What the Paris Development Finance Summit Missed
The biggest problem with global climate finance today is that only a small share of it goes to developing countries. Far more must be done to create a better working relationship between multilateral development banks and the major private investors that hold the key to closing the financing gap.
BEIJING – Although French President Emmanuel Macron’s recent Summit for a New Global Financing Pact produced a “roadmap” toward reforming the global financial system, the proposed reforms are unlikely to mobilize private capital at the scale required to mitigate climate change. A key reason for this is that the roadmap largely fails to address the barriers that prevent pension funds and other large institutional investors from joining forces with multilateral development banks (MDBs). While proposed provisions to increase foreign-currency guarantees and pool currency risks are helpful, they are unlikely to be sufficient.
A critical problem with global climate finance today is that only a small share of it goes to developing countries. The International Energy Agency estimates that, to achieve net-zero emissions by 2050, capital spending on clean energy in these economies must increase from less than $150 billion in 2020 to over $1 trillion annually by 2030. Other estimates are even higher.
About 70% of this clean-energy investment will need to come from private sources. The private sector currently funds 81% of green investment in high-income countries, but only 14% in developing countries, where financing costs can be up to seven times higher.
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