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At his “Summit for a New Global Financial Pact” in Paris, President Emmanuel Macron emphasized the need for a “public finance shock” to address the urgent and interconnected challenges of climate change, poverty, and nature conservation. It is estimated that over $2tn annually will be required by 2030 to combat climate change and its impacts in emerging market and developing countries (excluding China), compared to the current investment of approximately $500bn. Achieving this goal will demand significant efforts from multilateral development banks, governments, and the private sector. However, in addition to raising more finance, global actors must adopt smarter approaches.
Raising finance will be a complex task, considering the current global government debt of around $86tn. Approximately 60% of low-income countries are in debt distress or at high risk of it, and many argue against being held accountable for historical emissions caused by industrialized economies. Moreover, there is intense competition to attract green investment, and the higher cost of capital in developing countries discourages private sector involvement.
To shift from “billions to trillions,” innovative approaches are necessary, such as optimizing the utilization of multilateral development banks’ (MDBs) balance sheets, enhancing private sector investment confidence by minimizing risks, exploring creative solutions for debt reduction, and establishing new revenue streams.
MDBs, which hold approximately $1.8tn in assets, will play a crucial role in this effort. They should expedite their use of balance sheets to raise investment capacities by up to $1tn without jeopardizing their triple-A credit ratings, according to certain studies. Encouraging wealthier shareholders to inject additional capital and issuing hybrid capital to institutional investors can also enhance lending capacity. Additionally, MDBs can consider assembling multi-asset portfolios from their projects to attract investments from institutional asset managers.
MDBs’ mobilization of private capital is currently limited, primarily due to the perceived risks associated with investing in low-income countries. The International Energy Agency states that the cost of capital for utility-scale solar projects can be three times higher in key emerging economies than in advanced nations. MDBs must play a more significant role in mitigating project risks, which could include assuming subordinated tranche positions, accepting first-loss slices, or providing foreign exchange guarantees for financing in volatile currencies.
MDBs and governments should develop a variety of financial products tailored to address specific funding challenges. For instance, supporting research and development for climate solutions may involve mechanisms like grant competitions and long-term contracts that pre-commit funding to innovative but expensive projects.
Reducing the debt burden of low-income nations will free up resources for sustainable development. Coordinated international efforts, including cooperation with creditors like China, are essential. Creative options, such as debt-for-climate swaps that provide debt relief for green initiatives, should be explored. The World Bank’s initiative to allow countries affected by disasters to temporarily suspend loan repayments is also a prudent measure.
Exploring new revenue streams is equally important. A global carbon tax, for example, can incentivize emission reduction while generating funds to support low-income countries. However, consensus on this matter remains challenging.
The world is beginning to comprehend the immense financial and labor requirements to tackle the climate challenge. However, commitment must be matched with ingenuity to ensure timely action.
Climate Capital
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