy) access to money because no taxpayer money is needed.

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

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

And there is another caveat: governments that sign up for these so-called public-private partnerships (PPPs) often become contractually-liable in case investments do not work out as intended.

Billion dollar mishaps

Gabor details one such investment gone sour in her study on the Wall Street Consensus.

In Nigeria, a consortium of Wall Street investors, the World Bank and the Dutch Development Bank (FMO) invested €780m in the 460-megawatt Azura powerplant on the outskirts of Benin City.

When finished, it became clear the dilapidated electricity network could not process the amount of energy produced in the new power plant.

As stipulated in the contract, the Nigerian government became liable for the loan and had to reimburse lost income for the investors worth up to €1bn.

In a similar case that is still ongoing, the Spanish government had to pay back private investors and the European Investment Bank (EIB) €1,35bn when a gas storage project resulted in earthquakes that endangered a nearby nuclear power plant.

Investments in clean technologies or local resilience-building - renovating homes, improving infrastructure to resist extreme weather or droughts - or disaster cleanups are often complex singular projects that need specialised knowledge of the environment and the community to window in all contingencies and prevent risk.

De-risking schemes take away the necessity of proper risk assessment from private partners. Public institutions like the World Bank and the EIB backed the projects and risks were pushed off on governments through complex PPP-contracts - "the de-risked state always pays," Gabor warns.

Governments needed for 'heavy lifting'

The Gfanz alliance has overpromised, one anonymous banker warned cited in the Financial Times. "This number implies that finance is greening the world," he said, while in reality, governments will have to do much of the lifting - especially in high-risk, low-income environments.

"Private finance might be appropriate in some circumstances," economists Maria Jose Romero, Flora Sonkin, wrote in a paper published by Eurodad, a financial NGO based in Brussels, ahead of COP26.

"But only when democratically-owned development plans are followed, high quality and equitable public services are prioritised, and international standards of transparency and accountability are met."

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