A Paradigm Shift? Really?
Posted Mar. 20, 2013 / Posted by: Karen Orenstein
The third meeting of the United Nations Green Climate Fund wrapped up last week. Though “paradigm shift” emerged as the new catch-phrase of GCF discourse -- as the fund’s governing instrument calls for a “paradigm shift towards low-emission and climate-resilient development pathways” -- the board meeting was almost anything but.
Follow the money…Wait, there is none!
There is laughably little money being put forth toward the GCF by rich countries, which undercuts a sense of urgency and even a sense of seriousness. As has come to be expected at UN climate meetings (and at most multilateral meetings these days), the U.S. government’s representatives did not disappoint in their disappointing attitude toward the GCF -- although admittedly the U.S. was certainly not alone in their lack of constructive engagement. The U.S. reps were in top obstructionist form, however, when they took the floor to object to the setting of any specific timeline to mobilize resources for the fund. A fund without money, why not? That’s a sure way to keep that horse from getting out of the gate.
GCF board and civil society: We like you, but…
Though the Indian board member at one point did give me hope for progress on GCF engagement with civil society, that optimism was regrettably short-lived. While the situation for active observers improved over the previous meeting, it was more a case of “one step forward, two steps back.” (The GCF allows for two active civil society observers – one from a developing country and one from a developed country – who, at board meetings thus far, sit at the back of the board room at a special table and are given the opportunity to intervene on agenda items.) For example, despite the fact that a number of government representatives advocated webcasting future board meetings (which is especially important for reaching people in developing countries who cannot fly all over the world to attend board meetings), the board rejected this simple proposal. Additionally, the board did not agree to allow alternates or advisers for active observers, making an already difficult task even more difficult. (The two active civil society observers are somehow supposed to represent the views of all of civil society globally – from Indigenous Peoples to labor to farmers.) While some board members supported the idea of a roster of active observers who could speak to various subject matters, in the end, the board didn’t approve that compromise arrangement either.
Honestly, civil society observers at GCF meetings would love to move beyond fighting for the right to participate in GCF goings-on, and dive into the substance of how to make sure the GCF is environmentally sound, equitable, effective, etc., but access to information and an avenue for constructive engagement are prerequisites. If well-resourced NGO representatives are already having trouble providing and receiving input, one can only imagine future scenarios in which affected communities face tremendous obstacles.
The answer to all of life’s problems: private investment
Once again, a number of board members pointed to private investment as the savior to all our problems. We heard over and over again, predominantly from developed country delegates, that the key to unlocking the GCF’s magic is to use it to mobilize private investment to solve the climate crisis. Sure, moving money can be a good thing, but if not done carefully and appropriately, it will undoubtedly go toward lining the pockets of those with already well-lined pockets – bankers on Wall Street and in London, corporate executives sitting in Oslo, and the like.
Before private finance can be seen as a solution in the context of the GCF, the appropriate questions must first be asked – what are the adaptation and mitigation needs of people in developing countries, especially the poorest and most vulnerable, and how can the GCF effectively and equitably meet those needs through mobilizing private finance and supporting the private sector?
In limited circumstances and with a number of stipulations, GCF efforts to mobilize private finance may help. But it is not a “silver bullet,” and it will be especially difficult to deploy in low and lower middle income countries. Further, private climate finance cannot be a substitute for direct public support. In line with the basic tenet of the polluter pays principle, the $100 billion developed countries have promised to contribute for climate finance by 2020 must be made up entirely of public funds. And, as far as how the GCF spends its share of the $100 billion, grant-based financing for the public sector must play a prominent role. Many areas in need of funding, especially adaptation efforts in the poorest countries, simply will not turn a profit.
Further, directing finance towards the private sector has real limitations. Micro, small and medium enterprises (MSMEs) are the most important economic actors and provide most of the employment in developing countries. However, most MSMEs focus on subsistence livelihoods and have high informality rates and low returns. As a result, they are often ignored or bypassed by international donors and financiers. Without rigorous and well-articulated efforts to address this dynamic, the GCF would also be likely to do the same in its private sector support.
GCF board members should be wary of drinking the private sector Kool-Aid so present in today’s political discourse worldwide. Private investment should not be off limits, but it should be approached with serious caution.
For starters, the board should banish the idea of a separate governance structure for the private sector facility within the GCF, and by extension, banish the idea of having private sector board members as part of that governance structure. Despite what some board members seem to be asserting, it is very possible to have private investment experts providing advice rather than making decisions. The GCF cannot be “country-driven” (another popular catch-phrase) if country governments are kept from making decisions. The private sector facility should be a tool available to developing country governments, should they decide to deploy it. Neither multilateral financiers nor GCF board members should decide what’s the best investment for country X. Country X – through a democratic participatory process – must be in the driver’s seat doing the deciding.
Greek gods, additionality and leveraging private finance
Finally, the mythology behind “leveraging” private finance must be deconstructed in order for the GCF board to have a meaningful discussion about private investment. At present, leverage ratios tend to inflate claims of leverage, failing to differentiate between public and private money, counting public funds that are already earmarked and double counting. They also tend to lack financial and institutional/operational additionality (i.e. would the investment have happened anyway, and is the resulting investment better aligned with the aims of the GCF?). Indeed, higher leverage ratios are often not worth bragging about – projects with high leverage ratios tend to show greater discrepancy between what the public institution intends and what the projects actually accomplish; high leverage ratios generally mean that the influence of the public institution is significantly diluted.
The GCF should refrain from using leverage ratios as criteria to guide funding decisions at least until:
- A common methodology is established to calculate leverage ratios, and its usage mandated;
- Leverage ratios only reflect private, not public, funds mobilized;
- Only private flows that are truly additional – both financially and operationally/institutionally – are counted; and
- Public actors are not allowed to claim that they have raised each other’s money. If different public institutions support the same project, leverage ratios should be calculated using the amount of private finance that is proportional to their contribution in order to avoid double counting.
For more information, please see:
Photo credit: Green Climate Fund board, GCF website, http://gcfund.net/?id=10.
 Beyond a few sentences in the GCF governing instrument, the details and workings of the private sector facility are not yet delineated.
Climate and Energy,
Economics for the Earth,
/ Tags: Climate finance, Green climate fund, Karen orenstein
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