Large amounts of money are needed to address the impacts of climate change. If we succeed in limiting global warming to 2°C, this will still require as much as US$275 billon. A new report released by Eurodad calls into question the latest desperate initiative of donors to fill the gaps in public climate finance: investing in the private sector with the aim of leveraging additional funds.

Rich countries promised to mobilise resources to help developing countries deal with climate challenges. However, they are failing to meet their commitments. According to the World Resource Institute’s preliminary analysis of the Copenhagen’s Fast Start pledges, not more than half of the US$30 billion pledged to be provided between 2010-2012 has been accounted for, and it is not yet clear how much of this money has been or will be delivered.

The report published by Eurodad focuses on financial intermediaries, one of the main tools to leverage private funds. According to many Development Finance Institutions (DFIs), financial intermediaries, such as banks, insurance companies or private equity funds have the ability to use public money to overcome the barriers to private investments in developing countries and leverage substantial amounts of private money. For instance, the public money that is invested in a local bank should make the institution stronger and more profitable, hence attracting more private capital.

The report questions the ability of financial intermediaries to raise several times more money than originally invested, as claimed by DFIs. It also raises serious concerns about the climate effectiveness of these tools.

Donor governments committed, under the principle of common but differentiated responsibility, to help developing countries shoulder the costs of addressing climate challenges. It seems logical, that the most vulnerable sectors and countries are prioritised. However, the report finds that financial intermediaries are likely to by-pass small and local businesses in low-income countries, where the help is most needed. After assessing the portfolios of several DFIs, Eurodad concludes that almost no money reaches low-income countries or smallholders. The real problem is that most of the investment instruments are much more likely to reach large multinational companies rather than SMEs. The fact that the average size of loans provided by the IMF is above EUR 15 million only confirms this.

Monitoring the impact and holding intermediaries accountable for their use of funds are also major challenges. DFIs usually rely on financial intermediaries’ self-reporting and very little information is available on the use of taxpayer’s money. The transparency of investments is further diminished by the fact that many of the financial intermediaries are registered in tax havens and do not comply with adequate transparency and accountability requirements.

Given these gaps and the lack of clarity with regards to the climate impacts of investing in financial intermediaries, donor governments should think twice before relying on intermediaries. Private climate finance should by no means dilute the rich country’s commitments to help developing countries respond to climate challenges.

Download the report “Cashing in on climate change?”

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