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PRESS RELEASE: Cashing in on climate change? New report lifts the lid on how rich nations use financial intermediaries to dodge climate change commitments to world’s poor

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BRUSSELS, 19 April, 2012: A new Eurodad report reveals how rich nations are using a complex web of private funds and financial intermediaries to wiggle out of pledges to provide $100 billion a year to help developing countries cope with the devastating effects of climate change.

“Overreliance on the private sector could spell disaster for the world’s poorest,” said Javier Pereira, who authored the report for Eurodad, the European Network on Debt and Development. “Leveraging money through financial intermediaries cannot be used as a substitute for providing sufficient public resources directly to countries who, through no fault of their own, are suffering most from global warming,” he added.

A commitment by the world’s richest nations, and biggest polluters, to mobilise $100 billion a year by 2020 was one of the few concrete achievements of the Copenhagen Climate Change summit in December 2009. Governments, however, have failed to meet their interim commitments and are now looking to use much smaller amounts of their own money in order to leverage private funding to make up the bulk of the $100billion.

The idea is that development banks and financial institutions, such as the European Investment Bank and the International Finance Corporation, use public money to invest in financial intermediaries working in developing countries to attract private investors. By investing in an African bank, for instance, they believe they can trigger flows up to ten times higher than the initial investment.

While Eurodad’s report acknowledges that supporting private-sector investments can have a useful, if limited, multiplier effect on public funds, it casts serious doubts on claims made about their leveraging potential and reveals that it is often impossible to know where the public money ends up.

“These tools only work with very large and mostly Northern companies and the investments are unlikely help those who are most in need,” Pereira added. “The average size of the loans provided by the IFC is above € 15 million and it’s just not possible to pretend that investments of this size will help smallholders in developing countries cope with climate change.”

Eurodad says that international development institutions should make sure financial intermediaries are more transparent and accountable; their investments have to be properly integrated into the national strategies of developing countries; and they must be used effectively to help those most at risk adapt to climate change, notably through support for small, local businesses, rather than Northern-based multinationals.

“We are not suggesting developed countries and international organisations should stop using financial intermediaries altogether, but given the evidence this should only be a small part of the solution,” said Eurodad’s Director Jesse Griffiths.

ENDS

The report, “Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges” is available at: http://eurodad.org/wp-content/uploads/2012/04/CF-report_final_web.pdf

For further details or comment, contact:

Javier Pereira, Eurodad policy and advocacy officer, on jpereira@eurodad.org or Tel: + 32 2 894 46 47; Mobile: +32 488 570 654; or

Jesse Griffiths, Eurodad director, on jgriffiths@eurodad.org or Mobile: +32 491 429 697 (in Washington DC).

Eurodad (the European Network on Debt and Development) unites 49 non-governmental organizations from 19 European nations working on issues related to debt development finance and poverty reduction.

Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges

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The effects of climate change on developing countries have created a huge financial burden. Policymakers aim to limit global warming to a rise of 2°C in this century. In this scenario, the cost of adapting to and mitigating the impact of climate change would be in the range of USD 110-275 billion (€79-198 billion) per year for developing countries. Given their historical responsibility, accumulated climate debt and the principle of common but differentiated responsibility, developed countries will have to shoulder most of the cost.

Rich countries have pledged to make available USD 100 billion (€72 billion) per year by 2020, most of which will presumably be channelled through the Green Climate Fund. Although originally this money was expected to come from public sources, developed countries have begun to rely on mobilising large amounts of private money.

As the discussion about mobilising private resources is mainstreamed, financial intermediaries (FIs) are placing themselves at the forefront of the debate. They are receiving a great deal of attention due to their perceived ability to use public money to overcome the barriers to private investment in developing countries. Estimates suggest that through the use of FIs, it may be possible to raise in the range of USD 100-200 billion (€72-144 billion) per year of private flows from developed to developing countries.

While climate finance is vital for both mitigation and adaptation, this report focuses on the latter. It looks at some of the main instruments that can be used to leverage private climate finance through financial intermediaries and analyses data from some major development finance institutions (DFIs). It specifically assesses the role of financial intermediaries in low-income countries (LICs) and in supporting small and medium sized enterprises (SMEs) and looks into the main monitoring and accountability constraints when using financial intermediaries.

Eurodad’s report finds that:

  • Important gaps exist in the knowledge of how money is leveraged through financial intermediaries. These gaps should be filled before channelling any significant amounts of climate finance through FIs.
  • Financial intermediaries and existing investment instruments are very limited when it comes to targeting LICs and SMEs in sectors which are particularly vulnerable to climate change.
  • Developed countries are looking at financial intermediaries as isolated actors without paying attention to the policy and institutional environments in which they operate.
  • Monitoring financial intermediaries is extremely difficult and there are no mechanisms to ensure private climate finance is aligned with developing countries’ priorities.

These shortcomings underscore the importance of direct public finance. Leveraging money through financial intermediaries cannot be used as a substitute for directing sufficient public resources directly to the poorest. Given the gaps, a strong reliance on FIs and the private sector could spell disaster for many citizens in developing countries.

Read the full Eurodad report: “Cashing in on Climate Change?”